Rogue directors face clampdown.
Although many companies become insolvent due to fraudulent managers, a legal loophole allows dodgy directors to get away with a simple disqualification after having embezzled millions of pounds.
To counter this trend, the government has launched a pilot scheme, The Insolvency Service Civil Recovery Scheme, in conjunction with insolvency practitioners at Kingston Smith & Partners.
Law firms involved in the scheme include Moon Beaver and Howes Percival.
According to Ian Defty, senior manager at Kingston Smith, in cases where proceedings are underway, the firm has been advised that there is a better than 75% chance of success if they seek ‘a substantial return’ to creditors.
Under the new scheme, the government is considering 23 cases from compulsory liquidations and bankruptcies in which perpetrators owe creditors about #14.5m. Typically an attempt is made to reach a settlement before commencing full proceedings, and in the two cases where settlement was reached, creditors received a 100% return on their claims.
Proceedings have begun in four cases. A further nine cases are under investigation.
Although there is legislation against fraud and embezzlement under the Company Directors Disqualification Act 1986, until recently, the Official Receiver has has not pursued dodgy directors for the money owed to creditors.
This is because, at present, about 85% of companies that go into compulsory liquidation have few or no assets left to attract an insolvency practitioner to take the case up in place of the Official Receiver. But now, under the new scheme, insolvency practitioners and lawyers work on a ‘no win no fee’ basis to prosecute fraudulent directors whose companies have gone into compulsory liquidation under the Official Receiver.
Lawyers and IPs involved, who call themselves The Forensic Insolvency Recovery Service, ensure the cost is kept to a minimum and review cases identified by creditors and the Official Receiver.
Defty, who runs the FIRS team, says the team only runs cases in which they know the director being sued has funds. Part of the claim includes the fee, but FIRS makes sure there is a return to creditors. He adds: ‘As far as we’re concerned the scheme is very successful. We haven’t lost a case yet.’
And Defty sees the case load growing. ‘There are an increasing number of directors being disqualified in the current climate.’
Although the scheme only runs in the Southeast and Anglia, it is hoped it will expand nationwide. And so far it has been so successful that the FIRS team is working on 50 other cases from sources outside the government.