Examination of witness

Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill – in a Public Bill Committee at 3:43 pm on 6th July 2021.

Alert me about debates like this

Duncan Swift gave evidence.

Photo of David Mundell David Mundell Conservative, Dumfriesshire, Clydesdale and Tweeddale 4:09 pm, 6th July 2021

I now come to our next and final witness of the day. We are going to hear from Duncan Swift, formerly the president at R3, and we have until 5.15 pm for this session. Mr Swift, could you please introduce yourself for the record?

Duncan Swift:

Thank you. My name is Duncan Swift. As you have just heard, I am the immediate past president of R3, which is the UK’s trade association for restructuring and insolvency professionals. I am a chartered accountant and a licensed insolvency practitioner with over 30 years in practice, and I am a partner in Azets restructuring and insolvency practice.

Photo of David Mundell David Mundell Conservative, Dumfriesshire, Clydesdale and Tweeddale

We are grateful to you, too, for your flexibility on timing.

Photo of Seema Malhotra Seema Malhotra Shadow Minister (Business, Energy and Industrial Strategy)

Q Thank you for giving evidence to us today, Mr Swift. I wonder whether you might want to make some opening remarks about your general views of the Bill and whether you support the measures in it.

Duncan Swift:

I will be pleased to do so. It is fair to say that the Bill is regarded by R3 and the profession as a step in the right direction. It has been something that we have been seeking for several years now. However, I have to say that it is not a complete solution to the use of company dissolution as a vehicle for fraud.

To expand on that point, the shortfalls relate to the scale of the problem, which the Bill does not address. It also does not necessarily address fully what remedy is applied in the prosecution of directors or in relation to gaining redress for creditors who have lost out in the use of company dissolution for fraud.

Photo of Seema Malhotra Seema Malhotra Shadow Minister (Business, Energy and Industrial Strategy)

Q Could you say more about the scale? You talked about what you saw as the scale of the issue. What is your experience of that?

Duncan Swift:

There are two things in the context of scale. One is that the Insolvency Service undertakes company director disqualification in relation to the 17,000-odd UK corporate insolvencies that occur annually. It typically achieves about 1,200 disqualifications per annum. R3 members report that they often encounter cases involving significant breaches by directors of Insolvency Act 1986 and Companies Act 2006 requirements that are not included in the company director disqualifications at all, which would suggest that the Insolvency Service is somewhat resource-constrained.

On the flip side, there are about 400,000 to 500,000 company dissolutions per annum. Nobody is quite sure just how many of those are insolvent company dissolutions, but the last time it was looked at in any detail, it was thought that about 50% of that total might be insolvent company dissolutions. That is 10 to 15 times greater than the corporate insolvency volume I talked about earlier. One has to ask whether the Insolvency Service will be scaled up 10 to 15 times to deal with that magnitude of investigation into insolvent dissolutions, or whether the investigation of insolvent dissolutions will come at the expense of investigations into errant director behaviour in insolvencies.

Photo of Seema Malhotra Seema Malhotra Shadow Minister (Business, Energy and Industrial Strategy)

Q You have written in, but not formally, I do not think, to the Committee with evidence. I think you have written to Members of Parliament before. I wonder whether you might be able to put some of those ballpark calculations in a note to the Committee.

Duncan Swift:

Yes, R3 will be happy to supply that to you.

Photo of Seema Malhotra Seema Malhotra Shadow Minister (Business, Energy and Industrial Strategy)

Q Thank you. You raise some quite serious concerns about the resourcing of the Insolvency Service. Are you and your members concerned, then, that action is not being taken against directors against whom action should be taken? Are you seeing that result in phoenixism? Have you seen that and have your members seen that?

Duncan Swift:

From the reports of R3 members, we are seeing surprise that adverse director conduct reports on serious misconduct have not resulted in disqualification of the directors. Whether that caused phoenixism or meant that the directors went on to commit the same type of misbehaviour in other corporate situations, I am not able to advise.

