Comments from ACCA to the Department for Business, Innovation & Skills (BIS), September 2013.
ACCA welcomes the high-level consideration of the concepts of transparency and trust as they affect the corporate sector. Agreeing to be transparent about company affairs must always be an integral element of the social contract that individuals enter into when they set up limited companies and take advantage of the legal and financial privileges that are associated with incorporated status. Transparency is particularly relevant to the processes of financial reporting and auditing: only if directors and managers are transparent in the disclosure of their company’s transactions can financial reporting and auditing hope to present the affairs and performance of entities in a way which is faithful and which can be subsequently relied upon by users. Trust on the part of wider society is an outcome that the regulation of the corporate sector should always aspire to achieving because of the privileges that shareholders and directors enjoy and the risks that third parties take when dealing with their companies. We agree that there are issues associated with both concepts that currently warrant exploration and reform.
While we support the review of these concepts, it would be complacent to assume that there will always be a direct relationship between transparency and trust. One of the factors that have contributed to problems of confidence in corporate reporting in recent years has in fact been the excess of disclosure rules, which, while producing more ‘transparency’ than ever before, has also led to confusion on the part of users and has provided scope for companies to disguise certain matters or else to misrepresent their real substance. It could be argued, in fact, that rules which aim to increase transparency are actually a substitute for authentic trust, which is related more closely to the concept of trustworthiness, which in turn comes about via a motivation to act in the ‘right way’. Requiring companies to make more information public will not, in itself, prevent illegal activity from occurring. In encouraging transparency in its various respects, therefore, we need to keep the limitations of transparency in mind and avoid settling for bringing about only an appearance of respectability. In particular, there is a need to ensure that the benefits of any increased transparency exceed their compliance costs. The real objective should be to ensure that the individuals who run companies understand what is expected of them and commit themselves to carrying out their functions with due regard to their fiduciary obligations and standards of commercial morality.
Bringing about greater transparency in beneficial ownership, as proposed in the document, will undoubtedly benefit the campaign against tax evasion as well as the many professional advisers and businesses that have obligations under the FATF recommendations and associated legislation. Ensuring that information on beneficial ownership is routinely available will therefore facilitate the client due diligence process and will in most cases pose no hardship on the entity. Ensuring that companies are aware of their beneficial owners will also aid the process of shareholder engagement.
There is however a difference between ensuring that the information is available to those with a recognised legitimate interest in it and publishing it on a public register. To require all companies to publish information on their beneficial ownership in a central register would go further than what is required of the UK under both the FATF recommendations and the draft EU directive on money laundering/terrorist financing and would accordingly amount to an exercise in gold plating. To make this register publicly accessible would go even further. Introducing a new requirement to file information on ownership would be illogical at a time when other information requirements are being dispensed with in the interests of cutting burdens, remembering that the great majority of companies that are to be covered by the proposed measures are small private entities. It would also impose a significant responsibility on companies to ensure that the information being published was correct: companies would have to manage the risk of publishing incorrect information. It should be sufficient, for the purposes of compliance and transparency, for the information concerned to be recorded by each entity and made available to the authorities and other approved persons at their request.
We believe that there is a strong case for reforming the rules on corporate directors. Without reform, it will be impossible to apply and enforce properly the recently strengthened rules on directors’ duties. There should be some derogation for the incorporation of new companies, and there should be a transition period before restrictions on corporate directors come into effect, but the administrative efficiencies associated with corporate directors no longer justify their use.
The consultation exercise presents a useful opportunity to review the status of the current rules on directors’ duties, the enforcement machinery for which is currently ineffectual. There needs to be some additional onus for directors to comply with their legal responsibilities in Part 10 of the Act. One means of achieving this would be for the Act to be amended to require directors to provide a similar declaration to that which they already provide in respect of their responsibilities for preparing their company’s accounts. Directors would state in their directors’ report that they acknowledge their responsibilities under Part 10 of the Act. Since they are already expected to comply with those responsibilities, though there is widespread scepticism about whether they actually do, this would not amount to a new burden but could have the beneficial effect of re-emphasising to them the importance of these provisions for the quality of corporate decision-making: this would be a useful outcome in itself. For directors of listed companies, this declaration could be supplemented by a new requirement in the Code on Corporate Governance, on the lines that currently applies to compliance with the main principles, for directors to explain how they have secured compliance with their responsibilities.
