Directors in troubled times

678 the impact of corporate insolvency

from creditors, ascertain the validity of creditors ’ claims, and expose

scrutiny.4 Society had an interest in insolvency processes and attention

5

someone other than the directoCork,. thus, emphasised the need for insolvency law to promote highestthe‘ standards of business probity and

creditors. That fresh approach was to be implemented throughs Cor

prevention to retribution.7 It should not be forgotten, however, that Cork saw proposals that were designed to impose stricter controls on directors as merely one aspect of a package of reforms that, amongst other things, aimed to facilitate rescues and to limit the losses that might result from directorial deficiencies or other misfortunes.

The statutory legacy of Cork will be dealt with below but it is worth noting, first, that recent years have seen a shift in emphasis away from Cork’s concerns both to redress the law’s lenient treatment of directors and to do something about ‘phoenix company’ problems.8 The Blair Government was marked by a stress on the virtues of entrepreneurship and risk taking as necessary components of wealth creation and the White Paper on Enterprise, Skill and Innovation of 20019 encapsulated this approach with its aims to ‘help create an ambitious business culture’ and proposals including ‘significantly relaxing insolvency rules so that honest businesses and individuals who go bankrupt have a better chance of starting again quicker while cracking down on the fraudulent and irresponsible’.10

As for cracking down on ‘rogue’ directors, Companies House, in 1997, created a new website listing directors subject to disqualification orders.11 In 1998 a ‘hotline’ was set up to allow the public to report rogue directors to the Insolvency Service (IS) and, in 2006–7, the IS took 328 calls, of which 26 resulted in reports to the prosecution authority.12 In 2000, the Minister for Competition and Consumer Affairs, Dr Kim Howells,

7See Carruthers and Halliday, Rescuing Business, pp. 274–7.

8The ‘phoenix’ syndrome occurs when the activities of a failed company are continued by those responsible, using the vehicle of a new company, or where a director engages in serial corporate failure, leaving creditors stranded with those failures, and moves on to a new company while concealing past failures from the public. See S. Frith, ‘Acting as a Director of a Phoenix Company’ (2003) 16 Insolvency Intelligence 37; T. Carter, ‘The Phoenix Syndrome – The Personal Liability of Directors’ (2006) 19 Insolvency Intelligence 38.

9DTI, Opportunity for All in a World of Change – A White Paper on Enterprise, Skill and Innovation (DTI, February 2001).

10See ch. 6 above; DTI White Paper, Our Competitive Future: Building the Knowledge Driven Economy (Cm 4176, December 1998) paras. 2.12–2.14; Insolvency Service, A Review of Company Rescue and Business Reconstruction Mechanisms, Interim Report (1999); A Review of Company Rescue and Business Reconstruction Mechanisms, Report by the Review Group (2000). On the European Commission’s approach to insolvency as part of its strategy for promoting entrepreneurship and ‘desirable risk taking’ see European Commission, Communication from the Commission to the Council and the European Parliament: Progress Report on the Risk Capital Action Plan, COM (November 2003).

11See www.companieshouse.gov.uk. On disqualification of directors see pp. 717–38, 750–3 below.

12Insolvency Service, Annual Report and Accounts 2006–7 (HC 752, London, 2007) p. 20. The figure for reports to prosecutors in 2005–6 was 135. Reports can be made online via

680 the impact of corporate insolvency

announced the setting up by the IS of a specialist team to investigate directors who asset-strip companies which then become insolvent. The Forensic Insolvency Recovery Service (FIRS) was established as a team of private sector and Insolvency Service partners comprising lawyers, insolvency practitioners and enquiry agents. The team was given powers to take legal actions to recover assets from unfit directors where there had been suspected misappropriation, misfeasance or negligence.13 Dr Howells urged, in April 2001, that there should be ‘no hiding place’ for unscrupulous directors. Of further interest to creditors and IPs, who will often be concerned to trace assets which may have been moved illegally, is the Assets Recovery Agency (ARA), which was set up in 2003 as a nonprosecuting authority to carry out operational functions including the recovery of assets under the Proceeds of Crime Act 2002.14 It is also noteworthy that the ‘credit crisis’ of 2007–8, together with growing worries about fraudulent dealings and transfers, produced a new focus on the directorial management of assets near insolvency and the increasing propensity of major lenders and office holders to resort to the services of newly skilled consultants specialising in forensic accountancy.15

What, then, are the mechanisms that insolvency law establishes for holding directors to account and controlling their behaviour? If the rules on disqualification are left out of consideration – for discussion later under the heading of expertise – accountability mechanisms can best be reviewed by focusing first on the array of rules that provide for directors’ liability and the associated issues of enforcement. Mention should then be made of the processes that are designed to control the activities of directors by providing that a company may be wound up in the public interest.

enforcement.hotline@insolvency.gsi.gov.uk. The Companies Act 2006 contains provisions increasing the powers to investigate companies: see e.g. CA 2006 Part 32, ss. 1035–9; Boyle and Birds’ Company Law (6th edn, Jordans, Bristol, 2007) pp. 531–4 and 719–30.

13See D. Milman, ‘Controlling Managerial Abuse: Current State of Play’ [2000] Ins. Law. 193; DTI Press Notice P/2000/510.

14See A. Leong, ‘The Assets Recovery Agency’ (2007) 28 Co. Law. 379; D. Ingram, ‘The Proceeds of Crime and Insolvency’ (2007) Recovery (Winter) 22; D. Lawler, ‘The Money Detectives’ (2007) Recovery (Winter) 24. On the wide-ranging powers of the court to assist IPs seeking to trace and secure assets see L. Katz, ‘Asset Tracing: Getting Evidence and Injunctive Relief’ (2007) Recovery (Winter) 18.

15See J. Willcock, ‘Credit Panic Stokes Forensic Boom’ (2007) Recovery (Winter) 17; F. O’Connell, J. Outen and A. Stephens, ‘Forensic Recovery: A Blend of Insolvency and Forensics’ (2007) Recovery (Winter) 20.