Reports under the Company Directors Disqualification Act 1986

Official Receivers and IPs appointed as Administrators, Administrative Receivers or Liquidators dealing with insolvent companies are required by the Company Directors Disqualification Act 1986 to report to the Secretary of State any suspected unfit conduct by the directors of the insolvent company.

It is then the responsibility of the IS to decide whether to investigate these cases and recommend to the Secretary of State if any action against the directors is justified in the public interest. The IS has to act on these cases within 2 years from the date of the insolvency.

The IS informed all IPs in a Dear IP letter of December 2006 - Issue No 29 that, because of unforeseen demands on their budgets, it had been necessary to cut the funds available for investigating IPs' reports on directors (D Reports) and that accordingly its investigators would not be able to complete all the investigations planned in financial year 2006/2007.

We understand that as a result no further action could be taken on some 500 D Reports, because the two year time-limit had expired. In order to achieve the financial savings required, DTI Ministers agreed new guidance which limits further investigations to cases of high public interest, cases likely to attract periods of disqualification of 7 years or more and a minority of cases likely to attract periods of disqualification of 4-6 years

A majority of the latter category and all cases likely to attract a period of disqualification of 2-3 years were to be given no further attention. The IS reassured IPs that expenditure on enforcement work will be restored to planned levels for financial year 2007/2008. It is unclear whether this means that all cases likely to attract a period of disqualification of any length will be reviewed in future years.

The Dear IP letter states only that the guidelines introduced in December will be “kept under continual review”. DTI Ministers have also announced that the cost of investigating and taking action on D Reports will now be met out of the assets of bankrupted estates rather than out of general taxation. We understand that since this change in funding took place the number of investigations have increased, but still do not cover all cases that might attract a period of disqualification.

The prompt and thorough investigation by the IS of IPs’ D Reports on the conduct of the directors of insolvent companies and effective follow-up action, wherever justified, are clearly crucial to the Government’s efforts to protect the general public against the abuse of limited liability status by unfit directors and to foster trust and confidence in commercial markets.

These goals were emphasised by the National Audit Office in October 1993 in a report that criticised the performance of the IS on this matter at that time. A programme of remedial action was proposed by the Public Accounts Committee in May 1994 and then a further report by the NAO in 1999 congratulated the Insolvency Service on remedying the deficiencies identified in its 1993 report.

Recommendation
The IPC considers that the Government’s action in cancelling a substantial proportion of the planned investigation programme into IPs' reports (D Reports) under the Company Directors Disqualification Act 1986 in 2006/2007, is damaging to the public interest. The effect is that a significant number of D Reports, which identify directors whose conduct may have made them liable to disqualification as unfit, were not investigated.

We would be seriously concerned if the restrictions on investigations introduced last December were to continue for any length of time. This would materially weaken the protection of the public in general and creditors in particular, which the CDDA is intended to provide. The IPC accordingly urges the Government to remove as soon as possible the restrictions on investigations announced in Dear IP of December 2006 - Issue No 29 and to provide sufficient funding to allow the DTI the discretion to investigate all the reports, which provide prima facie evidence of conduct by directors likely to attract a period of disqualification.

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