This weekend brought news of an incipient collapse: Wonga, the UK’s biggest payday lender, needed an emergency cash injection after a slew of customer compensation claims drained its war chest.
The ship is looking decidedly rickety and Wonga’s board has reportedly lined up Grant Thornton to handle the company’s administration. The company might shamble on for a bit longer, but the writing is on the wall.
A few interested parties will be observing the saga nervously. It’s the same anxiety that has spurred the government to hand the Insolvency Service new powers to punish directors that allow companies to go bust to avoid debts. Under the new powers, directors could be disqualified and fined.
The announcement is the outcome of consultation on insolvency and corporate governance. The government’s response outlines its ideas for improving the insolvency framework.
Notably, the government said it wants to stop the practice known as “phoenixing”, a decidedly less romantic, modern take on the mythological bird that was reborn after it died.
But instead of being a metaphor for spiritual renewal, Phoenixing is where a company is dissolved and another is created, leaving behind liabilities like pension deficits and supplier payments.
It’s not only Phoenixes, however, that are of concern in this instance: the British economic landscape has been pockmarked by damaging corporate failures of late. Two, in particular: Carillion and BHS. Carillion left thousands of small suppliers unpaid and BHS left a gaping pensions vortex in its wake.
Stuart Frith, president of insolvency and restructuring trade body R3, said members “have raised concerns for a long time that some directors are deliberately dissolving businesses to avoid paying their debts.”
He added, “The government’s announcement that it will look to disqualify directors of these companies is an important part of ensuring that directors are less likely to walk away from their responsibilities.”
The new powers are welcome, but it’s worrying that Frith also noted R3’s members’ “frustration” at making reports to the Insolvency Service of misbehaviour on the part of directors which are then not followed up.
In its response, the government said it believes that existing enforcement works, noting that over 1,200 individuals were disqualified from being a director last year.
Greater emphasis will be placed on stricter enforcement of directors’ duties as they exist already, including strengthening the UK’s framework relating to dividend payments. Directors will need to justify the affordability of dividends in relation to a company’s liabilities and other demands on its capital.
All the measures will be set out in further detail in the autumn.
About Francois Badenhorst
I'm AccountingWEB's business editor. Feel free to get in touch with comments, tips, scoops or irreverent banter.