As a trade association, our member feedback is that the number of 1,200 disqualifications per annum, which is a fairly regular number over the past several years, appears to be fewer than the volume of cases where adverse director conduct reports have been submitted, which would warrant such disqualifications being issued.

Photo of Seema Malhotra Seema Malhotra Shadow Minister (Business, Energy and Industrial Strategy)

Q That is very helpful—thank you. Could I ask further about when you have submitted reports and where action has been taken by the Insolvency Service and the Government? How do you think the Government should facilitate the repayment of loans from disqualified directors? Do you see that as through compensation orders? What other tools do you think could be used?

Duncan Swift:

That is one area where the Bill, as presented, appears to be incomplete. Mention is made to using things such as compensation orders, but that ordinarily benefits only a single creditor. I would anticipate that in this scenario that would be the public purse in the form of HM Revenue and Customs. Director disqualification in itself, which is the investigation and prosecution process that is envisaged, does not yield compensation to any party. All it yields is a decision that the behaviour of a director is such that they should be disqualified from acting as a director in future. It does not set the compensation mechanism or the process for compensation, whether to a single creditor or the creditor body as a whole.

Photo of Seema Malhotra Seema Malhotra Shadow Minister (Business, Energy and Industrial Strategy)

Q To follow up on that briefly, in your view there is an inadequacy in the legislation at the moment. Do you think that there is more that needs to be done? What would you want that to look like?

Duncan Swift:

On what needs to be done, disqualifications that prevent directors doing the same errant actions again is clearly a step in the right direction. Other actions that could be taken include enabling restoration of dissolved companies more readily to the register where such errant behaviour has taken place. I mentioned the number of 400,000 to 500,000 dissolutions—as in strike-offs—per annum, of which it is estimated about half are insolvent. Yet only 1% of strike-off companies are put through a process to restore them to the register. We are talking about 4,000 to 5,000 companies a year. That process, from experience, is a court-driven process that typically costs the applicant, normally a creditor, a few thousand pounds in legal costs, to get the company restored to the register, in order to have a licensed insolvency practitioner appointed to it, whether in a compulsory liquidation or a creditors’ voluntary liquidation, so as to investigate the company’s affairs, and recover assets that might have been misappropriated by its directors.

Photo of Seema Malhotra Seema Malhotra Shadow Minister (Business, Energy and Industrial Strategy)

Q From your experience, how long was that process taking?

Duncan Swift:

From experience, in terms of restoration pre-pandemic, you could be looking at 12, maybe 18 months. With the restrictions on court time in the pandemic, it is taking a lot longer.

Photo of Peter Grant Peter Grant Shadow SNP Spokesperson (Europe), Shadow SNP Deputy Spokesperson (Treasury - Chief Secretary)

Q Good afternoon, Mr Swift. May I pick up on something you referred to and which was mentioned in the submission to us yesterday from your colleagues at R3? You said that there are a number of reports of potentially serious misconduct by directors that have been submitted by your members that do not seem to be acted on. I can understand that, as a representative body, R3 might not be privy to the details, but are you telling us that you will have had members who have acted as administrators or liquidators who have submitted highly critical reports to the Insolvency Service and have then seen the same directors coming back, setting up a new company and essentially restarting the same kind of misconduct? Is that the information that you are getting back from your members, even if they are not allowed to tell you which companies they are referring to?

Duncan Swift:

Yes, sir, that is correct. Although director disqualification—banning a director or person from acting as such—is a deterrent, we also see instances of disqualified directors continuing to act as though they are the controlling party in corporate affairs subsequently. The serious rogue directors do not see being disqualified as a significant deterrent. A more significant deterrent is being held to account for the assets that they may have misappropriated and incurring personal liability for such actions that they have wrongfully undertaken while holding the office of director. That goes to the heart of the fact that more thought needs to be given by Government to how they will actually prosecute those directors. It is not just a matter of disqualifying them as directors. Crucially, what are the Government going to do in terms of revisiting the dissolved company that those directors have inappropriately dealt with through dissolution, rather than conducting an office holder investigation of their affairs, to enable some form of redress through the company’s position to recover assets and to compensate creditors who have lost out as a result of that individual’s actions?