With respect to the regime for dealing with director disqualification, there are widespread concerns among insolvency practitioners (IPs) about whether sufficient resources exist within the Insolvency Service to manage and process the information that IPs submit about the conduct of directors. These concerns were endorsed earlier this year by the House of Commons Business, Innovation & Skills Committee. Some of the specific measures put forward for discussion in the document for strengthening the machinery for dealing with delinquent or incompetent directors cannot be considered in isolation from the issue of the capacity of the Insolvency Service to investigate conduct issues through to enforcement.
We welcome the ideas put forward in the document for increasing the potential returns to creditors in insolvencies. There is no doubt that, if creditors were to receive higher returns, confidence in the insolvency system would increase among the creditor community, with potentially positive implications for trade. The key issue in this area is funding for recovery actions: even where liquidators consider they have a good case for recovering funds from directors under the wrongful and fraudulent trading provisions, the lack of sufficient funding to bring legal proceedings restricts their ability to improve the returns available to creditors. The proposals to allow liquidators to assign their right to bring cases are worthy of further examination, although there are a number of practical difficulties associated with the idea.
In supporting the principle of encouraging transparency in the conduct of companies’ affairs, we would also stress that the focus of Government initiatives in this area should not be directed solely at the large company sector. We fully agree that regulatory burdens must always be proportionate, and that the costs of individual requirements should not exceed their benefits. But the public should have a basic right to information and protection from all companies, and confidence in the system as a whole is affected by the activities of small companies as well as larger ones.
Part A: Enhancing the transparency of UK company ownership
We endorse many of the concerns expressed in the document about the potential dangers of under-regulating the beneficial ownership of companies. Limited companies benefit from significant legal and financial privileges and there are legitimate concerns that the UK’s light touch compliance regime, which features quick and inexpensive incorporation and, for small companies, minimal disclosure requirements, can lend itself to exploitation for criminal purposes. The danger of this is exacerbated where owners and controllers are able to disguise their involvements in companies. It is accordingly welcome that steps are to be taken to tighten up the controls in this area. It is reasonable to expect all legal entities to be aware of the individuals who own controlling stakes in them: this will serve the interests of shareholder engagement as much as compliance.
Bringing about greater transparency in beneficial ownership will also, undoubtedly, benefit the many professional advisers (including accountants and insolvency practitioners) and businesses who are regulated persons under the FATF recommendations and associated legislation, since they are obliged to identify a company’s beneficial owner (if there is one) as a condition of entering into a business relationship with it. In many cases, the necessary due diligence checks are straightforward and can be carried out without material cost, but in some cases the work will necessitate more extensive and time-consuming inquiries and the absence of clarity on this matter may even prevent the adviser concerned from doing business with the client. Ensuring that the information on beneficial ownership is routinely available will therefore facilitate the client due diligence process and will in most cases pose no hardship on the entity.
There is however a difference between ensuring that the information is available to those with a legitimate interest in it and publishing it on a public register. The relevant FATF recommendations only calls for ‘adequate, accurate and current information’ on beneficial ownership and control to be obtainable and accessible by competent authorities and for countries to ‘consider’ measures to facilitate access to such information by regulated persons; the draft EU directive requires member states to ensure that companies and other legal entities hold adequate, accurate and current information on their beneficial ownership and to ensure that this information can be accessed in a timely manner by competent authorities and by persons with obligations under the directive.
To require all companies to publish information on their beneficial ownership in a central register would go further than what is required of the UK under both the FATF recommendations and the draft directive and would accordingly amount to an exercise in gold plating. To make this register publicly accessible would go even further, and would present companies with the responsibility of managing the risk of publishing incorrect information. Introducing a new requirement to file information on beneficial ownership would be illogical at a time when other information requirements are being dispensed with in the interests of cutting burdens, remembering that the great majority of companies that are to be covered by the proposed measures are small private entities. It should be sufficient, for the purposes of compliance and transparency, for the information concerned to be recorded by each entity and made available to the authorities and other approved persons on their request.
Q1: In the interests of international consistency the UK definition of beneficial ownership should follow as closely as the forthcoming EU directive allows that set out in the FATF recommendations. This should mean that the primary definition would cover individuals who own or control more than 25% of the shares or voting rights in an entity, through direct or indirect means. In respect of the second bullet under para 2.20, if companies are to be obliged to channel information to the proposed register on individuals who wield control ‘by other means’, then they will need guidance as to what this classification actually means: to say only that information is required on individuals who have ‘at least as much influence as someone who owns more than 25% of the shares or rights is insufficient.
