The Insolvency Service, which acts as an impartial source of public information about insolvency matters, has released official statistics revealing the actions taken against company directors in Q1 2016.

The statistics reveal the enforcement actions taken against company directors following Insolvency Service investigations into their conduct. The cause of company failure is examined in every insolvency, and insolvency practitioners have a duty to report any incidences of suspected misconduct. This can include anything from causing significant harm to customers or suppliers, to committing an act of fraud or failing to use company assets in the proper way.

A report of suspected misconduct can trigger an Insolvency Service investigation. If the Insolvency Service decides the case is worth pursuing legally, typically company directors will agree to be disqualified for a period of years rather than going to court.

These latest statistics relate to the number of new outcomes obtained as a result of enforcement activities that took place between January and March 2016.

The headline findings

• Company insolvencies and enforcement outcomes are on a downwards trend

There is a direct link between the number of company insolvencies in a particular period and the director disqualifications handed down. The number of company insolvencies has been on a downwards trend since 2012, as have director disqualifications.

• Director disqualifications fell slightly year-on-year

1,210 director disqualifications were recorded for the year 2015/16, down from 1,210 the year before. However, the latest quarter, Q1 2016, saw the largest quarterly number of disqualifications since Q2 2010.

• The average disqualification period has increased

A director disqualification can last for a period of up to 15 years. In the last year, the average length of a disqualification handed down increased to 5.9 years, up 0.3 years on 2014/15. Of the 1,208 disqualifications made in January to March 2016, 56 percent were for a period of 2 to 5 years; 34 percent were for between 5 and 10 years; and 11 percent were disqualified for between 10 and 15 years.

• The number of companies wound up in the public interest has increased

Section 124A of the Insolvency Act 1986 gives the Secretary of State for Business, Innovation and Skills the power to petition the court to have a business wound up in the public interest. In the last year, 131 companies were wound up for this reason, an increase of 28 cases on the previous year.

Examples of companies wound up in the public interest

The following examples are just a few of the companies to be wound up in the public interest in Q1 2016:

• Two companies that misled almost 100 small businesses into paying between £495 and £2,500 for services to challenge business rate valuations. None of the rates were revalued.

• A company that made false and misleading claims to persuade elderly and vulnerable customers to buy grossly overpriced and unnecessary health supplements.

• A London clothing company that fabricated financial information to obtain significant credit it could not repay. It falsely claimed that it produced clothes for film productions and the opening and closing ceremonies at the Olympics.

The leading causes of director disqualifications

The following figures refer to disqualifications made under Section 6 of the Company Directors Disqualification Act 1986 only. These are disqualifications where the accused is a director of a company which has become insolvent, and his or her conduct as a director makes them unfit to be involved in the management of the company.

It is also important to note that one or more allegations of unfit conduct can be made in each disqualification case. The reasons give for the disqualification of company directors for Q1 2016 were as follows:

  • Unfair treatment of the Crown – 693
  • Accounting matters – 175
  • Transaction at the detriment of creditors – 164
  • Technical matters – 148
  • Criminal matters – 124
  • Misappropriation of assets – 22
  • Trading at a time when knowingly or unknowingly insolvent – 15
  • Phoenix companies or multiple failures – 4

Are you worried about a potential director disqualification?

It’s important to note that director disqualifications are still relatively rare; however, if you act fraudulently, wrongfully or neglect your obligations while in charge of an insolvent company, you could be at risk. For a no-obligation, cost-free discussion of your circumstances, please get in touch with our expert team.

Written by: Mike Smith