Photo of Peter Grant Peter Grant Shadow SNP Spokesperson (Europe), Shadow SNP Deputy Spokesperson (Treasury - Chief Secretary)

Q One solution that has been mooted— a partial solution—is that where an administrator or a liquidator makes a report beyond a given standard of belief that there has been serious misconduct, the fact of that report being submitted should be in the public domain. At the moment, it is a public fact that a report has been submitted, but the content of it is not published. Creditors of the dissolved company, and potentially investors in and creditors of a phoenix company, do not know whether any misconduct has been identified by the liquidator or administrator. Where do you see the balance of public interest in that case? Is there a question of potentially damaging the reputation of a director who turns out to have done nothing wrong? Or is it more important to protect the next generation of investors by flagging up that that particular director has had almost a yellow card—a report against them—that has not quite been followed up?

Duncan Swift:

That is a very difficult question to answer. I am not a lawyer, so I am not entirely certain where the legal privilege lies. There is the risk that a well-intended but adverse report by an office holder based upon, more often than not, incomplete information might open up that office holder to legal action by the person who is the subject of that adverse report for defamation and impact on their character. It is a very difficult area.

In terms of the position of directors and dissolved companies generally, certainly suppliers, the providers of credit and those who rely upon the good name of an individual as a director are able to assess the quality of that name by dint of Companies House records on the track record of dissolutions and formal insolvencies of those individuals, as long as the Companies House data upon which that assessment is made is known to be accurate. Although this sits somewhat outside the Bill, reforms have been proposed to improve the veracity of the data that Companies House provides to all its users for that assessment.

To go back to an earlier question on improvements that can be made, and going back to the scale of the problem that this Bill currently does not really address, one thing I have not mentioned is that 95% of all company dissolutions are actually at the behest of Companies House. They are not at the behest of directors. Companies House has automatic strike-off for non-filing of accounts and non-filing of conformation statements. It is no surprise that those who would abuse the position of director choose not to file accounts and choose not to file confirmation statements.

One clear improvement would therefore be to remove the automatic strike-off power of Companies House, and to have that 95% of companies that would be struck off put into some form of quarantine or screening process—whether that screening is done by the Insolvency Service or some other Government body—as a precursor to deciding what to do with those companies earmarked for strike-off, and also for their registered directors. What was their behaviour leading up to the circumstances where such strike-off was being contemplated? At the moment, there is a huge volume of companies coming up for dissolution at the behest of Companies House, not at any other party’s behest.

Photo of Peter Grant Peter Grant Shadow SNP Spokesperson (Europe), Shadow SNP Deputy Spokesperson (Treasury - Chief Secretary)

Q Would it make rogue directors less comfortable or less complacent about having one of their companies compulsorily struck off for what I think you described as non-compliance with reporting requirements? Would they be less likely to do that if there were also an automatic disqualification of all the relevant directorships at the same time? Would that act as an effective deterrent?

Duncan Swift:

It would certainly act as an effective deterrent. I would have to ask—not having considered the question before—whether that would proportionate to the size of the problem. It would certainly be a proportionate deterrent in the context of this Bill if, rather than it being left to the Insolvency Service to investigate dissolved companies that were found to be insolvent after the event, the companies about to be automatically struck off for non-filing of accounts and confirmation statements had their position reviewed by the Insolvency Service at that point, pre-strike-off, to identify whether they should go through a compulsory liquidation process to address and fully investigate the director’s behaviour, and to recover assets for the benefit of creditors.

