Cuts to the Insolvency Service’s budget have led to the agency being forced to focus on ‘easy target’ cases involving overdue debts to HMRC at the expense of investigating other forms of malpractice, says Hugh James, a Top-100 law firm.
Hugh James says that this could potentially damage the economy by leaving directors unpunished for serious offences.
Hugh James explains that in the last year 2012-13*, the percentage of director disqualifications that were due to tax debts to HMRC rose to 62%, from 52% in 2011-12 and just 35% in 2010-11.
By contrast, disqualifications for other categories of serious offences, which may be more difficult to prove, such as criminal activity or trading while insolvent, have fallen.
The number of disqualifications for criminal matters have fallen from 259 in 2010-11 to 54 in 2012-13, while disqualifications for trading while insolvent have dropped from 40 to just one over the same period.
The insolvency service is responsible for investigating potential misconduct by directors of insolvent companies that are referred to it by insolvency practitioners.
Hugh James explains that cuts in funding to the Insolvency Service have forced the agency to focus on allegations that are clearly documented on companies’ balance sheets and by HMRC, and so are easy to prove.
After several rounds of layoffs, the Insolvency Service now employs around 2,000 staff, down from 3,200 in 2011, when the agency’s budget was cut.
There are worries that this focus on debts to HMRC will result in directors that commit serious offences that jeopardize the interests of creditors and the wider economy receiving lighter punishments and shorter bans.
Michael O’Maoileoin, an insolvency expert at Hugh James, comments: “Proving that an insolvent company has run up a large debt to HMRC is pretty straightforward, but proving more significant wrongdoing may take months of painstaking work by forensic accountants.”
“Since its budget was cut, the Insolvency Service simply can’t afford to do as much of that kind of work as it used to. It is still bringing in the same amount of low-hanging fruit from tax debts, however.”
“This might save some money for the Treasury, but there’s a risk that the full extent of bad practice by dishonest and incompetent company directors will go undocumented and unpunished, and they will be back running companies shortly afterwards.”
“This can be very frustrating for insolvency practitioners who uncover signs of wrongdoing, refer the matter to the Insolvency Service and then find that it doesn’t have the capacity to do as full an investigation as it would like.”
Michael O’Maoileoin adds: “It’s also a matter of serious concern for the wider business community, because it makes it more difficult for businesses to be sure of the real track record of any director that they are doing business with or even employing.”
Percentage of director disqualifications for tax debts, last five years