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Insolvency Law

Expert guidance on all aspects of corporate and personal insolvency

05 AUG 2013

Is Directors' Disqualification Properly Funded?

(1) Funding and Disqualification - a Commons' Critique of the Insolvency Service

There have been a number of newsworthy items affecting the areas covered by this blog of late.1 The most notable of these is the recent House of Commons Business, Innovation and Skills (BIS) report on the Insolvency Service. There are a number of areas of concern to this newsletter particularly in relation to enforcement activity. I have included below extracts from the report that relate to this area. The report makes particularly interesting reading, not least because it comes against the backdrop of a reduction in disqualification cases as the following table demonstrates:

Table One: Directors' Disqualifications: 2009-20122


Number of Disqualifications









In relation to disqualification the report notes:

"48. The target of 68 per cent for stakeholder confidence in the enforcement regime has clearly proved a challenge for the Insolvency Service. Public perception of resource pressures may dampen stakeholder confidence but we do not accept that this is the prime reason for the Service to miss its targets in this area. Confidence in the enforcement regime is a key factor in the success of the Insolvency Service. In its response to this Report the Service must demonstrate that it has a strategy for promoting the successes of the investigatory and enforcement regime so that confidence in it can be better measured...

61. Both the insolvency industry and the Insolvency Service have recognised that resource constraints, both in terms of funding and staffing, have had an impact on the investigatory and enforcement regime. While we welcome additional funding from the Department for Business, Innovation and Skills, we remain concerned that this area of activity remains under-resourced...

62. We are strongly of the opinion that the levels of disqualification of errant directors should not be determined by an arbitrary level set in what the Insolvency Service describes as the public interest. We believe that any dilution of enforcement activity would send entirely the wrong message to delinquent directors and recommend that the Department provides the Insolvency Service with sufficient, and if necessary, additional funding to disqualify or sanction all directors who have been found guilty of misconduct."3

The committee members are clearly dissatisfied with the current disqualification activity at the Insolvency Service (IS). It will be interesting to see how the IS respond to the critique in their forthcoming response to the committee's report. What the report does perhaps suggest is that further work in the area will emerge if further funding is made available. It is hoped that further funding is forthcoming as the area of disqualification is integral not to just insolvency laws, but company laws in general.

Writing in 1947 Professor Sir Otto Kahn-Freund QC called the 1897 House of Lords decision in Salomon v. Salomon4 "calamitous".5This is of course at great odds with how others have described that landmark decision, e.g. Grantham and Rickett said that the case is regarded with, "a reverence bordering on religious."6 Kahn-Freund7 deployed such strong language as part of his examination of the corporate form and the harmful effects of cheap and easy attainment of the separate corporate personality with attendant limited liability. He examined the creation of the legal fiction from three perspectives, environment, shareholders and creditors. It is the last of these stakeholders, creditors, and in particular the creditors' desire to punish miscreant debtor behaviour that makes up the subject matter of this paper. If debtors abuse the corporate form, or on the personal side, if they act in some way which is inappropriate or rash in the lead up to their insolvency, i.e. gambling - what form of treatment of the debtor can the creditor hope for, if any?8  It can be argued that "punishment" responses of this nature form part of any modern insolvency law. According to the Cork Report the eighth aim of a good modern insolvency law is, "to ascertain the causes of the insolvent's failure and, if and insofar as his conduct or, in the case of a company, the conduct of its officers or agents, merits criticism or punishment, to decide what measures, if any, require to be taken against him or his associates, or such officers or agents."9 Punishment of debtor misconduct is an important issue for consideration within the gamut of insolvency legislation for as Johnson has noted, "...bankruptcy should be regarded as a public matter, affecting the community at large."10

It could be argued that modern policy approaches to debtor misconduct pay insufficient attention to the concerns of Professor Kahn-Freund and the Cork Committee, and that modern policy could do with being more rigorous with miscreant debtors.  It could also be argued that increasing severity and greater funding is needed.11 High profile and successfully argued cases such as Farepak12 are far too rare. So that our insolvency laws are not seen as a calamity we must inject proper funding and rigour into holding and punishing individual debtors. 

