Loophole closed: Law passed to crack down on director misconduct

02 February 2022

The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act, which received Royal Assent in December 2021 gives the Insolvency Service a significant new power to investigate former directors of dissolved companies where it believes these directors are responsible for wrongdoing.

Some unanswered questions

We highlighted the profession’s concerns with the proposals throughout the Bill’s legislative journey (and were proactive in briefing MPs and Peers ahead of debates to make sure the profession’s voice was represented in Parliament.

We outlined our concerns with the Bill in this blog from July 2021, but the three main questions we had around the legislation were:

1. How will these new, additional, investigations be funded?
2. What method will the Government use to prosecute rogue directors of dissolved companies?
3. What will the Government’s approach be to dealing with the dissolved companies themselves, in addition to the directors?

An issue of resource

On 1^st December 2021, final amendments concerning the Insolvency Services finances and funding were tabled as the Bill reached the Report Stage of its parliamentary journey.

These amendments reiterated the issue of resourcing we raised and would have required the Secretary of State to report on the resources and the powers available to the Insolvency Service in relation to the Bill.

The amendments would also have required a statement of the impact of the then-Bill on the financial situation of the Insolvency Service and whether the Insolvency Service is sufficiently resourced to meet its obligations.

Baroness Blake of Leeds highlighted our concerns around the Insolvency Service’s resources for dealing with the extra work this Bill would impose, stating: “The Bill makes no mention of further funding for the Insolvency Service. Given that the Bill means that the Service will be carrying out additional investigations, this is worrying and risks overstretching it.”

In response, Lord Callanan reassured that “the Government are currently considering the resourcing level needed for the Insolvency Service to undertake its statutory functions, and that includes the additional proposed enforcement requirement contained in the Bill, should it be passed by the House.”

These amendments were not moved, and as the Bill has now passed, we will continue to monitor the impact of these investigations on those that the Insolvency Service is already required to undertake into the conduct of directors of insolvent companies.

Benefitting all creditors

Given our concerns around the Government’s planned use of Compensation Orders as the method of recouping monies from the rogue directors targeted by this piece of legislation, we have been keen to ensure that the Act benefits all creditors in these fraud cases, not solely the Government. We were pleased to see this point echoed by Lord Leigh in the Report Stage reading.

In addition, he thanked R3 for sharing our members’ experience, saying: “I am grateful to the insolvency trade association, R3, which has advised us that insolvency and restructuring professionals, who have extensive experience in tackling fraud, have noted that serious serial rogue directors do not see being disqualified as a significant deterrent, and will often go on to commit repeat frauds.”

“Insolvency practitioners frequently see disqualified directors contributing to successive business failures or breaching the terms of their disqualification by working as shadow directors or “advisers” to these phoenix companies that are subsequently set up. In fact, R3 has given us specific examples of where that has taken place.”

In response, Lord Callanan spoke extensively about the process which leads to the disqualification of company directors and gave reassurance that no preference is given to any particular creditors. He also confirmed that it will not be necessary for a company to be restored to investigate its directors, which will mean costs and administrative burdens can be avoided. Despite the Minister’s reassurances, we remain concerned that the beneficiaries of these Compensation Orders will be limited.

Peers pay tribute to the profession

Our engagement with parliamentarians throughout the Act’s legislative journey resulted in a rare moment that saw parliamentarians come to the defence of the insolvency profession during several debates.

Both Lord Fox and Lord Leigh defended the profession against criticisms made by Lord Sikka in an earlier debate on the Bill. This was the first time we had seen parliamentarians publicly calling for the profession to be afforded a fair hearing and the opportunity to respond to unfair and unfounded criticisms.

We were also pleased to see Lord Callanan give thanks to insolvency practitioners generally at the Report Stage of the Bill, saying: “[I] pay tribute to the excellent work of insolvency practitioners, who provide the conduct returns to the Insolvency Service, and who in many cases continue to assist with the investigative effort beyond that initial assessment.”

Long-term benefits?

The Insolvency Service is likely to use its new powers to initially prioritise Bounce Back fraud cases, but moving forward, this Act could play a really important role in closing the dissolved companies loophole which currently allows far too many rogue directors to commit fraud.

Overall, we were pleased to see this Bill through to a conclusion and welcome the change in legislation. However, we still feel there are some questions the Government did not fully answer and believe that this legislation could have been used to close the loophole more fully.

As the Insolvency Service starts to make use its the new powers, we’ll continue to ensure it and Government are aware of the profession’s view of how this new piece of legislation is helping efforts to tackle director misconduct.