At a speech given this month, The Right Honourable Vince Cable, Secretary of State for Business, Innovation and Skills has flagged the Government’s intention to bring in legislation to commence fining disqualified directors, and in doing so puts forward an appealing perspective.
On closer inspection of the current system, the fining of directors seems to be wallpaper covering the cracks of the real issues in dealing with directors guilty of dishonest business practice. He has conveniently ignored the white elephants which are actually preventing the director disqualification process from being as strong a deterrent as it could be.
Firstly, under-funding. The Insolvency Service is the government body tasked with bringing disqualification proceedings against directors, yet its funding has been cut by 40%. This has manifested itself in that the number of directors reported for dishonesty to the Insolvency Service has risen by over 20% in the past three years, whilst the number of cases leading to disqualification has stayed static. In other words, a fifth more individuals are being highlighted as having potentially committed offences, yet no more in number are being properly investigated. Surely, that is counter productive to the tough regime being espoused?
Secondly, Mr Cable talks about Disqualification as punishment for those acting fraudulently, or continuingly ‘phoenix-ing’ their business. The reality however is that although the majority of the reports made against directors are for “fraud” based allegations, of the actual disqualification orders, the Insolvency Service pursues less than 7% are of this type!
By far, the most common offence that leads to disqualification is the non payment of Crown debt, and that’s because it is much easier to prove. Unfortunately, the directors guilty of this offence, are not usually the ‘fraudsters’ Mr Cable wishes to target, but the lower end ‘easy-pickings’.
My view is that there is little point in the Government looking to increase the level of punishment without also changing the system so the right errant directors are being targeted. If you are increasingly unlikely to be pursued in the first place – why would a fine be a deterrent?
For more information on the type and number of disqualifications, please read Help for Directors – Prt 1
If you require advice on any of the issues raised, I can be contacted on email@example.com
Eamonn Wall, Managing Director