Public at risk from ‘dodgy directors’
January 2011
Directors Disqualification Paper 2010-11
The number of directors disqualified by the government for misconduct, such as fraud, has failed to keep pace with an increased number of reports of potential misconduct, according to research by insolvency trade body R3.
The percentage of reports taken forward by the Insolvency Service (i.e. disqualifications) has halved from 40% in 2003/4 to 20% in 2009/10. Fraudulent activity is known to increase during tough economic times. In 2009/10, insolvency practitioners submitted 7,030 reports on directors' behaviour which they believed warranted further investigation. However, in that year, only 1,387 cases were concluded by the Insolvency Service.
R3's President Steven Law commented: "This mechanism is in place to protect the general public and other businesses from dishonest directors. Not punishing directors who are blameworthy sends out a dangerous message to others."
The most common reasons for insolvency practitioners reporting directors are: failure to pay tax debts (35%); obtaining personal benefits from the company (28%) and appropriation of assets to other companies (24%).
"These are serious infringements that damage the reputation and success of UK plc", continued Steven Law. "Furthermore, R3 would like to assist the Insolvency Service in implementing an effective system which ensures that it is not just the easier cases that are pursued. It is important that the more serious offences are punished appropriately."
R3 would like to see blameworthy directors fined and wants to work with Government to establish a financial and corporate education programme for disqualified directors. This would help prevent the sequential failures from directors which are so damaging to public confidence, as would increasing the percentage of insolvency practitioner reports taken forward by the Insolvency Service.
Cases when directors have not been disqualified despite the insolvency practitioner reporting obvious misconduct:
A company working in the airline industry, based in South East England.
Aspects of the director’s conduct which the IP believed warranted a report to the IS: attempted concealment of assets. The IP stated: “£250,000 was sent to a German company with no details… [this was] clearly a scam to remove money from the company to be paid back to the director.”
An electrical company, located in London.
Aspects of the director’s conduct which the IP believed warranted a report to the IS: appropriation of assets, preferential payments, personal benefits obtained by directors, overvaluing assets in accounts for the purpose of obtaining loans, or other financial accommodation, or to mislead creditors, loans to directors in making share purchases and dishonoured cheques. The IP stated that: “Funds were diverted to an associated company….which ran off with the money”.
A manufacturing company, located in the South Midlands.
Aspects of the director’s conduct which the IP believed warranted a report to the IS: attempted concealment of assets, phoenix operations, appropriation of assets to other companies, preferential payments, overvaluing assets in accounts for the purpose of obtaining loans, or other financial accommodation, or to mislead creditors, use of delaying tactics and non-payment of Crown debts to finance trading. The IP stated that this was: “probably the most clear cut case I have ever made a submission on”.