Harris & Co chartered accountants report that Government plans to tackle rogue directors will fail unless more funding is made available to enforce proposed tough new rules, given the current high number of ‘zombie’ companies still operating, according research from international law firm Pinsent Masons.
Figures obtained by the firm from the UK Insolvency Service under the Freedom of Information act show that the number of company directors director disqualification orders issued in England and Wales have fallen by 30% in the past three years. Only 920 directors were disqualified in England & Wales in 2012-13 compared to 1,333 in 2010-11. Similarly, director disqualification proceedings issued by the Insolvency Service have fallen 24% over the same period.
In September, business secretary Vince Cable called for tougher laws to crack down on "rogue directors", saying: ‘We need to see fairness and as well as trust in our director disqualification regime. For too long, a small rotten core has got away with either a slap on the wrist, a ban from working in their own industry or at the most, a time-limited ban.’
Alastair Lomax, legal director of Pinsent Masons’ restructuring team, said: ‘The sharp fall in enforcement action by the Insolvency Service does give cause for concern but the proposals put forward by Vince Cable do not address the fundamental driver for this. If the government is serious about tackling the issue of rogue directors they need to ensure that reforms address the issue of dwindling funds available to liquidators and the Insolvency Service to investigate and prosecute claims.’
Lomax points to the large number of ‘zombie’ companies which are unable to service their debt but continue to operate rather than enter the insolvency process. As a result, while the Insolvency Service’s case work volumes are down by 58% since 2010, the value of value of asset realisations from formal insolvencies has also declined by 54%.
‘The key issue is a lack of case-work and the funding that it generates rather than major deficiencies in the available legal powers,’ Lomax said.
Under the reforms suggested as a result of BIS’s ‘Trust and Transparency’ consultation, the Insolvency Service would be given powers to seek compensation from rogue directors, but this money would go to creditors rather than towards filling the funding gap.
Lomax also warns that the proposals could result in a ‘turf-war’ with liquidators who have traditionally been tasked with prosecuting compensatory claims against directors so as to return money to creditors before handing details to the Insolvency Service to deal with disqualification. There could be a clash between the need for funding for those investigating rogue directors, and the requirement to make fair and equal distribution of any remaining company assets to creditors.