Delinquent Directors

Delinquent Directors under Government Scrutiny

Following the collapse of Carillion earlier this year, and other high profile companies such as BHS in 2016, much has come out in the press about irresponsible directors who profit from their company’s failure, whilst employees are made redundant and suppliers don’t get paid. In other words the directors who, by definition, were at the helm when insolvency struck, tend to be the ones who don’t suffer. This article looks at the Government’s proposals.

What has happened with Carillion and BHS?

Carillion and BHS are 2 of the most high profile examples of a collapsed firm where there has been considerable Government (and public) concern that the directors involved might be able to shield themselves from any liability for, and impact of, the insolvency.

In Carillion’s case, the fact that so far over 1,800 jobs have gone and several sub-contractors have gone bust, including West Lothian based Vaughan Engineering, for example, might well be the tip of the iceberg. This is before the effect on pension funds is considered.

With BHS, where 11,000 jobs were lost, much has happened since its collapse in 2016. Recent reports confirm that Dominic Chappell has been fined £87,000 (including costs) for failing to disclose vital details to the Pensions Regulator as part of its investigation into the collapse of BHS, in addition to a demand for £10 million to help plug a huge hole in the company’s pension fund. It has also been disclosed that the Insolvency Service intends to disqualify Mr Chappell and 3 of his fellow directors from serving as company directors for up to the maximum of 15 years.

As the Government has said, whilst it believes that most companies are run responsibly, those that aren’t can end up harming workers and suppliers when they collapse, as well as the UK’s reputation as an attractive place to invest. The Government’s planned reforms look to go much further than current legislation allows, as the Business Secretary Greg Clark has said:

“These reforms will give the regulatory authorities much stronger powers to come down hard on abuse and to make irresponsible directors bear the consequences of their actions.”

What are the Government’s Proposals?

The plans are currently open for consultation, and it will therefore be some time before any legislation is passed. The proposals, which aim to hold individual directors more accountable for their conduct and therefore strengthening the hand of workers and suppliers, are:

• Firstly, new sanctions including fines and director disqualification for directors selling companies recklessly are proposed. In other words, those directors who sell the firm they work for “knowing it would fail” would be held liable for its collapse.
• Secondly, inappropriate asset stripping could be reversed with the money given back to workers and small suppliers. Proposals include clawing back money for workers and suppliers by reversing asset sales by struggling firms.
• Thirdly, directors dissolving companies to dodge debts and avoid facing accusations of misconduct would face investigation for the first time. The Insolvency Service would be given new powers in this instance.

The Official Receiver is Conducting a Detailed Investigation into Carillion’s Collapse

The Official Receiver, which is investigating the cause of Carillion’s insolvency, including its business dealings and affairs and the conduct of its directors, has said it wants to hear from anyone who did business with the contractor, whether a creditor or not, before it went into liquidation.

This is evidence that the Official Receiver is going wider and deeper than its normal scope in the case of Carillion. The key phrase here is ‘whether a creditor or not’. Indeed, it has added that it will welcome all submissions, even if respondents cannot remember all of the relevant details or do not have a particular document to hand.

Andy Turpin, partner and Insolvency Practitioner, commented:

“Whilst much of this isn’t necessarily new, the proposed changes on investigations into delinquent and irresponsible directors, where companies have simply been dissolved is welcome.  This does, however, show a significant shift in emphasis that the government is favoured towards targeting individuals’ misconduct and ensuring they are held accountable for their actions”.

We await to see the outcome of the consultation phase of these proposals. In our view, as Insolvency Practitioners, we would welcome any tightening of the insolvency regime that legislates against the behaviour of irresponsible directors.