Rise in Criminality Among Directors

• Whistle-blowing complaints to Insolvency Service at highest point since 2009
• Investigations against disqualified directors and bankrupts up 150%

Research carried out by the firm has found that the number of whistle blowing complaints received by the Insolvency Service has reached its highest level since 2009, while the number of criminal investigations has also increased.

Further, the data shows that a significantly higher proportion of complaints received by the Insolvency Service are being referred for investigation than at any point over the past three years. The number of referrals made to the Criminal Enforcement team at the Department for Business, Innovations and Skills (BIS) has increased by 150% over the past three years.

Pamela Muir, a Director in the Restructuring and Recovery team at Pinsent Masons, says that the figures could point towards increasing levels of criminal wrongdoing among businesspeople in distress.

"The number of complaints made to the Insolvency Service reached a high-point in 2008-09, but very few of those appeared to have substance with only around 2% being investigated. Now, however, complaints are creeping back up again and they seem more substantial, with around 7% coming under scrutiny."

The Insolvency Service established a 24-hour Enforcement Hotline in 1998 to allow members of the public to provide information about suspected breaches of disqualifications and bankruptcy restrictions.

According to the information obtained by Pinsent Masons, all of the referrals made to BIS relate to disqualified directors, bankrupts or individuals subject to bankruptcy restrictions – some of whom may be unlawfully acting in the management of a company.

Muir says, "The rules in this area are quite clear and uncomplicated so it seems likely that what we are seeing here is an increase in deliberate or negligent wrongdoing. It may be that individuals are simply getting more desperate and are willing to deliberately take the risk of breaching the rules in order to try and trade their way out of financial trouble."

She continues, "It's a risky game to play - breaches of this sort are a serious business and can be punishable by substantial fines and up to 10 years imprisonment.

"Of far greater concern, however, is the impact on business. People need to have the confidence to know that the individuals they are trading with are legitimate. I suspect most businesspeople would be appalled to suddenly find that the directors of their suppliers or customers are trading whilst in bankruptcy or in further wrongdoing."

Where businesses do suspect wrongdoing, they should immediately try to seek redress through the civil courts. This heightens the chances of recovery of any money or assets which are owed, and the results of a successful commercial litigation or insolvency procedure can subsequently help secure criminal convictions and prevent further criminal behaviour. What we may be seeing here is more criminal proceedings being instigated now that the civil process has been completed. Having a Director in jail does you no favours if your business remains out of pocket."

Muir says that she has been involved in several civil cases where there has been evidence of deliberate fraud perpetrated by Directors who have been disqualified.

"We have seen a clear increase in frauds committed by increasingly desperate Directors. One of the most common since the downturn has been in invoice discounting. This is where a third party effectively 'buys' the outstanding invoices owed to a business at a knockdown price. The invoice discounter – usually a bank – then chases payment for themselves, only to discover that the debt is fictitious or irrecoverable."