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directors’ duties. Although such practical difficulties have to some extent been ameliorated by legislative reform,169 problems of funding allocation170 and legal uncertainty still remain, particularly in the case of wrongful trading, and to date we have seen an accountability regime of seemingly low impact.171

Public interest liquidation

As indicated above, one further way to hold directors to account – and to protect the public from errant directors – is to prevent ongoing trading through compulsory liquidation of the company on public interest grounds. This procedure is, in the main, carried out by the Companies Investigation Branch (CIB) of the Insolvency Service.172 As noted in chapter 13, a key value of public interest liquidation (PIL) is that it allows the public authorities to seek a winding up in order to protect consumers and the public from the activities of errant directors – and to do so where no individual member of the public has an economic interest that would

169See the Insolvency (Amendment) Rules 2008 (SI 2008/737); ch. 13 above.

170The IP has an unusual role and one that may well involve conflict. As Katz and Mumford (Making Creditor Protection Effective, part 5) note: ‘On the one hand he is charged with protecting creditors’ interests, but on the other hand his own commercial interests and the right to charge fees may be detrimental to creditors’ interests. There is a subtle balance to be struck … Putting to one side concerns as to whether office holders always put creditors’ interests ahead of their own, the law has not always been accommodating to office holders who may very properly wish to incur costs to bring recovery actions that have a good prospect of increasing the funds available to creditors. We suggest that the Insolvency Service explore the system of aid made available by the New Zealand Insolvency Service, which provides funding for cases which it believes are winnable (recovering the funds out of the proceeds of the action).’ See also ch. 13 above.

171Lack of visible enforcement of the wrongful trading provisions may give an excessively negative view of their impact, however, since insolvency practitioners may use the threat of proceedings to concentrate directors’ minds, extract sums from directors in order to settle claims and force quick settlements: see Walters, ‘Enforcing Wrongful Trading’, p. 159; C. Williams and A. McGee, A Company Director’s Liability for Wrongful Trading, ACCA Research Report 30 (London, 1992) p. 16.

172The FSA also has the power to apply for a ‘just and equitable’ winding up. The FSA has only infrequently proceeded with an application for a just and equitable winding up. When deciding whether to petition for such a winding up, the FSA will consider, amongst other things, whether the needs of consumers and the public interest require the body to cease to operate and whether consumer needs and the public interest can be met by using the FSA’s other powers: see FSA, Enforcement Handbook, online. Some types of breach that are of relevance to the FSA may be covered by other authorities such as professional bodies or overseers or other regulators such as the Director General of Fair Trading or the Serious Fraud Office (SFO).

justify this.173 It does not require that any illegal activity is involved174 and, accordingly, it does not demand that the criminal burden of proof is satisfied through the amassing of a highly elaborate body of evidence. Nor, indeed, does it have to be established that the errant company is insolvent.

As a device for controlling an individual director, however, PIL may constitute a blunt instrument because it does not target mischiefs or mischief-makers precisely. The misbehaviour at issue may be just one activity being carried out by a healthy company that conducts a range of otherwise reputable trading practices and PIL may destroy ‘any good that may co-exist within the company alongside the bad’.175 In some cases, indeed, the reluctance of the court to grant petitions for PILs may be due to such perceived bluntness – and Hoffmann J’s comments about ‘grossly disproportionate responses’ in Re Secure and Provide plc176 may reflect this perception. PIL may, indeed, be deployed bluntly because it has to play a role that other controls might well fulfil. In some circumstances the disqualification of a director may be called for but, as will be discussed below, disqualification may have developed into a tool that is illattuned to the protection of the public. As one senior official of the CIB put it:

PIL is the only vehicle we have got to stop a company from conducting business we think is wrong. Disqualification was meant to be quick. We saw the 1986 Insolvency Act as meaning the Secretary of State takes a view of the person who should be disqualified. The court’s role is only to determine how long to make the order. There was no concept that you would go and get these massive trials. The idea was you went in and the

bloke was disqualified, so you would do it in days … The courts just messed it up.177

173Under the Insolvency Act 1986 s. 123(1)(a) a creditor’s interest has to exceed £750 before a petition to wind up can be made (SI 1984/1199, para. 2).

