Lessons for anyone involved in monitoring and responding to companies in distress

13 Nov 23

Company failure can present the public sector with extremely high levels of risk. Simon Reason of the National Audit Office explains some work the watchdog has done preparing a report setting out lessons learnt from past failures, as well as a good practice guide for the sector.

Simon Reason

When you fly abroad, you expect to be able to come home. When you deposit money in the bank you expect to get it back. And when you flick the switch at home you expect the lights to come on. But sometimes, there is a risk this won’t happen unless the government intervenes in private markets to make it so.

The National Audit Office has drawn on over 20 years of reports for insights into how government monitors and responds to companies in distress. We also spoke to experts across government – including the Treasury, Cabinet Office, the Insolvency Service and UK Government Investments – to identify their hard-won lessons. We’ve set all these insights out in a report and guide to help those who may be involved. Here is a taster of what we say.

Very few companies should be rescued

The UK government’s position is that, in general, private sector companies should be allowed to fail as part of the efficient working of markets and the economy, and that direct government intervention is a last resort. But there are times when government must intervene – for example when 85,000 passengers were stranded owing to the collapse of Monarch.

The recent effects of the Covid-19 pandemic, war in Ukraine and energy crisis have shown how company failure in key sectors can ripple across the economy and have serious consequences for the government, taxpayers and service users, especially those who are vulnerable.

Our good practice guide sets out the importance of identifying and monitoring these risks, planning ahead for different scenarios, and putting in place detailed contingency plans where necessary.

Handling complex interventions and protecting taxpayers

If the possibility of company failure does become a critical risk requiring intervention, the responsible government department will need to understand the costs and benefits of all its options, including doing nothing, and will need to document its decisions clearly. Ultimately, as in any activity involving government money, when intervening to support a distressed company, a government department must adhere to the principles set out in Managing Public Money.

Because of the unusual nature of government intervention in a private company, even where there may be little or no public money spent, a department will likely be required to carry out a formal Accounting Officer Assessment. The approval will very likely be required too if the intervention is considered “novel or contentious”. 

If the accounting officer has serious concerns about value for money, he or she can flag this to Parliament by requesting a direction from the minister to proceed. This has happened in several cases, including British Steel.

Even if a company has been gradually failing for a long period and has been monitored closely by the responsible department, at the end the department may need rapid decision-making by officials and ministers, based on imperfect information and a set of unattractive options. The department’s policy and operational teams are responsible for leading this work, drawing on their understanding of the government’s objectives and duties in the area.

Specialist skills, resourcing and evaluation

Those teams will need advice and support from people with specialist expertise in corporate finance transactions and negotiations, contracting and insolvency law. It is important that those responsible in a department understand which skills they require and how to fill any gaps quickly.

When entering a significant intervention such as a special administration, the government will often need to purchase additional advice from legal and insolvency firms and there will also be costs associated with the court appointment of administrators and their advisers. As well as the cost of professional fees, this kind of commitment ties up departmental staff in handling a transaction. It is important to consider the potential scale of costs and elapsed time that may be required in different scenarios.

Evaluation of government interventions is important for learning what works and why, and to demonstrate accountability for the use of public money. Our Audit framework for evaluating government spending highlights the importance of collating and sharing evaluation findings and lessons learned across government.

 When it comes to handling high-speed, high-risk company distress situations, where the relevant experience and specialist expertise is in short supply in the civil service, wider sharing of learning becomes even more valuable. The Government Commercial Function delivers training for government officials on corporate financial distress, which draws out learning from past examples.

This is ever more important given the high turnover of civil servants. The government experts we consulted expressed concern that the government’s corporate knowledge in this field was vulnerable to the loss of people with specialist skills who might move jobs or leave the civil service.

All in all, the issue poses a unique set of challenges which I hope users of our guide will find a little easier to navigate, so they can keep the lights on, deposits safe, and bring home stranded travellers if the need ever again arises.

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