Q2: We agree that limited companies, of all types, and LLPs should be covered by new arrangements on beneficial ownership, and that listed companies need not be covered because they are already subject to comparable disclosure rules. In due course trusts and charities should both by encompassed by equivalent rules.
Q3: We support the proposal to allow private companies to approach individuals to confirm whether they have an interest in the company’s shares, with an obligation for the individuals concerned to respond. The proposal to require individuals who are aware that they are beneficial owners to notify the company of that fact, within a given time-scale, is also reasonable. The proposal to require companies to pursue the owners of blocks of shares is likely however to be disproportionate as a standard requirement. Companies should have a basic obligation to identify their beneficial owner(s) and resort to whatever means they consider may be appropriate in the circumstances to attain that end.
Q4: We can see the logic in requiring disclosure of the trustee. But requiring disclosure of the beneficiary as well, while logical, appears to us to be a breach of the private nature of the arrangement. This is another argument for confining the new measures to in-house procedures rather than to a central and possibly publicly accessible register.
Q5: We support the proposal to allow designated authorities to be given generalised powers to investigate company ownership.
Q6: The document acknowledges that the current procedure only requires a full list of shareholders to be provided every three years. We would argue that the point about information on beneficial ownership is that it must be accurate and up-to-date; whether information on beneficial ownership is months or years out of date would make no difference – it would not be fit for purpose.
As already stated, we believe that the idea of creating a central register is unnecessary to achieve the purpose of the exercise and would amount to a disproportionate burden for companies. Companies should only be required to have an accurate and up-to-date understanding of who ultimately owns their shares and to make that information available to those with a legitimate right of access to it, including the tax and law enforcement authorities and regulated persons under the AML/CTF legislation. We do however see some merit in requiring companies to disclose to Companies House, via the annual return, the fact that they have not been able to identify their beneficial owner(s). This could conceivably be seen as a signal by the authorities that some investigation was in order: companies would invariably wish to pre-empt this happening by taking all reasonable steps to complete the identification process.
Q7: Should a register be introduced, the current provisions of s1112 of the Companies Act would appear to be more than sufficient as a basis to emphasise the importance of providing accurate information and to provide a basis for sanction. There should, however, be allowance for cases where companies may genuinely not know the full details or else have been misled themselves.
Q8: We agree absolutely that information on beneficial ownership needs to be current, which is one reason why we do not think that the creation of a central register, carrying information which might be years out of date, would be appropriate.
If however the Government proceeds with the idea, companies should be required to notify the register as soon as they can of any change to the details they have already filed. Beneficial owners should be required to notify the individual company within a set timeframe, and then the company should be expected to notify the register.
Making information publicly available
Q9: We do not believe that a sufficient case has been made out for making this information publicly available, or indeed for creating a central register in the first place. We can summarise our reasons here:
As stated above, we believe that
i) A requirement for all companies to satisfy themselves about their beneficial ownership;
ii) A requirement for that information to be made available to designated approved persons on request; and
iii) A requirement for companies to inform Companies House if they have not been able to identify their beneficial owner(s)
would be sufficient to achieve the policy objective.
Q11: The issue of bearer shares may be viewed by some companies as a useful means of raising capital. As the document suggests, there may also be circumstances in which the ability to invest via bearer shares can be justified. We find it fundamentally unreasonable, however, that companies, via the issuing of such shares, are not in a position to record any details of who actually owns the shares issued, even if the numbers involved are very substantial. On balance, therefore, we believe that the interests of transparency override the potential economic benefits of bearer shares and would favour the abolition of new shares of this type. The small number of such instruments suggests that abolition would not cause a material level of distress. The procedure noted in the document for allowing existing bearer shares to be re-designated sounds attractive: a reasonable period of around two years should be allowed for completing the process.
Q31: It is to us a statement of obvious fact that any person who is appointed to the office of director is expected to fulfil the duties associated with that role. If some individuals are under the impression that because they believe they are on the board to represent a shareholder or some other party they are not subject to the standard legal provisions, that should be seen as tantamount to unfit behaviour. Clearly there is some scope for further education to be carried out in this area. The document notes the practice of directors seeking formally to divest themselves of their responsibilities, and passing responsibility on to some other party. There is no indication of how widespread this practice may be, but rather than making each such action public the practice should be made illegal: directors should not be able to unilaterally transfer their authority to someone who has not been properly appointed, and if the ‘shadow director’ in this sort of case wishes to act as a director then he or she should be formally appointed as such.
