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Insolvency Service is tough on directors

Dominic Dumville.

EARLIER this year, the government announced new measures that will further scrutinise auditing and corporate governance for larger companies following the high-profile collapses of retailer BHS and the builder, Carillion. The latter had a devasting impact on healthcare provision and resulted in the loss of thousands of jobs and revenue for shareholders. The board of directors was found solely responsible for the collapse and accused of “recklessness, hubris and greed” in a very public dressing down.

In a developed economy seeking to cultivate an entrepreneurial spirit, it’s generally considered to be a good thing that almost anyone can be a director of a company. Providing you are at least 16 years old and not currently bankrupt you can take the appointment in the UK. While such a low barrier to entry has, no doubt, helped the British economy over the decades, each year there are a minority who, due to their conduct, have lost the right to be a director. Currently there are over 6,500 directors with active UK disqualifications.

The Insolvency Service is the government agency with the role of monitoring director conduct and brings most disqualification proceedings. Nine times out of ten, the genesis for a disqualification is the company entering into insolvency proceedings and the Insolvency Practitioner submitting a conduct report to the Insolvency Service. If and when the Insolvency Service has cause to commence proceedings it is by no means guaranteed that disqualification will follow; as with all fair law enforcement, the accused have the chance to defend themselves.

The published figures for the year to March 2022 were down significantly on prior years; only 802 directors were disqualified in that year against 1200 – 1300 in earlier periods. While it would be nice to think that standards of behaviour have improved, I have a hunch that this recent downward trend will swing back in the opposite direction over the next few years:

  • During 2021, as a result of the pandemic and government support there were record low levels of corporate insolvencies, resulting in lower conduct reports;
  • Corporate insolvencies are expected to bounce back to more normal levels and increase in the wake of the pandemic and inflationary pressures;
  • The Insolvency Service was recently given powers to investigate into, and bring disqualification proceedings in, dissolved companies;
  • Perhaps most significantly, the government’s massively popular Covid support schemes were not always used in accordance with the scheme rules.

This hunch is supported by recent data from the Insolvency Service’s website pages listing recent disqualification outcomes.

A review of the summaries for cases submitted in June highlights the fact that more than half related to the abuse of Covid support measures and Bounce Back Loans in particular. The most common offences were the improper use of the funds and obtaining the loans by submitting false information.

Another interesting statistic is the average disqualification term. The commentary accompanying the statistics for the year to March 22 explains that the average disqualification term in that year was five years and 10 months. The disqualifications in cases submitted in June average a term of over seven years, with a number of the Bounce Back Loan related offences attracting bans for 10 and 11 years.

I’m often asked by directors ”Should I be worried?” and the answer is “It depends”.

Compared to the number of insolvencies in any given year, it is a minority that lead to disqualifications. However, if a director knows they’ve allowed the line between what’s good for them personally and what’s good for the company to become blurred they may find themselves in hot water. Where Bounce Back Loans have been obtained with false information or where the funds weren’t used in accordance with the terms set out by the British Business Bank, one might argue that the offence is undone if the loan is repaid. While logical, this argument should be considered in the bigger picture; have other creditors suffered as a result?

No two cases are the same and so the best advice I can give is “Take advice, early”. Swift, professional advice can mean that financial decisions are properly scrutinised, investors are kept in the loop and there is good, open communication with all involved.

Dominic Dunville is a partner in the corporate restructuring team at accountants Mercer & Hole. Email dominic.dumville@mercerhole.co.uk or visit www.mercerhole.co.uk.

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