Insolvency Services Crackdown on Delinquent Directors

As the Insolvency services tighten their belt and crack down on delinquent directors, it comes as no surprise that there is a sharp increase in the number of director disqualifications for frauds related to the Covid-19 Bounce Back Loans (BBL).

The recent figures published by the Insolvency Service show that out of the total 932 director disqualifications, almost half (459) disqualifications were because of misuse / abuse of the BBL. The stats showed a rise in criminal prosecutions against the directors, with all prosecutions resulting in a conviction and in two cases – immediate imprisonment.

The latest figures published by the Insolvency Service show an unsurprising rise across both corporate and personal insolvencies. The figures published are significantly higher than the pre-pandemic levels and this is a trend we have been observing for the past many months. The rise in corporate insolvencies is being driven by the increasing number of Creditors’ Voluntary Liquidations (CVL), while the monthly increase in Individual Voluntary Arrangement and Debt Relief Orders has impacted the numbers for personal bankruptcies. Amid the omnipresent cost of living crisis – these worrying trends have been predicted by insolvency practitioners for some time now.

But director disqualification is not the only thing that directors should be worrying about. Those directors who knowingly provided false information to secure the BBL or the Coronavirus Business Interruption Loan Scheme (CBIL) at the time, before absconding with the money, or putting the company in liquidation, run a real risk of having criminal investigations against them and being subsequently charged with various fraud offences.

Even if the company survived the pandemic without government-backed financial assistance, directors of insolvent or near-insolvent companies need to be aware of their statutory and fiduciary duties, especially in light of the much-hyped Supreme Court judgment in BTI v Sequana [i]. This case offers helpful guidance to directors as to the nature of the duties they might owe to the various stakeholders (primarily to the shareholders and creditors), at different points of the company becoming insolvent, or when it is just at the cusp of insolvency. It highlights the trigger point at which directors need to consider their obligations and hold the interests of the creditors paramount to the interests of the shareholders.

In this judgment, dismissing the appeal, the Supreme Court affirmed the existence of the directors’ duty to consider the interest of the creditors (the creditors’ interests’ duty) and clarified that this duty is engaged when the directors know, or ought to know that the company is insolvent or bordering on insolvency or that insolvent liquidation or administration is probable. In such circumstances, directors need to give appropriate weight to the creditors’ interests and balance these with the members’ interests, where there is a conflict. This duty is owed to the general body of the creditors and not in the interest of a particular creditor in a special position. Giving a sliding scale, the court explained that the directors’ duties will naturally tip towards the creditors, as the company’s financial problems worsen.

In practice, this means that for both the trigger and the contents of the creditors’ interests’ duty, the directors will need to take legal advice to help them navigate the challenges ahead. Indeed, the need of the hour is for directors to tighten their corporate governance, ensuring that the board is continuously monitoring the company’s financial health and ensuring proper documentation of the board’s decision-making. Directors would greatly benefit from paying heed to the old adage of ‘prevention is better than cure’ and taking legal advice as soon as it becomes clear that financial difficulties are on the horizon.

[i] BTI 2014 LLC v Sequana SA [2022] UKSC 25

Seek advice from IBB and we can discuss your options with you.

The Dispute Resolution team at IBB can advise you on any commercial disputes and help you with your debt collection and credit control practices and our Corporate Restructuring and Insolvency team can provide advice on business recovery where needed.

Speak to one of our specialist lawyers on 0330 175 7621 or email commercialdisputes@ibblaw.co.uk.