Q35: We believe that there is a strong case for reforming the rules on corporate directors. ACCA was in favour of abolishing the concept at the time of the last company law review exercise, when of course the decision was ultimately taken to retain it.
We appreciate that the concept can achieve administrative efficiencies, especially in group situations where it may not be immediately feasible to identify a suitable individual to take on an appointment. It is also the case that expert consultancy companies may provide a useful service to the business community by making their expertise and experience available, especially to SMEs, as either executive or non-executive directors, sometimes on a corporate appointment basis.
We can also see that there is a case for allowing corporate directors to be appointed at the time of initial registration – legitimate company formation agents depend on being able to set up new ‘shelf’ companies, using corporate directors and secretaries, on the understanding that when those companies are bought and sold the entries will be changed. We believe that the continuation of this particular facility should be permitted in the interests of business efficiency.
But there are a number of good reasons why the concept of corporate director in ‘live’ companies should be seen as being out of date, as well as a potential obstacle to improving standards of business conduct and enhancing levels of trust and transparency:
i) The Companies Act 2006 (CA 2006) has taken steps to ‘personalise’ the office of director, most obviously by imposing a minimum age for service on a board. This is plainly inappropriate in the case of limited companies.
ii) The Act lays down the duties that directors owe to their company. It is illogical to expect a limited company to satisfy these expectations, perhaps particularly that relating to the objective and subjective duties of skill and care.
iii) It becomes much more difficult to pursue a corporate director in civil, criminal and disqualification cases, thus undermining the whole regime.
iv) It is fair to assume that, where a corporate director is appointed, the involvement of that company is invariably conducted through the presence of one individual. It is unfair that the other directors on the board will be liable to fulfil their responsibilities on a personal basis while the corporate director may not be unless he is deemed to be a de facto director.
v) Of particular relevance to the current consultation is that it may well prove difficult or impossible to trace the individuals behind corporate directors.
As a matter of principle therefore we believe the time is right for the concept of the corporate director to be phased out, as it has been in other jurisdictions. As long as the system allows for corporate directors to be appointed, it is impossible for the regime of directors’ duties and sanctions to be applied fairly across the board.
As stated above, we would be in favour of allowing corporate directors to be appointed on a provisional basis on initial registration, but on the understanding that they will be replaced by natural persons either after a set period, eg 6 months, or on the initiation of business activity, whichever happens first.
We appreciate that corporate directors are used sometimes in parent-subsidiary situations, but this is by no means a universal practice in group structures and it seems perfectly practicable for individuals to represent the parent on the subsidiary board without the need for them to shelter behind a corporate structure.
Part B Increasing trust in UK business
The current regime
We consider that the present consultation exercise presents a useful opportunity to review the status of the current rules on directors’ duties, as set out in Part 10 of the CA 2006. The current set of rules is in some respects ineffectual. We support the idea that directors should be expected to make decisions on the basis of a suitably broad assessment of factors which might have a bearing on those decisions. Given though that they are only obliged to ‘have regard’ to each of the specified factors, proving breach in any specific case is extremely difficult, and it is hard to see that directors’ behaviour will have been changed in any material respect as a result of the introduction of these requirements. Our anecdotal evidence suggests that it has not.
Of perhaps more direct relevance to the current consultation is that the duties in Part 10 of the CA 2006 are owed only to the company’s shareholders, and it is only they (or a liquidator) that is entitled to take action against them for breach. We understand that some actions have been attempted under the new derivative rule but they have been rare. For the reason previously cited, viz the difficulty of proving breach, it seems unlikely that breach of s172 can be used as a ground for taking disqualification action against a director.
It would therefore be appropriate to consider at this stage whether some additional onus should be introduced for directors to comply with their legal responsibilities. One means of achieving this would be for the Act to be amended to require directors to provide a similar declaration to that which they already provide in respect of their responsibilities for preparing their company’s accounts. Directors would state in their directors’ report that they acknowledge their responsibilities under Part 10 of the CA 2006. Since they are already expected to comply with those responsibilities (though there is widespread scepticism about whether they actually do) this would not amount to a new burden but could have the beneficial effect of re-emphasising to them the importance of these provisions for the quality of corporate decision-making. We acknowledge that the stated purpose of the business review and the new strategic report is to inform members of the company how the directors have performed their duty under s172, but this does not amount to a statement of responsibility and, in any case, small companies (the great majority of companies) are not required to produce either of those reports.