Photo of Peter Grant Peter Grant Shadow SNP Spokesperson (Europe), Shadow SNP Deputy Spokesperson (Treasury - Chief Secretary)

Q May I play devil’s advocate for a moment and mention the fact that a lot of what you have suggested would generate a lot more work for insolvency practitioners? How do you persuade members of the Committee that what you are asking for is actually in the best interests of creditors, investors and suppliers of these companies, and is not simply trying to drum up more business for your employers?

Duncan Swift:

I understand where the question is coming from, but actually what I am proposing is a lot more work for the Insolvency Service, which is the party that this Bill identifies as performing it. What I am saying is that that work should occur a lot earlier than after the event of a company being struck off—more than likely at the behest of Companies House—and subsequently found to be insolvent.

Pre-strike-off by Companies House, that review is undertaken, ideally, by the Insolvency Service, if it is scaled up to do that investigation. But as I say, the volumes are 10 to 15 times more than the volume of insolvent companies. Should it go into a compulsory liquidation process following that investigation or initial review by the Insolvency Service, it is the official receiver that is first appointed by the court to be the liquidator in the compulsory liquidation—so, it is Companies House, Insolvency Service, Insolvency Service. That is not a direct benefit to the private sector members of the insolvency profession.

Photo of Peter Grant Peter Grant Shadow SNP Spokesperson (Europe), Shadow SNP Deputy Spokesperson (Treasury - Chief Secretary)

Q I have one final question. The legislation as it stands would set a three-year time limit on any application for disqualification, starting from when the company was dissolved. What are your views on that three-year time limit? Is too short, too long, or just about right?

Duncan Swift:

I have to say, from experience, it is too short. Rogue directors or individuals who abuse the position of director go to great pains to extract all the asset value out of the companies that they are abusing and to provide a false, or certainly incomplete, trail of their actions as directors of the company. As an office holder coming in after the event, it is like pulling together a 3,000 or 4,000-piece jigsaw puzzle when holding only about five pieces to start with. You are having to make inquiries with multiple stakeholders, as well as interviewing the directors and their associates, to start to get the bits of the jigsaw puzzle necessary for a picture of what actually went on, in order to convince a court that what went on was actually a fraud upon the creditors and that the director had not acted properly. Again, from experience, although a relatively speedy pulling together of the jigsaw puzzle and convincing of the court takes three years, there are many cases where it takes far longer.

Photo of Paul Scully Paul Scully Parliamentary Under-Secretary (Department for Business, Energy and Industrial Strategy), Minister of State (London)

Q To expand on a few of those areas, starting with the three-year time limit to file a disqualification application, the Insolvency Service or the Secretary of State can already examine historic conduct, but they have three years to file the application for disqualification. Can you expand a bit on what you meant about the court process, which presumably comes afterwards?

Duncan Swift:

What I was explaining about the timeline was that for the office holder—whether it be the Insolvency Service or the official receiver as liquidator, or the Insolvency Service coming in to pull together a picture of the company’s financial dealings and the director’s conduct in the course of those dealings—it takes time. In the first phase in particular, it can take two years to get a reasonably complete picture before one can be confident of putting forward an application to court, either for a recovery of assets or, I would have thought, the disqualification of a director in circumstances where that individual may well be using the proceeds of such activities to defend their position, as well as seeking to confuse it to defend against the likelihood of such claims being brought against them.

Photo of Paul Scully Paul Scully Parliamentary Under-Secretary (Department for Business, Energy and Industrial Strategy), Minister of State (London)

Q We talked a little about compensation orders earlier, which already exist for insolvent companies. This legislation would effectively extend them to dissolved companies, so that compensation can affect all creditors— individual and classes of creditors. A lot of the stuff you talked about at the beginning related to a wider piece of work that you would like to see on Insolvency Service reform and corporate governance. However, do you find the fact that we are bringing compensation orders within the realm of dissolved companies of benefit to—

Duncan Swift:

Forgive me, but my understanding and experience of compensation orders is that they are brought on behalf of a single creditor or a few creditors. I suggest a more comprehensive approach: that the insolvency process that already exists is applied, and if a dissolved company is found to be insolvent, it is readily restored to the register and put through the insolvency process. That will have two consequences: a full investigation by the office holder, who in the first instance of the compulsory liquidation is the official receiver of the directors’ conduct; and for that process to recover such assets that are available for the benefit of all creditors of that company, not only a few.

