As we reported at the time, the UK government, in response to various corporate failures, issued far-reaching company law reform proposals earlier this year. These proposals included plans to increase the liabilities of holding company directors when subsidiaries they have sold enter insolvency and to give new powers to liquidators and administrators to make recovery when rescue financings have failed. Although some aspects of the package of reforms were sensible and uncontroversial, these two suggestions in particular seemed to go too far – and risked invoking the law of unintended consequences. Many respondents to the government consultation – including the BVCA, on behalf of the UK private equity association – argued that proposals to hold directors to account for selling subsidiaries rather than putting them into liquidation, and suggestions that certain rescue financings could later be set aside, could result in fewer companies being saved.
We must now give credit where it is due: the UK government has listened carefully to those concerns, and has modified its proposals to meet many of the objections raised. In a response to the consultation, issued at the end of last month, the government confirms that it will proceed with some of its original plans, but will scale back those giving rise to the most significant negative comment.
The first of those proposals anticipated far-reaching new rules to impose potential liability on directors of holding companies that sell (rather than liquidate) distressed subsidiaries. Although the government will proceed with a modified version of that change, it will introduce several safeguards that will give considerable comfort to directors who are seeking to do the right thing for their own shareholders whilst giving proper consideration to the needs of the subsidiary’s underlying creditors and stakeholders. For example, the sanctions will only give rise to a risk of disqualification for offending directors, and won’t expose them to any new legal claims brought by the liquidator or administrator; directors who had a reasonable belief at the time of the sale (based, for example, on appropriate professional advice) that the outcome for the subsidiary’s stakeholders would be no worse than a formal insolvency will have a defense; and the rules will only apply if the subsidiary is a “large” company and is put into liquidation or administration within 12 months of the sale (rather than the two years originally proposed). These safeguards are very welcome. The adapted proposals strike a better balance between protecting a director who acts in good faith, while underlining the government’s determination to ensure that holding company directors take appropriate account of the interests of the subsidiary’s stakeholders when approving a sale.
The second controversial proposal entailed giving insolvency practitioners new powers to recover assets which were removed from a company by a potential rescuer with the aim of prejudicing existing creditors. As we and others argued at the time, these new powers were not needed because there are already existing ways to recover assets that are removed inappropriately from companies in the period leading up to insolvency, and powers that were overly broad in scope could make legitimate corporate rescues harder to pull off. The government has now said that it agrees, and will focus instead on strengthening the existing rules to make them more effective rather than introducing new ones. Again, that’s a very positive development – although we must wait and see how the government proposes to upgrade existing rules.
The government says that it will legislate for these new measures “when parliamentary time allows”. That could be some time, given the work involved in deciding how to leave the European Union. But, in the meantime, the BVCA and other market participants should be congratulated for their effective advocacy, and the government for its willingness to listen and respond to sensible objections to well-intended but imperfect proposals.
Simon Witney is special counsel and Christopher Boyne is international counsel at Debevoise & Plimpton.
This is part of a series, European Funds Comment, by Debevoise & Plimpton.