ICAS ICAS logo

Quicklinks

  1. About Us

    Find out about who we are and what we do here at ICAS.

  2. Find a CA

    Search our directory of individual CAs and Member organisations by name, location and professional criteria.

  3. CA Magazine

    View the latest issues of the dedicated magazine for ICAS Chartered Accountants.

  4. Contact Us

    Get in touch with ICAS by phone, email or post, with dedicated contacts for Members, Students and firms.

Login
  • Annual renewal
  • About us
  • Contact us
  • Find a CA
  1. About us
    1. Governance
  2. Members
    1. Become a member
    2. Newly qualified
    3. Manage my membership
    4. Benefits of membership
    5. Careers support
    6. Mentoring
    7. CA Wellbeing
    8. More for Members
    9. Area networks
    10. International communities
    11. Get involved
    12. Top Young CAs
    13. Career breaks
    14. ICAS podcast
    15. Newly admitted members 2022
    16. Newly admitted members 2023
  3. CA Students
    1. Student information
    2. Student resources
    3. Learning requirements
    4. Learning updates
    5. Learning blog
    6. Totum Pro | Student discount card
    7. CA Student wellbeing
  4. Become a CA
    1. How to become a CA
    2. Routes to becoming a CA
    3. CA Stories
    4. Find a training agreement
    5. Why become a CA
    6. Qualification information
    7. University exemptions
  5. Employers
    1. Become an Authorised Training Office
    2. Resources for Authorised Training Offices
    3. Professional entry
    4. Apprenticeships
  6. Find a CA
  7. ICAS events
    1. CA Summit
  8. CA magazine
  9. Insight
    1. Finance + Trust
    2. Finance + Technology
    3. Finance + EDI
    4. Finance + Mental Fitness
    5. Finance + Leadership
    6. Finance + Sustainability
  10. Professional resources
    1. Anti-money laundering
    2. Audit and assurance
    3. Brexit
    4. Business and governance
    5. Charities
    6. Coronavirus
    7. Corporate and financial reporting
    8. Cyber security
    9. Ethics
    10. Insolvency
    11. ICAS Research
    12. Pensions
    13. Practice
    14. Public sector
    15. Sustainability
    16. Tax
  11. CPD - professional development
    1. CPD courses and qualifications
    2. CPD news and updates
    3. CPD support and advice
  12. Regulation
    1. Complaints and sanctions
    2. Regulatory authorisations
    3. Guidance and help sheets
    4. Regulatory monitoring
  13. CA jobs
    1. CA jobs partner: Rutherford Cross
    2. Resources for your job search
    3. Advertise with CA jobs
    4. Hays | A Trusted ICAS CA Jobs Partner
    5. Azets | What's your ambition?
  14. Work at ICAS
    1. Business centres
    2. Meet our team
    3. Benefits
    4. Vacancies
    5. Imagine your career at ICAS
  15. Contact us
    1. Technical and regulation queries
    2. ICAS logo request

A question of balance in insolvency

  • LinkedIn (opens new window)
  • Twitter (opens new window)
By Anthony Harrington, CA magazine

6 August 2018

Main points

  • Recent proposals for reform in corporate insolvency may run the risk of over-simplifying complex issues.
  • Proposed measures would ensure a parent company retains some responsibility to a subsidiary even after it is sold.
  • There are worries around what impact this could have on 'entrepreneurial' thought as directors may be less inclined to try and find an appropriate buyer instead of opting for insolvency.

The perennial dilemma in insolvency is how best to balance the diametrically opposed interests of debtors and creditors. Anthony Harrington reviews recent consultations that seek to solve the issue.

A modern, entrepreneurial economy needs to make it possible for people to fail, and then get back on their feet to come up with a second - and even third or fourth - genuinely innovative venture.

A fair society also needs to have some measure of debt relief so individuals who find themselves with an impossible debt burden can see light at the end of the tunnel.

Insolvency legislation is necessary, but is it ideal? A number of people - including creditors, insolvency practitioners, debtors and even HMRC - argue that much could be improved to make the law work better and, in some cases, create a fairer balance.

One has to applaud the fact that these green papers address significant questions in straightforward language.

The UK Government and HMRC have both recently issued consultations on Insolvency and corporate governance and Tax abuse and insolvency respectively. Perhaps the key thrust of the Government’s proposals is the wish to address the current spate of high-profile corporate insolvencies and identify who might be to blame.

The astonishing thing about these two consultative documents is that, for a change, they are written in plain English, noted Yvonne Brady, a Partner in Shepherd and Wedderburn’s corporate recovery and restructuring team.

“One has to applaud the fact that these green papers address significant questions in straightforward language, for this has certainly not always been the case,” she said.

However, and it is a very big “however”, there is an inherent fallacy in the idea that really complex issues lend themselves easily to simple treatments.

Onus of responsibility

The corporate governance paper floats the idea of making parent groups that sell an ailing subsidiary responsible beyond the sale.

This is an astonishing proposition. The essence of a sale is that the seller sells something and departs, leaving it in the hands of the buyer. How could you make a seller responsible for an outcome after the sale, when he/she has no say in, or veto over, the buyer’s decision?

Is the Government paper suggesting it is the vendor that should be careful about whom they sell to?

Otherwise, the paper goes on, the Government could intercede and make the directors responsible for the sale personally liable to make good on creditor losses. One has to wonder how this could work legally in practice as a credible scenario?

As Yvonne pointed out: “Every sale of a distressed subsidiary is a bespoke sale, with its own special, unique dynamics and circumstances.”

