Rogue directors flourish in zombie twilight

Figures obtained by the firm from the UK Insolvency Service under the Freedom of Information act show that the number of company directors being investigated and disqualified has fallen dramatically since the Coalition Government came to power three years ago.

The findings come as business secretary, Vince Cable, this week called for tougher laws to crack down on 'dodgy directors'.

Data obtained from the UK Insolvency Service shows that the number of director disqualification orders issued in England and Wales have fallen by 30% in the past three years. Only 920 directors were disqualified in England & Wales in 2012-13 compared to 1333 in 2010-11. 

Similarly, director disqualification proceedings issued by the Insolvency Service, have fallen 24% in England and Wales since 2010/11

This is against a background of sustained, high levels of liquidations since 2008 – averaging in excess of 4,000 per quarter over the past three years.

Disqualification proceedings are most commonly brought where a company has become insolvent and there is evidence that the directors’ conduct makes them unfit to be concerned in the management of a company.  Misconduct can range from serious incompetence to recklessness and fraud.

Alastair Lomax,  Legal Director of Pinsent Masons’ Restructuring team, says:

“The sharp fall in enforcement action by the Insolvency Service does give cause for concern but the proposals put forward by Vince Cable do not address the fundamental driver for this. If the government is serious about tackling the issue of rogue directors they need to ensure that reforms address the issue of dwindling funds available to liquidators and the Insolvency Service to investigate and prosecute claims.  This is far more likely to generate tangible results which deter the rogues and compensate their victims.

“The Insolvency Service gets its funding from levying a fee against asset realisations in formal insolvency proceedings.  Despite signs of traction in the economy we remain in an era where over-leveraged zombie companies are lurking in the twilight instead of entering the formal insolvency which would either restore them to health or allow failures.  In that context, the volume of case-work (down 58% since 2010*) and the value of asset realisations from formal insolvencies (down 54% since 2010*) are inadequate to support the Insolvency Service’s funding model.  Factor in substantial staffing cuts aimed at rebalancing the books and it is inevitable that enforcement action will fall.

“Extending the current 2-year time-limit for bringing disqualification proceedings seems sensible – although an extension is currently available with the court’s permission.  Handing to the Insolvency Service the ability to seek compensation from rogue directors might appear sensible but it will not address the funding issue unless – controversially - the compensation goes to the Insolvency Service rather than affected creditors.  The reforms could also provoke a turf-war with liquidators who have traditionally been tasked with prosecuting compensatory claims against directors so as to return money to creditors before handing details to the Insolvency Service to deal with disqualification.  Typically both sets of claims relate to the same misconduct.

“Of course, liquidators are plagued by similar funding issues; companies are often so heavily indebted to their lenders that there are rarely any sufficient free assets available for a liquidator even to investigate misconduct claims, let alone prosecute them.  No doubt this sits behind potentially the government’s radical proposals to allow liquidators to treat their statutory powers as a commodity to be sold to the highest bidder.  Fairness and equal distribution of assets among creditors are the cornerstones of any credible insolvency regime.  The proposals suggest that there might be a market for claims whose primary purpose is to serve those high aims.  Perhaps we can no longer afford our principles but this will ring alarm bells.

“The key issue is a lack of case-work and the funding that it generates rather than major deficiencies in the available legal powers."

Disqualified Directors can face bans of up to 15 years depending on the nature and severity of the offence. Disqualifications bar individuals from being a director of a company; acting as receiver of a company's property; or being concerned in or taking part in the promotion, formation or management of a company.

*Insolvency Service Annual Report & Accounts 2012-13

** There is no distinction between England and Wales