According to data from International Law Firm RPC, in 2022 the Insolvency Service launched 36% more investigations into alleged misconduct of directors than in 2021. The average increased from 142 per month in April 2021 and March 2022 to 193 between 1 April and 31 December 2022.
The Insolvency Service oversees and investigates allegations of misconduct by company directors. This investigation will usually come about as a result of a complaint or evidence to suggest that the director acted inappropriately.
The investigation will involve a detailed review of the company’s financial records as well as interviews with the directors. Below are some of the more common misconducts by directors:
Failure to pay HMRC
Abuse of directors’ loan accounts
Drawing dividends illegally
Acting as a director while disqualified
It is not necessary to show that the directors’ actions were deliberate, it could be the case that the director was simply careless or overworked and this led to their conduct being below the standard expected. The Insolvency Services’ reasoning for seeking disqualification is to prevent the director from repeating any such conduct in the future (the public protection element) and to punish the director for their previous failings.
A reason for the increasing amount of investigations by the Insolvency Services may be the backlash from the COVID-19 pandemic and the increasing number of companies entering an insolvency process. In 2019, 41.9 per 10,000 companies entered insolvent liquidation, whereas post pandemic 49.5 per 10,000 businesses entered insolvent liquidation at the end of 2022.
The pandemic undoubtably caused businesses financial difficulties which led to the government-backed COVID support schemes, such as the Bounce Back Loan Scheme. This has also led to an increase in investigations as the directors would not be investigated for misuse of the loan until the company enters into an insolvency process.
The Insolvency Service recently reported that 459 directors were disqualified in 2022-23 for abuse of the pandemic financial support schemes, with average disqualification length of seven years four months, up from five years ten months last year.
With the increasing number of investigations into directors’ misconduct, it is crucial that directors understand their duties. Our insolvency team at Farleys offer advice on these matters, whether it is concerns pre-insolvency or post insolvency investigations. To discuss your circumstances in confidence, please call 0845 287 0939 or contact us by email.