174Re SHV Senator Hanseatische mbH [1997] BCC 112, 119; cf. Secretary of State for Trade and Industry v. Travel Time (UK) Ltd [2000] BCC 792. In cases where illegal activities are involved, the criminal law can be used and offences under, say, the Theft Act 1968 such as obtaining property by deception can be prosecuted. The FSA also possesses a variety of options, including some powers that it can exercise without having to seek court approval. The FSA can vary permissions to engage in regulated activities; cancel such permission; withdraw approvals; seek injunctions; issue prohibition orders; apply for restitution orders; apply disciplinary measures; petition for administration orders against companies and partnerships and bankruptcy orders against individuals; and prosecute for criminal offences (FSMA 2000 s. 56).

175DTI, Company Investigations: Powers for the 21st Century (2001).

176[1992] BCC 405, 414. 177 Interview, CIB, 10 April 2002.

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It might be argued, however, that the undertakings regime inserted into the Company Directors’ Disqualification Act 1986 (CDDA) by the Insolvency Act 2000178 may have allowed the disqualification system to be redeployed along more responsive lines. The effect of the undertaking system, as will be noted below, is to rule out the need for the Secretary of State to seek a disqualification order from the court. It is seen by senior CIB staff as a device that is potentially useful in some circumstances and has been used in a small number of cases to date. It should be borne in mind, however, that in relation to section 8(2)(A) undertakings, just as in relation to disqualification orders under section 8(1), the Secretary of State will have to form an opinion that it is expedient in the public interest that a disqualification should be made before applying to court for such an order. The feeling of CIB officials seems to be that in relatively clear cases, the undertaking system may offer public protection, but in complex scenarios or where directors are making large profits from gullible parties, unscrupulous individuals are liable to delay giving undertakings for three or so years while they continue to plunder the market.179

A system of more precise targeting would be possible. Within the financial services regime, the FSA (and to a lesser extent BERR) can target specific practices, individuals or firms and the (then) DTI suggested in its 2001 Discussion Paper on Company Investigations that it also should possess a power to seek a targeted restraint order from the courts.180 The proposal was that the Secretary of State should be able to seek an order restraining the company from engaging in a specified business activity or carrying on all or part of its business in a specified way.181 On controlling particular directors, the DTI argued that, for a restraining order to be effective, it would need to bind directors and the Department put forward for discussion the idea that the Secretary of State should be able to seek an order removing a person from office as the director of a particular company as part of a restraining order.182 Such a power, it was mooted, would be less severe than disqualification and might be appropriate where the conduct did not merit such a serious course of action as general disqualification.183

178Insolvency Act 2000 s. 6: see pp. 718–19, 732–3, 751–3 below.

179Interview, CIB, 10 April 2002. 180 DTI, Company Investigations, paras. 120–35.

181Ibid., para. 120. The DTI conceded that it would be unwilling to use such a power to enter into a ‘regulatory’ relationship with a firm (para. 129).

182Directors and company officers responsible for breaches of restraining orders would also be personally liable for relevant debts of a company: ibid., para. 129.

183Ibid., para. 126.

A restraining order in the above terms would not, however, be efficacious where the errant company director engaged in ‘phoenix’ manoeuvres184 and moved on from the restrained company only to replicate the undesirable practice by operating through a new corporate vehicle. In order to deal with this problem, the DTI consulted on whether restraining orders should be able to ‘follow’ the director in such circumstances.185 Such an order would be used to restrict the activities of a director who had been required to give up office under a restraining order. It would deal with objectionable conduct by the director whether acting as a director in a new company or as a sole proprietor.

The Department, moreover, also invited suggestions on whether an interim restraining order should be available where it becomes clear, early on in an investigation, that a practice should be restrained but the investigation still has time to run until completion. This is a power that is less draconian than applying for the immediate appointment of a provisional liquidator and thus brings advantages. Appointing a provisional liquidator might be useful in bringing the powers of the directors to an end and reducing the risk that corporate assets will be dissipated, but it effectively terminates the company’s usual trading and is such a serious step that the court is likely to demand substantial evidence of misconduct.186 This, in turn, will require that a good deal of time is spent amassing such evidence and preparing a case. In contrast, an interim restraining order allows the company or director to carry on trading subject to abandoning the harmful practice. The court is being asked to take a relatively modest and specific step and the burden of establishing the case for such an order will be far less onerous (and far less timeconsuming) for the CIB. The order possesses similar advantages over a petition for a director’s disqualification order. As for the circumstances in which such an order might be sought, the DTI gave the following example: ‘A multinational conglomerate is operating a lottery as a promotional exercise without complying with the necessary legislation. In such an instance the Department would not wish to wind up the entire company but merely prevent it from continuing an illegal practice. A restraining order would be more appropriate.’187

184 See pp. 703–4 above. 185 DTI, Company Investigations, para. 127.

186See C. Campbell, ‘Protection by Elimination: Winding Up of Companies on Public Interest Grounds’ (2001) 17 IL&P 129 at 131.

