Directors – Transparency, Trust and consequences of non-compliance

A busy day for Insolvency with Vince Cable’s discussion paper “Transparency and Trust” following the government’s commitment to tackling fraud at the recent G8 Summit.

Whilst the suggestions regarding Companies House are welcome it is hoped they will be as robust as possible, requiring director identification evidence and auditor verification (mirroring the proposals of the Fraud Advisory Panel and R3), as well as proof of beneficial ownership. All too often a change of a date of birth or a misspelling of a name and there is no chance of putting together a true picture of who you are doing business with. There are numerous companies filing accounts purporting to be audited by large and reputable auditors when they are in fact wholly fictitious, and I would suggest this must also be tackled as part of the project.

The proposal that banks should have greater and more specific director duties, and that breach of sector specific duties should be taken into account in disqualification also seems eminently sensible. The other proposal that the procedure takes into account the effect on victims of the delinquent director’s behaviour i.e. losses to others and wider impact on society has good public policy reasoning behind it I would suggest.

Extending the period allowed to the Insolvency Service to bring disqualification proceedings seems sensible. A proper investigation and putting together a case can easily take the Service over the two years presently allowed in a complex case, and five years seems more reasonable. However there is a corresponding risk that smaller cases which could be more swiftly brought will be more slowly processed, adding to cost and distress, and failing to provide the public protection that disqualification should swiftly bring. The paper does specifically state that most cases should still be brought within the two years.

The government suggests that compensation should be able to be ordered by the court on disqualification, the paper specifically suggests a “compensatory award” so one would assume those funds would go into the insolvent estate is awarded, but discussion is invited on the proposal and whether it would improve confidence in the corporate enforcement regime.

The government also proposes to allow liquidators to sell/assign wrongful trading and fraudulent trading actions as they can other actions. That may sound wise but a better alternative would be to allow proper funding to enable the IP to bring those proceedings themselves being best placed to do so. The present market for assigned claims often takes at least half the recovery and targets the easy claims (not a description usually applicable to fraudulent and wrongful trading cases). Those funds would otherwise be available to creditors in full if the IP could be funded to bring the action him or herself.

The proposals also extend to bringing disqualification proceedings against directors who have been convicted of a crime in relation to the management of a company abroad as well as amending the Companies Act 2006 to ban those subject to foreign restrictions in relation to management of a company from becoming directors in the UK.

The government says it intends to streamline the process for Insolvency Practitioners to report director misconduct, however as I understand it that involves amalgamating the D1 and D2 form which seems to me more about losing statistical data on the percentage of reports taken forward to disqualification. The strengthening of the disqualification regime also intends to strengthen government investigators’ powers to make them akin to those of an Insolvency Practitioner.

The Government invites responses by 16th September 2013.

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