The regulatory nature of disqualification would make some argue that the jurisdiction does not exist to punish miscreant conduct. This may not be the primary function (which is paraded as protection of the public) but it certainly is a corollary of the system. A disqualified director losing his professional license and therefore capacity to earn certainly smacks of punishment activity. 

1          See for example: Freedman, J. Cobbetts partners face scrutiny from SRA and administrators, says KPMG report. The Lawyer, April 4, 2013. See also: Milman, D. Disqualification of directors: an evaluation of current law, policy and practice in the UK (2013) pp.1-5.  See also: Clench, T. D reports - what you really need to know (2013) Insolv. Int. 2013, 26(2), 17-23.

2             Hat tip to Christoper Leo at the IS for a correction on the previous statistics. See further: Insolvency Service Annual Report 2011-12 - available at: http://www.official-documents.gov.uk/document/hc1213/hc03/0358/0358.pdf and the reports for 2012-2013. 

3                    See: http://www.publications.parliament.uk/pa/cm201213/cmselect/cmbis/675/675.pdf

4             Salomon v. Salomon [1897] AC 22.

5          Kahn-Freund, O. Some reflections on Company Law Reform (1944) 7 MLR, page 54-66.

6         See for the introduction in: Grantham, R & Rickett, C (Eds). Corporate Personality in the 20th Century. Hart Publishing Ltd, Oxford, 1998.

7          Beatson, J  & Zimmerman, R (Eds). Jurists Uprooted: German-Speaking Emigre Lawyers in 20th century Britain. OUP, Oxford, 2004, at page 299.

8          For examples of the disqualifications brought about by miscreant debtor behaviour on the personal side see: Tribe, J. Parliamentarians and Bankruptcy: The Disqualification of MPs and Peers from sitting in the Palace of Westminster (forthcoming).

9          Insolvency Law and Practice, Report of the Review Committee. Cmnd 8558. HMSO, London, 1982, at paragraph 198. Hereafter referred to as the Cork Report. See further: Cork, K. Cork on Cork. Macmillan, London, 1988, at Chapter 10. Kingston Law School is currently cataloguing and digitising Professor Muir Hunter QC's collection of Cork Papers. These include a number of documents that touch on issues covered in this work and which will be discussed in future editions of the newsletter. See for example: ILRC - 51st Meeting - views of Edward (trust property), Alfred (qualifications), Peter Davis (qualifying requirements for liquidators, trustees, receivers), disqualification, delinquent directors, Hunter (schemes of reconstruction); Disqualification of Directors of Insolvent Companies - Written Evidence ILRC 135; Disqualification of Directors - Written Evidence ILRC 136; Brief for Item 4: Disqualification of directors and insolvent companies (ILRC 135-136); ILRC - 48th Meeting: Brief for Item 2 - Disqualification of Directors, comments by Ritchie Penny. On the project see: http://law.kingston.ac.uk/research/centre-insolvency-law-policy/muir-hunter-museum/cork-report-archive-2012/2013-fund-raising- 

10        Ms. Melanie Johnson MP 2002 ILA annual lecture (see: http://webarchive.nationalarchives.gov.uk/+/http://www.dti.gov.uk/ministers/speeches/Mjohnson131102.html).

11        See further: Tribe, J. Punishment and Insolvency: a historical overview - should modern policy take a more punitive approach to debtor misconduct? Insolvency Lawyers' Association 2012 Pre-Dinner Lecture (forthcoming).

12        See Mr Justice Peter Smith's judicial statement in relation to the Farepak disqualification proceedings here: http://www.judiciary.gov.uk/Resources/JCO/Documents/Judgments/farepak-judges-statement.pdf. See also: "MPs accused of defamation after failed attempt to disqualify Farepak directors" in, The Times, October 3, 2012, page 41. See further: http://www.jordansinsolvencylaw.com/articles/a-fare-outcome-for-creditors-and-company-insolvency-law-regulation-generally



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