Cable's dodgy director crackdown 'set to fail'
A decline in enforcement action against dodgy company directors coinciding with a high level of liquidations has been seized upon as evidence that reforms are overdue, but of a different ilk to those proposed.
Rather than Vince Cable’s plan to allow the Insolvency Service to seek compensation directly from rogue directors, lawyers say that, controversially, compensation should go to the service, rather than affected creditors.
This is because the funds available to both the service and liquidators – who typically prosecute compensatory claims to reimburse creditors before informing the service so it can potentially issue disqualification orders – are “dwindling.”
Pinsent Masons added that unless funding for the service is stepped up to ensure enforcement action can be taken, the business secretary’s proposals to deter rogue company directors and compensate their victims will fail to achieve "tangible results".
Part of the problem is due to rogue directors “lurking in the twilight” instead of entering formal insolvency, because the service only gets its funding from levying a fee against asset realisations in formal insolvency proceedings.
As a result, explained Pinsent Masons’ legal director Alastair Lomax, such “zombie companies” frustrate creditors - by neither failing nor being rescued – and put a strain on the service’s funding model.
Alongside staffing cuts aimed at rebalancing the books, he described it as “inevitable” that enforcement action by the service would decline – as it has done, by 30 per cent in the past three years in terms of director disqualification orders.
In fact, only 920 directors were disqualified in England & Wales in 2012-13, compared with 1,333 in 2010-11. Similarly, director disqualification proceedings issued by the service in England & Wales have abated - by 24 per cent since 2010-11.
Lomax pointed out that the slump in enforcement action against dodgy directors coincides with a sustained, high level of liquidations since 2008 – averaging in excess of 4,000 per quarter over the past three years.
But he says liquidators are “plagued” by funding issues, as “companies are often so heavily indebted to their lenders that there are rarely any sufficient free assets available for a liquidator even to investigate misconduct claims, let alone prosecute them.”
He added: “No doubt this sits behind potentially the government’s radical proposals to allow liquidators to treat their statutory powers as a commodity to be sold to the highest bidder… [but] fairness and equal distribution of assets among creditors are the cornerstones of any credible insolvency regime.”
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