CM September 2021

Gap Analysis
A new Bill seeks to plug the gap in
Directors’ misconduct.
AUTHOR – David Kerr
FOR 35 years, the Company
Directors Disqualification Act has
been a feature of the insolvency
landscape, bringing with it
an obligation on Insolvency
Practitioners appointed in
insolvent liquidations and administrations
to file reports on those who were involved in
the company, with a view to investigation and
potential bans on any individuals found to
have acted inappropriately.
IPs and creditors have often argued that
too few cases have been taken up by the
Insolvency Service, but while the department
can’t pursue every case (and applies a public
interest test before deciding whether to use
its limited resources to take any action), it
does have a solid record of obtaining banning
orders or undertakings in the worst examples
of misconduct.
MIND THE GAP
However, this doesn’t apply to every case. In
Company Voluntary Arrangements (CVAs), for
example, there is no duty to report. But the
biggest gap has been in respect of companies
that are allowed to be dissolved without
going through a formal insolvency process,
and in 2018 the Service consulted on whether
to extend its disqualification powers to
companies in those circumstances.
Respondents mainly thought this was
a sensible measure, CICM included, but
other priorities meant that the proposal was
shelved, temporarily at least. Then along came
COVID-19, and the myriad of Government
financial support including bounce back loans,
and in turn a concern that some companies
were seeking to avoid repayment by going
down the dissolution route.
This led Government to introduce a
measure in a piece of legislation dealing
with other coronavirus provisions, and hey
presto the Rating (Coronavirus) and Directors
Disqualification (Dissolved Companies) Bill
was born. CICM was invited to give evidence
to the Bill Committee on the Directors part
of the Bill, and I duly pitched up (remotely)
to appear before the Committee on 6 July.
A Hansard record is available on-line
for those keen enough to view the wordfor-word
proceedings, but I’ll aim here to give a
flavour of the issues raised.
The essence of the Insolvency Service’s case
for the Bill was to plug the gap in respect of
dissolved companies and provide Government
David Kerr FCICM
But the biggest gap
has been in respect
of companies that
are allowed to be
dissolved without
going through a
formal insolvency
process, and in
2018 the Service
consulted on
whether to extend
its disqualification
powers to
companies in those
circumstances.
with investigative and disqualification powers
similar to those it already has in respect of
insolvent companies. This avoids the need
for creditors or others to incur the cost of
restoring a company to the register in order to
commence an investigation.
CONSULTATION APPROACH
The original consultation had asked whether
respondents agreed that there is a problem in
this area and that action should be taken to
prevent directors from avoiding liabilities and
scrutiny by dissolving their companies, and
that director conduct should be brought within
scope of the Secretary of State’s investigatory
powers. Buoyed by positive responses, and the
new covid-related imperative to protect the
public purse, the Service sought to introduce
just such a measure this year.
This was considered by the Service to be an
uncontroversial piece of legislation. After all,
apart from the directors directly in the firing
line, who would regard this as anything other
than a logical extension of existing powers?
There were though some concerns raised
during the course of the passage of the Bill,
and I’ll come back to those points shortly.
Witnesses before the Committee included
representatives of the IPs’ ‘trade’ body, lenders,
academics and others, including of course
creditors, through CICM. Before coming to
some of the points they made, it’s worth noting
a few facts for perspective.
Figures from the Insolvency Service suggest
that Government has made £46bn available
through 1.5 million bounce back loans over
the last year and a half, and that approximately
2,500 companies with unpaid loans have
been dissolved during the same period. Total
company dissolutions in the first quarter of
this year showed a 25 percent increase on the
same period in 2020. The Service currently
disqualifies around 1,200 directors each year.
PRINCIPAL CONCERNS
It is evident from the above that without
significant additional resources, the Insolvency
Service is not going to be able to investigate
all of the 2,500 (and counting) dissolved
companies with unpaid bounce back loans.
Indeed, there is no suggestion that it would. As
with its current powers, a public interest test
would be applied. There were a number of MPs
and others though who vented frustration with
the absence of a promise to increase resources
to give full effect to the new provisions.
Advancing the credit profession / www.cicm.com / September 2021 / PAGE 10