#16695 - Directors Duties And Corporate Governance - Debt Restructuring

Overview:

• An introduction to directors’ duties in the UK

• Zooming in on directors’ duties in the area of corporate insolvency

• Recent high-profile failures: BHS and Carillion

  • Carillion plc: A large listed company with extensive overseas operations. It was involved extensively with the government via public-private partnerships.

    • What happened?

    • Who was to blame?

    • What are the lessons learnt?

    • A need for reform?

  • British Home Stores: A large privately-owned UK retailers.

• Government Reform: Corporate Governance 2019

Carillion:

• Key facts and timing:

  • The second-largest construction company in the UK as of 2017.

  • A plc with a complex group of subsidiaries.

    • It acquired several rivals in the sector (and with it their pension fund deficits).

  • 2016 accounts published on 2 March 2017: Everything seemed fine.

  • 10 July 2017: A 845 million provision was announced, and share price fell by 70% in response.

  • September 2017: A further 200 million provision announced, leaving it with net liabilities.

  • Not “too big to fail”: Request for government assistance unsuccessful.

  • January 2018: Compulsory liquidation.

• Compulsory liquidation:

  • Carillion entered compulsory liquidation with PwC as special managers rather than administration, though it was clear that administration was preferable.

    • This is because none of the big-4 accountants were willing to take on the office of administrator.

    • Being administrator meant taking on part of Carillion’s employees and contracts. The exposure that this created was simply too large.

  • Liabilities exceeding 2 billion with less than 30 million in the bank.

• The Department for Business, Energy, and Industrial Strategy (“BEIS”) report:

  • The report highlighted a lack of meaningful competition in the statutory audit market and recommended referring the case to the Competition And Markets Authority (“CMA”).

  • Carillion’s directors were criticised

  • Carillion’s professional advisors were also criticised.

  • The report raised concerns regarding independence and audit quality:

    • Auditors need to demonstrate “skepticism, integrity, objectivity, and independence”.

    • The task must be approached with an “enquiring mind”; it is not just a matter of looking out for “arithmetic irregularities”.

British Home Stores: A British institution incorporated in 1928. It was the workers, suppliers, and pensioners that lost out the most from this.

• Sir Philip Green: Accused to taking large sums of money out of BHS and transferring them to family members and overseas trusts.

• Administration: Sold for 1 to someone who was later found to be an undischarged bankrupt, with the buyer assuming all of BHS’s liabilities as part of the consideration.

• Liquidation: BHS was eventually liquidate.

• Select committee findings

Patisserie Valerie:

• A pot of 20 million was found to be missing, and a finance director was charged.

Directors’ duties and liabilities:

• Fiduciary and statutory duties:

  • Part 10 of the Companies Act 2006 sets out the statutory minimum.

    • S171: Duty to act within powers.

    • S172: Duty to promote the success of the company.

    • S173: Duty to exercise independent judgment.

    • S174: Duty to exercise reasonable skill, care, and diligence.

    • S175: Duty to avoid conflicts of interests.

    • S176: Duty to not accept benefits from third parties.

    • S177: Duty to declare one’s interest in proposed transactions with the company.

  • This applies to all directors, including shadow directors.

  • The (past) common law interpretation of fiduciary duties is still relevant.

• Directors’ duties in the “twilight zone”, when the company is verging on insolvency:

  • Cash flow insolvency = The company unable to pay its debts as they fall due; Balance sheet insolvency = The company’s liabilities exceed its assets.

  • The directors will be under pressure from:

    • Employees and pension funds;

    • The government and the public relations department;

    • Trade creditors; and

    • Her Majesty’s Revenue and Customs (“HMRS”.

  • Key issues for directors on insolvency:

    • A shift in duties: Directors should shift their focus from shareholders to creditors;

    • Wrongful trading;

    • Fraudulent trading;

    • Misfeasance; and

    • Disqualification.

  • S214 Insolvency Act 1986: Wrongful trading.

    • If the company enters administration or insolvent liquidation; and

    • At some time time before that, the directors knew or ought to have known that there was no reasonable prospect of avoiding insolvent;

    • The directors must then have taken every step to minimise losses to creditors (including by ceasing to trade).

    • The test for determining directorial liability features both subjective and objective elements.

    • A finding of liability under S214 leads to an order for contribution, so as to make good the losses that the company suffered throughout the period that it traded wrongfully.

  • S213 Insolvency Act 1986: Fraudulent Trading.

    • This is a criminal offence.

    • It requires an intention to defraud, defined as “actual dishonesty, involving real moral blame”.

  • S212 Insolvency Act 1986: Misfeasance.

  • Carillion makes clear a few things:

    • Throwing around “big names” like Slaughter and May or PwC is insufficient;

    • It is important to keep written minutes; and

    • It is also important to keep creditors informed.

Government Proposals for UK Law Reform:

• Actions to improve the Insolvency Framework in cases of major failures.

  • Sale of businesses in distress: Directors of holding companies should also be held to account.

    • BHS: “Let’s avoid the stigma of insolvency ourselves and instead give it to some else for a mere pound and let crash spectacularly.”

  • Value extraction schemes:

    • E.g. PE funds rescuing ailing retailers and applying huge administration fees, thus keeping the company limping along whilst leeching as much as possible out of it.

  • Dissolved companies: Extend the Insolvency Service’s powers of investigation.

  • A 28-day moratorium to reinforce the rescue culture.

  • A new procedure for restructuring plans.

  • A prohibition against suppliers from enforcing termination clauses.

    • Suppliers must continue to supply to debtor with essential services.

• Strengthening corporate governance in pre-insolvency situations:

  • Corporate group structures;

  • Shareholder stewardship;

  • Payment of dividends; and

  • Boardroom effectiveness + Directors’ training and...