The 11-year Director’s Disqualification for the former CFO of construction giant Carillion, which collapsed in 2018, is an extreme example of the Insolvency Service’s appetite for taking action against errant bosses.
On a scale of two years to a maximum 15, the Carillion ban was undoubtedly ‘top end’, particularly since the individual’s voluntary undertaking to be disqualified probably shaved some time off a court-enforced outcome, plus costs. The bulk of cases, however, don’t involve signing off £50m-plus of dividends before going bust with £7bn of debt.
Recent figures from Insolvency Service show that from the total of 932 director disqualifications in 2022/23, almost half (459) related to abuse or misuse of Government-backed Bounce Back Loans (BBL) obtained during the Covid period. The stats showed a rise in criminal prosecutions against the directors, with all prosecutions resulting in a conviction and, in two cases, imprisonment.
The Insolvency Service is wasting no time launching official investigations into those voluntarily dissolving companies (outside a Creditors’ Voluntary Liquidation) with outstanding BBLs. In theory there is no ‘comeback’ on Directors whose businesses default on BBLs: their personal assets are safe since the loans are unsecured and involve no personal guarantees. The debt is written off once the company is liquidated, so liability doesn’t transfer, provided Directors have complied with their statutory duties.
Government investigators and appointed Liquidators will pick apart a company’s financial record in the run-up to insolvency. There are countless examples of questionable payments and enrichment on the back of BBLs, with some extreme cases well documented. Improper use of these lifelines will almost certainly make Directors personally liable for this outstanding debt.
Beyond BBL abuse, the recent (October 2022) Supreme Court ruling in BTI v. Sequana on directors’ fiduciary duties in a looming insolvency provides a further sobering reminder. When a company is “insolvent or bordering on insolvency”, or an insolvent liquidation or administration is probable, the directors’ duty to act in good faith in the interests of the company should be understood as including the interests of its creditors as a whole (the creditor duty).
While a “real risk of insolvency” is not sufficient to trigger this duty – and in Sequana, the creditor duty was not engaged, because insolvency was not even probable at the relevant time – as a general principle, the greater the company’s financial difficulties, the more the directors should prioritise creditors’ interests. Where an insolvent liquidation or administration is inevitable, creditors’ interests become paramount as the shareholders cease to retain any valuable interest in the company.
The Insolvency Service’s tighter grip is on directors is revealing wider fraud issues beyond government loan abuse. The number of cases sent to the service’s compliance and targeting department more than doubled in 2022/23, to 1,077 per month. Since investigators are clearly on the warpath, Director & Officer’s (D&O) insurance claims are likely to show a marked uptick from those seeking to cover the costs of investigations and penalties.
Written by David Buchler, Chairman at Buchler Phillips, UK based independent boutique firm with an impeccable Mayfair heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.