For directors of listed companies, this declaration could be supplemented by a new requirement in the Code on Corporate Governance, on the lines that currently applies to compliance with the main principles, for directors to explain how they have secured compliance with their responsibilities. This measure would be designed to address the specific issue of how the directors have sought to comply with the various requirements of s172, and its remit would thus differ from that of the rules governing the content of the business review/strategic report.
that the thinking behind s172 is essentially to help ensure good governance, we suggest it would be appropriate for such a provision in the code on corporate governance.
With respect to the regime for dealing with director disqualification, the Government will be aware of the widespread concerns among insolvency practitioners (IPs) about whether sufficient resources exist within the Insolvency Service to manage and process the information that IPs submit about the conduct of directors. These concerns were endorsed earlier this year by the House of Commons Business, Innovation & Skills Committee. Certain of the measures put forward for discussion in the document cannot be considered in isolation from the issue of the capacity of the Insolvency Service to investigate conduct issues through to enforcement.
Factors to be taken into account in disqualification proceedings
‘Wider social impact’ as a criterion of unfitness
Q44: We believe it is right in principle for the effects of directors’ actions on the wider business environment to be able to be taken into account in the consideration of disqualification actions. While unfitness should not be determined solely by reference to the materiality of consequences, those consequences should be able to be taken into account in the process.
The duties under section 172, which already constitute a matter for determining unfitness under the Company Directors Disqualification Act (CDDA), require directors to take into account the interests of designated stakeholders and causes; hence it is already accepted that directors’ conduct can be dealt with under the CDDA if they fail to show sufficient regard for those interests. Given that we have mentioned above the practical difficulties of enforcing section 172 at present, we agree that some enhanced basis of dealing with non-compliance with statutory responsibilities would be appropriate.
Q45: As the document suggests, the term ‘wider social impact’ would need to be defined carefully. It would need to ensure that the effects of the provision were not felt disproportionately by directors of larger companies solely because their companies, when they fail or make mistakes, are likely to have a greater aggregate impact on stakeholders than directors of smaller companies. It is arguable that the materiality of the impact on stakeholders of unfit conduct on the part of directors can be just as great in the case of small companies as in the case of large companies. A definition would also need to avoid attributing to companies and their directors an obligation to ‘society’ which was wider than is currently expected in company law.
We suggest it would be feasible to frame an explicit new provision based on the scale of detriment caused to third parties as a result of a failure to properly carry out statutory duties under section 172. The courts, or the Insolvency Service as the case may be, could be required to take into account, when applying para 1 of Schedule 1 to the CDDA, the extent of losses incurred by the designated stakeholder groups and interests. This list of designated groups and interests is sufficiently widely framed as to be capable of capturing wider social impact, but without the uncertainties that would be associated with the adoption of that particular term. For example, substantial economic detriment experienced by a company’s employees, suppliers and customers, or economic or non-economic detriment suffered by the local community and the environment, could all be encompassed by such a new provision if it could be linked to a directors’ conduct; this would mean that, for example, a director’s failure to pay the required due regard to the interests of the local environment in the direction of his company’s business could be taken into account. In insolvency cases, there would need to be an express reference made to the company’s creditors since these are not listed as relevant interests in section 172, but will effectively become so by operation of law in the event of insolvency.
Q46: We agree that the proposal to impose differential tariffs, taking into account a director’s record of dealing with particular types of stakeholders, would be consistent with the new emphasis in section 174 of the CA 2006 on the importance of directors exercising the care, skill and diligence that is appropriate and relevant to the particular situation in which they and their company find themselves. If a director has a record of abusing or exploiting a particular group of stakeholders, or acting without the required level of skill and care when dealing with them, it could amount to proportionate action to prevent that person from continuing to act in the line of business concerned. It may also be reasonable that, while a director’s conduct is not of the worst level, his skills, experience and aptitude are plainly unsuited to acting in a particular type of business or sector.
It does not appear to us to be appropriate, however, to define too closely the circumstances in which this differential approach could be adopted. If it made sense to mete out differential sanctions in respect of high volume deposits or pre-payments, why would it not make sense to consider similar action where directors abuse charitable status or are responsible for chronic late payment of their company’s debts? It would be more efficient, we suggest, to allow the courts and the Insolvency Service to impose differential tariffs where they are persuaded that it would be in the public interest to impose restrictions an individual’s involvement in particular, specified activities.