187DTI, Company Investigations, para. 15(a).

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Can it be said that the PIL process effectively protects the public from the actions of unscrupulous directors? Statistically it is difficult to contend that PIL leads the way among devices designed to protect the public from directorial misdemeanours – only a modest number of companies each year are wound up following PIL petition.188 It could be argued, however, that until the phoenix problem is adequately dealt with, errant directors are only effectively restrained by the PIL mechanism. It might, nevertheless, be responded that the PIL procedure is insufficiently preventative and only allows corporate operations to be ended when large numbers of creditors have been harmed. As the law presently stands, the CIB has to amass a good deal of information before petitioning the court. The burden of proof in a PIL case may only have to be discharged to the civil, not the criminal, standard but establishing a case, even on a balance of probabilities, may demand that a lengthy and detailed investigation of corporate activities is carried to a conclusion. Here again, the issue of coordination across the PIL process is raised. If a petition is to be triggered by a CIB investigation of a company’s affairs, that investigation may aim to discover a host of issues that go beyond the terms of a PIL petition. These matters will usually be concluded and a report made before action on a PIL is taken. During this research and investigation period, large numbers of the public may be forwarding funds to the company at issue. As noted already, the DTI raised the possibility of its being able to apply for an interim order to restrain a company engaging in a specific activity.189 Without such a power it was conceded by the DTI that an excessive time may pass during the completion of investigations and the obtaining of the appointment of a provisional liquidator on a winding-up order against the company.190

A particular difficulty with PIL is that the CIB, the courts and the Insolvency Service may diverge in their approaches to this as a control device. These divergencies not merely make for philosophical confusion but have the potential to impair the efficiency of the PIL process – as where, for example, the courts place weight on a need to establish corporate culpability before an order is granted but the CIB operates on a different basis – that of public protection rather than blame attribution. To some extent the CIB’s difficulties may, on occasion, flow from its

188In 2006–7 the combined number of winding-up orders and disqualification orders obtained by CIB was 116: see Insolvency Service, Annual Report and Accounts 2006–7, HC 752 (Stationery Office, London, 2007).

189DTI, Company Investigations, para. 131. 190 Ibid.

using PIL where a more narrowly targeted procedure would distinguish more clearly between unacceptable and acceptable directorial or corporate behaviour and would allow the former to be eradicated without threatening the latter.

PIL does not, in its present form, operate as a highly effective measure for protecting the public from errant directors – it is too confused in conception and too cumbersome in operation. This is not a complaint that can be placed readily at the door of the judges. The courts have resisted the CIB’s petitions on occasion but have tended to do so for reasons that are supportable – because using a winding up to control a specific problem is too ill-focused and extreme a course of action.

As for the deterrent value of PIL and its influence in controlling directors’ business practices and standards of behaviour, it has been pointed out that the PIL procedure has a very low public profile and most companies and their controllers will be unaware of the Secretary of State’s powers until they are brought into effect.191 Here there is considerable scope for promotional work either through BERR public information or through requirements that company direction should involve a level of basic training in the fundamentals of corporate law and governance.192

Recent developments and proposals do, however, offer a way forward for PIL. The proposed restraining order and interim restraining order system would allow the CIB to provide a more rapid response to unacceptable trading than is possible with PIL. It would also allow unacceptable directorial or corporate behaviour to be dealt with in a more closely targeted manner than PIL allows. When applied to directors, the restraining order would allow the ‘phoenix’ operation to be constrained and, with the interim restraining order, it would prove a more readily deployable response to mischief than is provided by the directors’ disqualification procedure which, even with the undertaking process introduced by the Insolvency Act 2000, can prove excessively broad and draconian. As for the need for the CIB to apply to the court for a restraining order (as proposed by the (then) DTI) it could be contended that controls analogous to the FSA’s ‘own initiative’ powers should be

191A. Keay, ‘Public Interest Petitions’ (1999) 20 Co. Law. 296 at 301. On directors’ low awareness of sanctions generally see R. Williams, ‘Disqualifying Directors: A Remedy Worse than the Disease?’ [2007] 7 JCLS 213.

192For a discussion of which see, inter alia, Law Commission and Scottish Law Commission, Company Directors (1999); CLRSG, Final Report, 2001, paras. 3.9, 6.18; Finch, ‘Company Directors’; and pp. 738–9 below.