Number of directors disqualified falls
The number of company directors that have been disqualified by the Insolvency Service has dropped by 24 per cent year-on-year but could be set to increase due to state-backed loan fraud.
National accountancy group UHY Hacker Young cited The Insolvency Service’s data showing the figure fell from 1,280 in 2019/2020 to 972 in 2020/21.
The firm said failure to investigate directors guilty of financial misconduct could result in a huge loss to the taxpayer through defaults by those directors that have taken out loans through the coronavirus business interruption loan scheme (CBILS) and bounce back loan scheme (BBLS).
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Speculation has mounted that director fraud during the pandemic could amount to billions of pounds, with under-pressure directors taking out government-backed CBILS and BBLS loans with no intention of paying them back.
UHY Hacker Young said the fall in disqualifications of directors last year is an unusual result given the scale of last year’s record-breaking recession in 2020 and directors are far more likely to attempt financial misconduct during economic downturns to maintain their personal income or to try and save their businesses.
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Since May 2021, possibly in response to the high take-up of CBILS and BBLS, the Insolvency Service can retrospectively penalise directors for fraudulently refusing to pay back loans, even if a director had dissolved their company.
Peter Kubik, partner at UHY Hacker Young, said that the low number of directors being disqualified in the last year is partly due to government measures to artificially reduce the number of corporate insolvencies.
Misconduct by directors is often only discovered once a business has become insolvent and an insolvency practitioner looks at what has happened.
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“The low number of insolvencies in the last year does not mean that directors are behaving themselves,” said Kubik.
“More likely it means that misbehaviour, including criminal behaviour, is not being discovered.
“It is concerning if directors are escaping penalties for committing financial misconduct. If criminal behaviour of directors isn’t punished then there will be little incentive for other directors to follow the rules in the future.”
Directors can be disqualified for actions such as attempting to defraud HMRC, falsifying records or transferring money out of a business when insolvent.
8,784 whistleblower reports were made by insolvency practitioners against directors in 2019/20, showing that only a small percentage of whistleblowing reports against directors led to action against those directors.
In the early stages of the pandemic, HMRC gave forbearance to companies with their arrears.
Furthermore, the Insolvency Service’s powers did not extend to investigating directors of companies that had ceased trading.
UHY Hacker Young said that the government must ensure that the Insolvency Service is sufficiently resourced to cope with a steep rise in investigations.