The number of company directors that have been disqualified by the Insolvency Service fell by 24% in the last year, from 1,280 the year before to 972 in 2020/21*, says UHY Hacker Young.
Failure to investigate directors guilty of financial misconduct could result in a huge loss to the taxpayer through defaults by those directors on Coronavirus Business Interruption Loans (CBILS) and Bounce Back Loans (BBLS).
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 with no intention of paying them back.
The fall in disqualifications of directors last year is an unusual result given the scale of last year’s record-breaking recession in 2020. Directors are far more likely to attempt financial misconduct during economic downturns to maintain their personal income or to try and save their businesses.
Peter Kubik, Partner at UHY Hacker Young explains 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.
Adds Peter Kubik: “The low number of insolvencies in the last year does not mean that directors are behaving themselves. 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.
A total of 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 unprecedented forbearance to companies with their arrears. Also, the Insolvency Service’s powers did not extend to investigating directors of companies that had ceased trading. 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.
UHY Hacker Young says that the government must ensure that the Insolvency Service is sufficiently resourced to cope with a steep rise in investigations. If the Insolvency Service is not well-resourced, then the loss to the taxpayer as a result of defrauding HMRC could be enormous.
If found guilty of fraud, a director can be banned from acting as a company director for up to 15 years and can face jail time. Directors may also be banned from setting up a near identical business after dissolution, so they cannot continue trading whilst leaving creditors and HMRC unpaid.
* Year-end March 31 2021. Source: The Insolvency Service