Crackdown on director misconduct
19th July 2010
Source: Financial Times
The government has cracked down on company directors accused of misconduct, increasing disqualification proceedings by almost one-fifth in the year to March 31.
The rise was fuelled by an increase in actions to strike off directors suspected of fraud or doing deals damaging to their businesses, according to an analysis of official figures by City law firm Wedlake Bell.
However, the move to blackball more dishonest or incompetent directors has lagged behind a sharp jump in whistleblowing by insolvency practitioners.
These professionals, responsible for recovering debts for creditors, have a duty to report suspected misconduct. Their “adverse conduct reports” jumped almost 50 per cent to 7,000 in 2009-2010. That compared with the 17 per cent increase in disqualification proceedings to 2,169 over the same period.
The disparity will fuel concerns that it is too easy for crooked or bungling directors to escape from the wreckage of a failed business, free to start another doomed enterprise – risking a rise in “frequent fliers”, as such repeat offenders are dubbed.
“Most of our members think that there are not enough disqualifications; they produce adverse reports for good reasons,” said Steven Law, president of R3, which represents corporate recovery professionals.
Last week the Insolvency Service said it was cutting the jobs of a number of investigators working on short-term contracts, triggering fears that cost-cutting would make it easier for directors to breach their statutory duties with impunity.
When the Insolvency Service decides that a case is worth pursuing legally, it has a success rate of about 90 per cent in obtaining strike-offs. Typically, suspect directors agree to be disqualified for a period of years rather than go to court.
In a recent case, the Manchester businessman Caleb Storkey agreed last month to be banned from managing a company or acting as a director until 2017. His urban regeneration business, Freedom Properties, which failed with debts of £1.9m in April, had operated from an old parsonage and obtained investment money that included the savings of local clergy. As a result, 13 clients lost a total of more than £230,000.
According to the Insolvency Service: “In signing his [disqualification] undertaking Mr Storkey did not dispute that he caused the company to represent to its clients that deposit monies would be held in a client account. But they were not and were utilised as general company funds.”
In another case, three directors were disqualified for high-pressure selling that included driving an elderly client with dementia to a bank to withdraw £3,500.
More prosaically, the analysis by Wedlake Bell shows that the most common reason for disqualification proceedings against directors is underpaid tax, which resulted in 813 actions in 2009-10. Directors of failing businesses often neglected to pay tax liabilities, the firm said, concentrating instead on meeting wage bills and supplier invoices.
However, deliberate or potential dishonesty were behind the largest rises in cases. There was an increase of more than 50 per cent in proceedings triggered by suspected fraud or “making transactions to the detriment of the company”, such as selling an asset cheaply to a relative.
Edward Starling, a partner at Wedlake Bell, said: “These are just fingers in tills – a lot of directors of smaller businesses treat their companies as their own assets, but their debts to creditors do not entitle them to do this.”
Honest directors of struggling businesses often worry that they may be “trading insolvently”, which means that expected income is insufficient to cover debts, an offence punishable by disqualification. However, the figures show that the Insolvency Service pursues few cases of this kind.
