The Insolvency Service tweeted on 27 July 2016 with some satisfaction that last year it disqualified 1,208 directors for unfit conduct.

Our economy is reliant upon business people and entrepreneurs taking risks and trying new enterprises and the insolvency and rescue culture is there to support that but there must also be an appreciation that there is a difference between bad luck, bad management and bad behaviour.

Does the Insolvency Service differentiate on this?

When a Company or business has failed a report used to be submitted by the liquidator to the Insolvency Service if there was evidence of the unfit conduct of a director.

‘Unfit conduct’ includes:

  • allowing a company to continue trading when it can’t pay its debts
  • not keeping proper company accounting records
  • not sending accounts and returns to Companies House
  • not paying tax owed by the company
  • using company money or assets for personal benefit

If found guilty the court can order disqualification periods from 2 to 15 years. During this period there are severe restrictions on what the former director can or cannot do in terms of promoting or managing a business.

Prior to 6 April 2016 the liquidator made a confidential recommendation on the former director’s conduct to the Insolvency Service who would then decide which cases to take forward. However since 6 April 2016 a new “automated” system started to make the decision on whether a director’s conduct is worthy of further investigation or not.

Despite this automation the reality remains however that the Insolvency Service has a target of approximately 1,200 disqualifications a year, a target they hit every year, and the data will be filtered and weighted in a manner which results in the same number of disqualifications being achieved.

If there are too many cases the Insolvency Service doesn’t have the resources to deal with them, too few and questions will be asked as to why the Insolvency Service is failing to achieve its target and funding might be reduced.

Impact

The consequence of this “weighting” is, unfortunately, that the Insolvency Service will continue to target the easy disqualifications.

Directors who are “guilty” of technical breaches of accounts rules or whose businesses work on a seasonal cycle that get “caught out” by bad luck at the wrong time leaving them with unpaid HMRC sums are likely to be pursued and suffer disqualification.

Directors who are more aware/experienced or have complicated fraud and dishonesty issues may be more likely to escape punishment unless of course they are high profile or high value enough to attract public attention.

What can you do?

If you are a director that has been contacted by the Insolvency Service, or thinks that you may be contacted, following the collapse of a business it is important that you take the correct advice as early as possible to avoid being a further statistic.

The Insolvency Service provides a short period for a response if they are going to take action and it might be that the provision of the correct information will avoid any proceedings or that matters can be resolved without the need for court involvement.