The work of the insolvency profession in tackling rogue directors

29 January 2018

The recent BBC Panorama programme, ‘Millionaire Bankrupts Exposed', sought to expose the ways in which some bankrupts attempt to get around the restrictions imposed by their bankruptcy or Bankruptcy Restrictions Orders (BROs) – in the process, breaking the law and attempting to cheat creditors, including the taxpayer, out of the money they are owed.

The programme sparked a big response on social media and drew attention to a part of the insolvency framework not normally the focus of much media interest. Indeed, a number of blogs and articles were published in response (see here, here and here) which look more closely at some of issues identified (or missed) by the programme, including the difference between the administration of bankruptcy procedures in England and Wales compared to Scotland, and the profile of those most likely to enter bankruptcy.

While R3 supports the principle of exposing wrong-doing by people who are not complying with the terms of their bankruptcy, one thing in the programme which caused us some concern was the use of the word “crime” to refer to bankruptcy. Simply put, bankruptcy is not a crime. It’s a legitimate and important tool to help individuals get back on their feet when facing financial difficulty. By focusing on the behaviour of a small number individuals who are not at all representative of the typical person entering this type of insolvency procedure, the programme risked conflating bankruptcy as a whole with the illegal actions of a few. With stigma around insolvency procedures already preventing many indebted individuals from even seeking advice in the first place, it’s not helpful to hear bankruptcy described in these terms.

However, rather than re-run these issues in too much detail, we thought it might be helpful to highlight the work that the insolvency profession undertakes in tackling rogue directors and bankrupts, like those featured on Panorama. Indeed, while this may have been the first time that viewers at home have been made aware of the issue of some people hiding the scale of their assets, insolvency practitioners are well aware of the activities of these individuals and already play a key role in tackling this problem.

When an insolvency practitioner is appointed as the ‘office holder’ of an insolvent company or individual’s estate, they have responsibility for the estate’s assets and the power to investigate whether fraudulent actions and transactions involving the estate have taken place. It’s the office holder’s duty to maximise returns to the estate’s creditors and a key part of this is tracking down assets being hidden from the estate or wrongly transferred out of a bankrupt’s or company’s possession prior to the start of an insolvency process. Office holders will often undertake litigation or investigative work to achieve this.

In order to carry out those investigations effectively, the insolvency profession has wide-ranging powers to probe a bankrupt’s or company’s activities, including the ability to interview under compulsion, to search and seize property associated with fraud, and to obtain passport orders (where the individual is ordered to surrender their passport to prevent them leaving the country).

The profession also works closely with government agencies to take action against ‘rogue’ directors or bankrupts where possible. This will largely involve liaising with the Insolvency Service (IS), particularly given that, with a few exceptions, insolvency practitioners are required to produce a report for the IS on director behaviour in every case they are appointed to. The Insolvency Service then uses these reports to determine which directors to pursue for disqualification or which bankrupts to make subject to further restrictions.

But the insolvency profession is keen to see a number of policy changes which could make it easier to tackle fraudulent activity. R3’s 2015 Fraud Landscape paper set out a number of recommendations, including:

• Requiring directors to provide identity documents when registering with Companies House (directors are not currently required to do so; it also costs only £12 to register a company online, making it too easy for ‘rogue’ directors to abuse the privilege of limited liability);
• Requiring companies to state on their annual return to Companies House the names of all directors ‘howsoever described’ rather than just the appointed directors;
• Enabling the Secretary of State to issue petitions to make individuals bankrupt in the public interest (companies can already be wound up in the public interest).

The insolvency profession plays a really important role in tackling rogue directors and fraud more generally, and is keen to do even more wherever possible. Creditors should always remember that they have the option to appoint an insolvency practitioner to oversee an insolvency procedure should they wish (and provided enough other creditors agree).

R3 will continue to call for new policies to help in the fight against fraud and will be launching an updated Fraud Landscape paper later this year.