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Insolvency Series: The Naughty Step

08 February, 2018Keith Pond

For lovers of Dickens (David Copperfield and Little Dorrit, for example) where Debtors’ Gaols loom large in the plot of the story and in the lives of many characters and even for those who long for a return to Capital Punishment for debt (this blog, July 2017) there was always the warm reassurance of a fitting punishment for those guilty of not repaying debts.

Disqualification

In a corporate sense there is still capital punishment (let’s call it liquidation) for companies but what of their human agents – their directors?  Nothing as drastic and final as hanging is allowed – rather, a disqualification from office as a Director and a bar to managing a company or LLC for a specified period.

The UK Insolvency Service makes regular press releases (examples for 2018 are listed below) in which it almost gleefully announces the disqualification of directors and offers details of their wrongdoings.  In this way not only the disqualification gets noticed by regular readers of their output but the grounds for disqualification become more transparent.

Total Director Disqualifications 2009 to 2017


The overall statistics show:

  • There is an 80/20 split in favour of Undertakings (cheaper, quicker – because the courts are avoided) to Orders (reserved for more serious cases).
  • The typical duration of Undertaking disqualification is 5–6 years, for Orders it is 7-8 years. Disqualifications can have a maximum of 15 years.
  • Most enforcements relate to HMRC debts, especially where other creditors were preferred or records were not kept accurately.
  • On average there is ONE disqualification per 13 or 14 corporate insolvencies.

It is reported anecdotally, however, that this represents the tip of the iceberg of D1 (“unfit”) Insolvency Practitioner reports under The Company Director Disqualification Act 1986 (CDDA).

But what does this all mean for the average lending officer or relationship manager in a bank?

Could it mean that rogue directors who have evaded insolvency or have suffered insolvency of their business but have not been subject to a disqualification for lack of prosecution are free to start up new companies, continue to run existing ones and continue to borrow from banks?

Well, YES.

What it means is that lenders cannot rely on the Director Disqualification register to provide all negative information.  The CDDA is yet another example of moral hazard – bankers should not see it as a safety net and should use their own due diligence and professional training to detect the few bad apples.

References:

The Insolvency service Press releases 12 January 2018:

https://www.gov.uk/government/news/chippy-directors-served-with-ten-year-ban and

https://www.gov.uk/government/news/14-year-disqualification-for-previously-banned-director-and-8-year-ban-for-his-mother

The Insolvency Service, (2017), Insolvency Service Enforcement Outcomes, available at: https://www.gov.uk/government/statistics/insolvency-service-enforcement-outcomes-201718 [Accessed 15 January 2018]

Read the previous Insolvency articles.