Company Directors are Suspected of Misconduct in 30% of Insolvencies

Company Directors are Suspected of Misconduct in 30% of Insolvencies
Recent research has shown that almost a third of all business insolvencies are referred to the Insolvency Service for further investigation.

In the past three years, the number of insolvency cases referred to the Insolvency Service’s Disqualification Unit has risen by a startling 21%. This has prompted fears in the industry that the number of senior leaders who are prepared to act dishonestly during corporate insolvencies is on the rise.

The increase in the number of Disqualification Unit referrals means nearly a third of all the directors of firms that have collapsed over the past year have been subject to an Insolvency Service investigation.

In the 12 months to 30 March 2014, more than 15,400 business insolvencies have been scrutinised by licensed insolvency practitioners. Of these, a total of 4,671 directors were reported to the Insolvency Service for potential misconduct.

A substantial rise in the Insolvency Service’s workload

Of the 4,671 business leaders referred to the Insolvency Service for investigation, disqualification proceedings were brought in 1,273 cases, representing 27% of the total cases brought. This is a 21% increase in the number of proceedings entered into three years ago when just 1,031 misconduct proceedings resulted from 5,401 Insolvency Service referrals.

This represents a considerable increase in the Insolvency Service’s workload. Despite the fact that more cases were referred to the Insolvency Service in 2011, a far smaller proportion of those cases merited further investigation.

Budgetary cuts have not blunted the Service

In the last couple of years, the Insolvency Service has been the victim of government cutbacks, prompting fears that its ability to effectively handle such a large number of cases would be blunted.

However, these figures show that despite an upturn in case numbers, the Insolvency Service has continued to fulfil its remit by punishing the growing number of directors who lead their companies astray.

On what grounds might a director disqualification order be made?

The directors of insolvent companies found guilty of misconduct are liable for a disqualification of up to 15 years. Any application is heard and decided by the court following a decision by the Secretary of State as to whether pursuing a disqualification order is in the public interest.

Disqualification orders can only be handed to directors in office in the last three years of the company’s trading. Examples of misconduct which may lead to a director disqualification include:

  • Failure to keep proper accounting records
  • Failure to prepare and file accounts or make returns to Companies House
  • Failure to submit tax returns or pay over to the Crown tax or other money due
  • Failure to cooperate with the official receiver or insolvency practitioner
  • Continuing to trade to the detriment of creditors at a time when the company was insolvent

Disqualifying rogue directors serves as a crucial deterrent

Commenting on the findings, a spokesperson for the accountancy firm Moore Stephens, which conducted the original research, said: “The Insolvency Service has delivered a substantial improvement in the number of disqualification proceedings against dishonest directors.

“It is important the funding is available to all of the Insolvency Service to pursue these cases, as disqualifying rogue directors serves as a crucial deterrent – and is vital to ensuring a fair deal for creditors in any insolvency.

“Having an effective enforcement regime for dishonest directors is in everyone’s interests, and is critical to ensuring that honest business owners can compete on a level playing field.”

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