Government to crack down on 'reckless' company directors

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BHS fell into administration in 2016 (Source: Getty)

Directors who dissolve firms to avoid paying out pension pots or salaries to workers could get hit with hefty fines under a new government initiative.

The Insolvency Service (IS) will be tackling directors who dodge paying their company's debts by dissolving the firm and then setting up a near identical business, in a process also known as 'phoenixing'.

Business minister Kelly Tolhurst said the IS will be given powers to fine directors or have them disqualified.

"While the vast majority of UK companies are run responsibly, some recent large-scale business failures have shown that a minority of directors are recklessly profiting from dissolved companies. This can’t continue," she said in a statement published today. 

UK bosses will also have to provide more detailed explanations to shareholders on how a company can afford to pay out dividends, in comparison to its other financial commitments such as capital investments, workers' rewards and pension schemes.

Read more: Experts sceptical of new powers for Pensions Regulator

IS currently disqualifies around 1,200 directors a year.

The announcement comes as part of a strategy launched in March by the Department for Business, Energy and Industrial Strategy to safeguard workers, pensions and small suppliers when a firm goes bust.

It follows several large-scale company collapses, including construction firm Carillion and retail chain BHS in 2016.

Read more: Pensions watchdog says Dominic Chappell knew BHS was bust when he bought it

The Pensions Regulator continues to argue Dominic Chappell, who bought BHS for just £1 from retail tycoon Sir Philip Green, knew it was insolvent before making the purchase.

The watchdog is continuing efforts to make Chappell pay £9.5m into BHS' pension pot for its former workers.

Today's measures will be set out in further detail later this autumn.

Chris Cummings, chief executive of the Investment Association, said there had been concern among investors for some time that companies were "utilising interim dividend payments to avoid shareholder approval".

Stuart Frith, president of the insolvency and restructuring trade body R3, welcomed the announcement.

"Our members have long raised concerns that some directors are deliberately dissolving businesses to avoid paying their debts. A strengthened disqualification regime will be an important part of ensuring that directors are less likely to walk away from their responsibilities."