Insolvency and the Conduct of Directors

The Comptroller and Auditor General for Northern Ireland, Mr John Dowdall, today published his report on ‘Insolvency and the Conduct of Directors’. The report examines the effectiveness of Insolvency Practitioners and the Official Receiver in assessing directors’ conduct in failed companies, the performance of the Insolvency Service in prosecuting cases of ‘unfit conduct’ and the extent to which it is engaging with key stakeholders.

Background

At March 2005, there were some 30,000 companies registered in Northern Ireland and approximately 155,000 directorships. Around 135 companies become insolvent (where debts and liabilities exceed assets) each year. Directors of insolvent companies may be disqualified, for between 2 and 15 years, if there has been ‘unfit conduct’ such as negligence, incompetence or lack of commercial integrity. Over the period from 1991 (when new legislation was implemented) to 2005, there were some 1,790 company insolvencies in Northern Ireland, resulting in losses to creditors of approximately £330 million – averaging some £24 million per year and £185,000 per company insolvency.

The Insolvency Service is a unit within the Department of Enterprise, Trade and Investment and is the main body responsible for pursuing director disqualification. The identification and reporting of directors’ unfit conduct is undertaken by the Official Receiver (a Civil Servant), responsible for administering and investigating compulsory liquidations (where companies are wound-up by the courts) and by private sector Insolvency Practitioners, generally accountants or solicitors, appointed to act in voluntary liquidations (where companies are wound-up by shareholders or creditors). From 1991 to 2005, a total of 209 directors were disqualified and a further 33 gave ‘undertakings’ not to act as directors.

Main Findings and Recommendations

On assessing directors’ conduct (Part 2 of the Report)

Insolvency Practitioners and Official Receiver staff report to the Insolvency Service on the conduct of directors of insolvent companies. Timeliness of submissions is a key aspect, as an application to the Courts for disqualification of a director has to be made within two years of the insolvency. The Audit Office reviewed 774 cases and found that, overall, 40 per cent of all final submissions were outside the six-month submission target. The report notes that Official Receiver staff were twice as likely as their private sector counterparts to submit Reports of unfit conduct within the initial six-month deadline. The Insolvency Service said that it has taken a number of actions which have resulted in a significant improvement (paragraphs 2.4 - 2.14).

Periodically, Insolvency Practitioners are visited to ensure that they have complied with all aspects of insolvency law and practice. However, visits are not intended to assess whether the Insolvency Practitioners’ opinions, on whether there has been unfit conduct, is soundly-based. The Audit Office considers that, without such assurance, the Insolvency Service has no means of satisfying itself that Insolvency Practitioners are interpreting and applying the legislation consistently and fairly. The report recommends that the Insolvency Service raises this issue with its GB counterpart, with a view to discussing possible changes with the ‘Recognised Professional Bodies’ (paragraphs 2.38 - 2.43).

A 2001 internal review of the Official Receiver Unit noted a number of deficiencies, including cases where there had been no attempt to chase up unanswered correspondence with companies and cases where there was no evidence on file of any investigation taking place. The review also noted that requests and follow-up reminders for information from Insolvency Service’s own ‘Directors’ Disqualification Unit’ went unanswered or unacknowledged for long periods of time; that there were long periods of inactivity in case-handling; and holding returns had been used by staff because they had not at that stage undertaken any investigation. The report notes that Insolvency Service has initiated a process to address all the issues raised (paragraphs 2.44 – 2.48).

On the performance of Insolvency Service in taking unfit conduct cases (Part 3)

In the 12 year-period to March 2003, the Directors’ Disqualification Unit (DDU) received a total of 563 Reports of unfit conduct. DDU took court proceedings in 157 cases, some 28 per cent. The Department told the Audit Office that, over a similar period, the Insolvency Service in GB initiated disqualification proceedings in 21 per cent of its cases of reported unfit conduct (paragraph 3.2).

In a significant proportion of cases, Insolvency Service had not managed to meet its corporate target of submitting all affidavits to the Departmental Solicitor within 21 months. The Audit Office reviewed a sample of 35 cases, noting three instances where the cases appeared to be overlooked, investigations were not completed or inadequate time was left to clear points raised by the Departmental Solicitor, with the consequence that disqualification was not pursued. The Department said that Insolvency Service is strengthening DDU with appropriate staffing and other resources, including information technology. In addition, the Official Receiver and DDU are now monitoring the timeliness of replies to enquiries, by meeting on a regular basis (paragraphs 1.10, 3.21 - 3.28).

On engagement with external stakeholders (Part 4)

The Audit Office commissioned a survey of 200 company directors in Northern Ireland and found that a majority felt well informed about the responsibilities of directors and the factors that could lead to their disqualification. However, 10 per cent indicated that they were not informed at all and a further 31 per cent that they felt not very well informed. Only 7 per cent of those surveyed indicated that they had been given formal information by Government Departments on disqualification (paragraphs 4.3 – 4.4).

The survey also revealed that a significant proportion of directors is not familiar with issues such as to whom disqualification applies and what it means in practice - 70 per cent did not recognise that disqualification applies to all those directors of companies who were, or should have been aware of the misconduct; 30 per cent did not recognise that the director is disqualified from acting as a director of any company; and 85 per cent were not aware of the penalties for continuing to act as a director while disqualified. The Insolvency Service said that guidance for directors would be put on the Companies Registry website and that other initiatives to improve communication with company directors are being considered (paragraphs 4.5 – 4.17).

The Audit Office also surveyed the 48 Insolvency Practitioners based in Northern Ireland. While 30 per cent considered the Service was bringing proceedings against a sufficient number of unfit directors, 30 per cent considered it was not and, although 42 per cent considered the Service acted quickly enough to protect the public interest and creditors, 26 per cent felt it did not act fast enough. Following the Audit Office’s recommendation for more structured and systematic consultation with Practitioners, the Insolvency Service met with the Practitioners’ representative bodies and held a number of Workshops. These will now be held on an annual basis (paragraphs 4.23 – 4.28).