Greg Wright: Lack of cash sees ‘dodgy directors’ getting away with it

Lawyers aren’t renowned for their purple prose, but a report which thudded on my desk yesterday morning from Pinsent Masons forced a sharp intake of breath. Corrupt directors are being allowed to flourish, the report argues, because the enforcers who are supposed to protect us are being starved of funding.

Dishonest directors act as barriers to economic growth. Apart from destroying their own company – and forcing people on to the dole – they often leave a trail of destruction which can affect whole communities. Creditors are left unpaid, which causes hardship for everyone who was unlucky enough to have come within their orbit. During my decade on the business desk, I’ve been angered and alarmed by reports about the growing number of firms run by “shadow directors” – disqualified directors who are the real power behind the throne, but never allow their names to appear on the company accounts.

The Pinsent Masons report makes sombre reading. Plans to tackle rogue directors will fail unless more funding is made available to enforce new rules, the report argues.

Figures obtained by the firm from the Insolvency Service under the Freedom of Information act show that the number of company directors being investigated and disqualified has fallen dramatically since the coalition Government came to power three years ago.

The findings come as Business Secretary Vince Cable calls for tougher laws to crack down on “dodgy directors”.

Data obtained from the Insolvency Service shows that the number of director disqualification orders issued in England and Wales have fallen by 30 per cent in the last three years. Only 920 directors were disqualified in England & Wales in 2012-13 compared with 1,333 in 2010-11. Director disqualification proceedings issued by the Insolvency Service, have also fallen by 24 per cent in England and Wales over the same period.

This is against a background of high levels of liquidations since 2008 – they average more than 4,000 per quarter over the past three years.

Disqualification proceedings are most commonly brought where a company has become insolvent and there is evidence that the directors’ conduct makes them unfit to run a company. Misconduct can range from serious incompetence to recklessness and fraud. Alastair Lomax, the legal director of Pinsent Masons’ restructuring team, said: “If the Government is serious about tackling the issue of rogue directors, they need to ensure that reforms address the issue of dwindling funds available to liquidators and the Insolvency Service to investigate and prosecute claims.

“This is far more likely to generate tangible results which deter the rogues and compensate their victims.”

The Insolvency Service gets its funding from levying a fee against asset realisations in formal insolvency proceedings.

Mr Lomax added: “Despite signs of traction in the economy, we remain in an era where over-leveraged ‘zombie’ companies are lurking in the twilight, instead of entering the formal insolvency which would either restore them to health or allow failures.”

According to Mr Lomax, the volume of case-work, which is down 58 per cent since 2010, and the value of asset realisations from insolvencies, which has dropped by 54 per cent over the last three years, are inadequate to support the Insolvency Service’s funding model.

He added: “Factor in substantial staffing cuts aimed at rebalancing the books, and it is inevitable that enforcement action will fall.”

The Institute of Directors doesn’t take as “hyperbolic” a stance as Mr Lomax. A spokesman pointed out that disqualification is a lagging indicator in relation to corporate insolvency.

Yesterday, a Department for Business spokesman told me that the Government had announced a set of tougher rules to crack down on rogue directors last month.

The reforms aim to tackle concerns that many rogues got off too lightly in the past.

The spokesman added: “Our reforms will help those who are owed money get compensation where they have suffered loss. We are also ensuring that rogue directors who are banned from running companies abroad, cannot run British companies.

“The Government is committed to implementing these reforms before the end of Parliament.”

Tough Government action is long overdue. Creditors are screaming out for justice.

If we fail to act against corrupt directors, we are insulting the honest entrepreneurs who burn the midnight oil to help our economy grow.