Directors of holding companies must be more accountable for decisions to sell financially-distressed subsidiaries, but their liability cannot extend beyond the point of sale, the Institute of Directors said today. Responding to a Government consultation which was prompted by the collapse of BHS following its sale by the Arcadia group, the IoD called for a new requirement to publish group governance frameworks that spell out how subsidiaries are controlled by their parent company.
This is necessary, the IoD argues, because the law typically views subsidiaries as separate legal entities, when in reality any major sale would normally approved by the holding company board. In its consultation response, the IoD said that while directors had a duty of care when considering the sale of near-insolvent subsidiary, they did not have ‘crystal balls’ and would not necessarily be able to tell whether a sale would harm or improve the fortunes of a struggling company.
Instead, the IoD proposes that directors should be required to consult the company’s creditors, employees and pension fund trustees before proceeding with a sale. If there is reasonable agreement that selling is the best course of action, the directors would then be said to have fulfilled their duty.
Full consultation response
Dr Roger Barker, Head of Corporate Governance at the Institute of Directors, said:
“Companies sometimes fail and that is the reality of business. But if we take anything away from the unfortunate events like the collapse of BHS or Carillion, it is that there must be clearer accountability for decisions that are made when companies are facing financial difficulties, and which have wide ranging implications for thousands of people. This consultation is a clear commitment from the Government that they are eager to do just that. But the proposed reforms must also allow directors the flexibility to seek ways of rescuing distressed companies through possible sales to third parties.
“It is absolutely crucial, for example, that the responsibilities of directors are clear when firms are in or approaching insolvency. We have called for a new requirement for directors to spell out roles and responsibilities within groups of companies. But we would warn against proposals making holding company directors responsible for up to two years after the sale of a subsidiary has gone through - it make no sense for directors to remain responsible for companies that are no longer under their control.
“The Government must therefore show restraint, A kneejerk reaction to the highly specific circumstances of recent high-profile cases is not good policy making, and would not be relevant to the concerns of the wider business community. Furthermore, the attempts of the Government to impose liability on directors for "reasonably foreseeable" company insolvencies - which occur after they have been sold - is unrealistic. Hindsight is a wonderful thing, but in the real world it is difficult for anyone, including directors, to predict if a company will survive under a new owner."