This being the case, one can only wish the Government the best of luck drafting legislation that can capture all of this variation, across all possible sales, and craft a prescribed ‘right way’ that will stand the test of legal scrutiny.

The last thing you want as a director is to find that someone can come along after the sale and second guess your decision.

Moreover, Yvonne continued, even if a civil service drafting team did produce workable legislation, the outcome would very probably be convoluted.

She explained: “Parent company boards look at all the circumstances around the sale of a subsidiary and make a judgement about whether a sale will be better for all stakeholders than a formal insolvency.

“The last thing you want as a director is to find that someone can come along some time after the sale and second guess you on the decision, and bring civil and criminal penalties to bear if their judgement disagrees with yours.”

The argument against suggests that, if this happened, it would paralyse entrepreneurial judgements. Directors would have no option but to minimise risk and put everything that looked wobbly into formal insolvency instead of trying to find a willing buyer to continue running the company.

However, if they did put everything into insolvency, that too could lay them open to attack on the grounds that they acted hastily and did not fulfil their “due care” obligations. So, directors would find themselves in a “damned if you do, damned if you don’t” scenario and UK enterprise would be severely damaged.

Knee-jerk reaction

Now let us look at the individual insolvency paper, courtesy of HMRC. As Donald McNaught, Partner and Head of Restructuring with Johnston Carmichael, explained, this paper in effect seeks to curtail possible director abuses by piercing the corporate veil.

HMRC’s motivation for producing the paper is pretty straightforward: “There is a minority who artificially and unfairly seek to reduce their tax bill through the misuse of insolvency of companies.”

Some folk, it seems, make a practice of “running up tax liabilities in a limited liability entity, then avoiding paying them by making the company insolvent - and setting up a new company to carry out the same practice again.”

The danger is not just that these “phoenix” companies (the new rising from the ashes of the old, as it were) cheat the taxman, they could also, according to the paper, “force out those businesses that act responsibly and contribute to society and the economy by paying the taxes due”.

Once you start allowing HMRC to pierce the corporate veil, you run the risk of chilling entrepreneurial behaviour.

The danger in all this is that these two documents are quite clearly a knee-jerk reaction on the part of the Government to recent high-profile insolvencies. However, Donald argued that the problems the consultative documents set out are not as widespread as the politicians seem to think.

“No one wants to see abuses, but the HMRC document in particular looks like HMRC want to put themselves in an enhanced position, as against other creditors, which goes against the principle of pari passu, or all creditors being on an equal footing," he explained. "Once you start allowing HMRC to pierce the corporate veil, you run the risk of chilling entrepreneurial behaviour as every director is going to be worried that a particular decision could jeopardise their assets and possibly land them with criminal charges."

On the corporate governance consultative paper, Donald pointed out that what the Government seems to be trying to do is to initiate the kind of obligation that was recently introduced regarding the sale of major football clubs.

“With these sales, the Football Association now has a rule that any sale of a football club has to be to a 'fit and proper' person, so there is an onus on clubs to properly vet the party it wants to sell to, and to stand responsible, post the sale, if things go horribly wrong.

“The politicians and HMRC like these consultative papers because they set out to target abusers of the system. However, the cure could well be worse than the disease. What I would like to see is HMRC working much more closely with insolvency practitioners."

Photo of London black and white

Finance Directors unveil top 10 most pressing issues

By ICAS

20 July 2018

Tax Abuse and Insolvency and Extension of the existing security deposit legislation to CT and CIS

By Susan Cattell, Head of Tax Technical Policy, ICAS

6 July 2018

2022-11-mitigo 2022-11-mitigo
ICAS logo

Footer links

  • Contact us
  • Terms and conditions
  • Modern slavery statement
  • Privacy notice
  • CA magazine

Connect with ICAS

  • Facebook (opens new window) Facebook Icon
  • Twitter (opens new window) Twitter Icon
  • LinkedIn (opens new window) LinkedIn Icon
  • Instagram (opens new window) Instagram Icon

ICAS is a member of the following bodies

  • Consultative Committee of Accountancy Bodies (opens new window) Consultative Committee of Accountancy Bodies logo
  • Chartered Accountants Worldwide (opens new window) Chartered Accountants Worldwide logo
  • Global Accounting Alliance (opens new window) Global Accounting Alliance
  • International Federation of Accountants (opens new window) IFAC
  • Access Accountancy (opens new window) Access Acountancy

Charities

  • ICAS Foundation (opens new window) ICAS Foundation
  • SCABA (opens new window) scaba

Accreditations

  • ISO 9001 - RGB (opens new window)
© ICAS 2022

The mark and designation “CA” is a registered trade mark of The Institute of Chartered Accountants of Scotland (ICAS), and is available for use in the UK and EU only to members of ICAS. If you are not a member of ICAS, you should not use the “CA” mark and designation in the UK or EU in relation to accountancy, tax or insolvency services. The mark and designation “Chartered Accountant” is a registered trade mark of ICAS, the Institute of Chartered Accountants of England and Wales and Chartered Accountants Ireland. If you are not a member of one of these organisations, you should not use the “Chartered Accountant” mark and designation in the UK or EU in relation to these services. Further restrictions on the use of these marks also apply where you are a member.

ICAS logo

Our cookie policy

ICAS.com uses cookies which are essential for our website to work. We would also like to use analytical cookies to help us improve our website and your user experience. Any data collected is anonymised. Please have a look at the further information in our cookie policy and confirm if you are happy for us to use analytical cookies: