Tougher Sanctions for Disqualified Directors: Cause for Concern?

Tougher Sanctions for Disqualified Directors: Cause for Concern?

Some 1,200 company directors are disqualified every year in the United Kingdom under the Insolvency Service’s disqualification regime. During the period of their disqualification, the disqualified must not act as a director of or be involved in the formation, promotion or management of a limited company.

The effects of the disqualification order are particularly far-reaching for practising professionals, who may no longer fulfil their membership body’s criteria for authorisation, but persons subject to a disqualification order are also prevented from acting in any associated positions of responsibility.

Clearly, however, the current disqualification order is not a sufficient deterrent to the small but significant number of directors intent on trading to the detriment of shareholders, investors and creditors, and recent reports suggest the Government is pushing for stronger deterrents and tougher sanctions for those who flout the law.

Vince Cable, the Business Secretary, said: “The vast majority of directors in this country run their businesses in the right way. But some people have suffered unnecessary losses as a result of rogue behaviour. Rogue directors can cause a huge amount of harm in terms of large financial losses, unnecessary redundancies and lifelong investments going down the drain. It is only right that we put the toughest possible sanctions in place, make sure we stamp out unfair practices and deter those who are looking to act dishonestly.”

The proposed sanctions include giving courts the power to make an order for disqualified directors to pay compensation to their victims. This will have particular impact on directors running investment schemes which fail to meet investors’ expectations: directors involved in ‘landbanking’ schemes and alternative investment propositions can also expect particular scrutiny into their conduct.

Insolvency Case Study

The director of a Kent based wine investment company – Bordeaux UK Limited, which took in more than £23m from investors and collapsed with debts in excess of £10m – was disqualified for a period of nine years for failing to keep proper company books and records.

The company encouraged members of the public to invest £23m in wine, both ‘in bond’ (bottled and stored in warehouses) and ‘en primeur’ (vintage still in the barrel), but when the company folded, only £4.6m was found to have been used to purchase wine. Investors alleged that the company disposed of wine on their behalf, with the proceeds to be either reinvested in new wine stock, or passed on to the investors, but new stock was found not to have been purchased, and the funds had been dissipated by the time the Liquidator was appointed. The company had only £1.2m of stock at the date of liquidation, and could not account for the losses suffered by investors.

Under the new proposals, the directors of such an enterprise may be forced to personally compensate their victims.

Cause for concern?

R3, the trade body for the insolvency profession, comments that although the Government’s proposals are welcomed, the rhetoric on director disqualification does not match the record. Giles Frampton, R3’s vice president, says: “While the number of reports of rogue directors has increased by over half in the last ten years, the number of directors actually disqualified has fallen by a quarter at the same time. Unless the Government is able to up its game, creditors – including small businesses and the taxman – will be exposed to people who are responsible for business failure after business failure.”

Who should be wary?

The Insolvency Service is not in the business of disqualifying directors who have tried their best, and the vast majority of directors seeking the advice of an insolvency practitioner have run their businesses with integrity. Nevertheless, directors involved in any kind of alternative investment scheme, that is, investments in asset classes other than stocks, bonds and cash, should anticipate intense scrutiny on their business activities, and all directors should ensure that they are keeping adequate books and records to substantiate the company’s activities and demonstrate, in the event of insolvency, that the company’s affairs were managed properly.

 

For the latest news regarding CFA claims against dodgy directors and how the Jackson Reforms will effect insolvency cases, see HERE

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