Photo of Paul Scully Paul Scully Parliamentary Under-Secretary (Department for Business, Energy and Industrial Strategy), Minister of State (London)

Q Okay. The other issue I want to clarify is the resource issue that we started off talking about. In some of the conversations that we had with earlier panellists, we were talking about the public interest test and the prioritisation of the cases that were most likely to get a result, frankly. Is it purely a resource issue that you are raising? Is it one of those that is not working as well? Are you saying that the filters may be wrong within those tests? Could you expand on that?

Duncan Swift:

All I can go on is the statistics issued by the Insolvency Service on disqualification orders or undertakings from directors for misconduct relative to the total number of corporate insolvencies per annum, and the member feedback that R3 receives. At an anecdotal level, members report that they have submitted serious adverse conduct reports against individuals, only to find that no action has been taken against said individuals by the Insolvency Service. We are not told why. Clearly there is a threshold.

Coming back to the statistics, it would appear that the Insolvency Service is consistently—year in, year out, irrespective of fluctuations in the total number of corporate insolvencies—disqualifying about 1,200 individuals per annum. That suggests to me that there is a resource issue. I am not in a position to ask the Insolvency Service whether that is the case, but that is what it feels like.

Photo of Paul Scully Paul Scully Parliamentary Under-Secretary (Department for Business, Energy and Industrial Strategy), Minister of State (London)

Q That is interesting—thank you very much. Obviously, we consulted on this back in 2018, but there is a particular compulsion to do this now, to tackle the most egregious cases of fraud involving the financial support given by the taxpayer throughout the pandemic. Presumably you welcome that, and therefore the drive to get this measure—albeit that it is not as wide as you would like—through now?

Duncan Swift:

Yes. As I said at the start, this is a step in the right direction, but unfortunately it does not go far enough.

Photo of Paul Scully Paul Scully Parliamentary Under-Secretary (Department for Business, Energy and Industrial Strategy), Minister of State (London)

Q Sure, but going back to the numbers—I know that it is anecdotal so it is difficult to tell—what sort of deterrent effect do you think this will have?

Duncan Swift:

I repeat: it is a step in the right direction, but it is not enough. Individuals who would choose to abuse the benefits of directorship of limited liability companies are not dissuaded by the prospect of being disqualified—that is my experience and that of the members of R3. A more significant deterrent is that they are not only disqualified but the ill-gotten gains of said actions that led to their disqualification are required to be repaid and recovered for the benefit of those who have suffered as a consequence of those actions. If that also includes criminal liability, so much the better; I am sure that will add to the weight of the deterrent. They are far less likely to do it if they can see the routes to the gains that they obtain from such behaviour being readily recoverable.

Photo of David Mundell David Mundell Conservative, Dumfriesshire, Clydesdale and Tweeddale

There are no further questions, Mr Swift. We thank you for your evidence this afternoon, and for your flexibility on timing, which we greatly appreciate. That brings us to the end of today’s sitting. The Committee will meet again on Thursday 8 July to begin line-by-line scrutiny of the Bill.

Ordered, That further consideration be now adjourned. —(Paul Scully.)

Adjourned till Thursday 8 July at half-past Eleven o’clock.

Written evidence to be reported to the House

RDDB01 Anton Smith, Partner, Ashton Bond Gigg solicitors

RDDB02 Institute of Revenues, Rating and Valuation (IRRV)

RDDB03 Paul Sewell BSc., Managing Director of The Machinery Users’ Association Inc.