Taking into account a director’s previous failures
Q48: We agree with the analysis in the document that while a director’s involvement in a company that becomes insolvent should not of itself indicate unfitness, where there is a demonstrated pattern of incompetent behaviour on the part of a director that should be capable of being taken into account in the consideration of a disqualification case. On this point, we note that section 6(1)(b) of the CDDA as currently framed should already enable the court to do this.
We would not favour the introduction of a rule which held that responsibility for a set number of company failures automatically constituted unfitness and grounds for disqualification. That would be to assume that business failure can always be avoided by responsible and competent directors: that, clearly, is not the case, especially in periods of economic downturn. A rule of this kind would also compromise the position of those consultants, or ‘company doctors’, who often provide very useful service to companies with financial difficulties (which will, inevitably, often fail despite the consultants’ best efforts).
It would be preferable for the courts to be encouraged to take into account evidence of patterns of similar conduct by an individual director in any number of other companies.
Improving financial redress for creditors
The more extensive personal liability regimes that are available in comparable other countries, with special reference to the SME context, have been reviewed in our own publication 'Protecting stakeholder interests in SME companies'. We would agree that the disqualification regime, on its own, is not seen as a commensurate response mechanism to the issue of misconduct on the part of directors.
Assigning wrongful and fraudulent trading actions
Q50: In the light of the planned changes to the rules on contingent liability actions, the suggestion that liquidators be entitled to assign their rights of action against directors is interesting and timely. Without the ability to fund actions on a contingent basis, it is probable that the likelihood of liquidators being able to take action to recover monies from directors will in future be reduced. This would not be a good outcome for creditors.
Q52: The provisions on wrongful and fraudulent trading in the Insolvency Act 1986 are useful and amount, potentially, to active encouragements to directors to ensure that they act responsibly when their company faces serious financial difficulties. Their effectiveness in recovering funds for creditors is, however, likely to be reduced if directors consider that actions are not likely to be initiated against them because of funding issues. Providing the right tools for enabling liquidators to fund actions, where that would be appropriate, must be therefore the right policy course for the Government to take.
In principle, we think that the idea of assignment is worthy of further investigation. Currently, the fact that a liquidator needs to be in place means that procedures can be extended, perhaps for the sole purpose of planning complicated s214 actions, and as a result costs continue to mount up. If the right was capable of assignment, the action could be contemplated outside the liquidation and the liquidation itself could be resolved earlier than it otherwise might be.
Q53: There are, however, practical issues with the proposal to assign the right of action which would need to be resolved. First there is the question of how the right is to be valued. This would have to be based primarily on the liquidator’s estimate of the amounts owed to the estate because of the director’s actions, but would then have to be negotiated to take into account the risk of any action not succeeding. In order for any assignee to place reliance on the liquidator’s valuation he would require access to inside information about the company’s recent financial history and dealings: without express permission the liquidator would not be entitled to communicate that confidential information for commercial purposes. Then it will be important that the liquidator be protected against any claims from creditors which might arise from a successful assigned action where the amount obtained exceeded the amount obtained by the liquidator for assigning the right. To pre-empt any creditor claim of this kind it would be necessary to get creditors’ agreement in advance for any proposal to assign the right. The approach to framing the right of assignment would also need to cover the situation where the company has already been struck off: where this is the case, an action is not capable of being brought. We would certainly agree with the point made in the document that safeguards would be needed to prevent the right being bought by prospective defendants. We would add that it is important that directors not be entitled to vote as creditors in winding up proceedings: their votes, for whatever amounts, should be disregarded where their conduct is the subject of scrutiny.
Q55: On balance however we take the view that the best solution is likely to be for liquidators to retain the sole right to bring these actions but with renewed attention given by the Government to the crucial question of funding. For this reason we believe that the current carve out of the ‘Jackson’ reforms on contingent fee actions should be extended indefinitely to insolvency practitioners.
Compensation payments against directors
Q56: Giving the courts the power to issue retrospective compensatory awards would go beyond the current purpose of the CDDA, which is to protect stakeholders in their future dealings with companies. Introducing this new measure would thus help to reinforce the regime and enhance stakeholder confidence. The benefit would be that creditors would stand to gain where the IP had not had sufficient funding to pursue recovery actions under existing provisions – any award should be made available to the IP for general distribution.
We would however make the point that any power to issue compensatory awards will need to be based on objective, set criteria separate from the criteria used to make the decision on disqualification. We would also raise the issue of whether an award would be capable of being avoided by bankruptcy. Clearly, it would not be helpful if any new provision for creditors led to an increase in bankruptcies.
Time limit for bringing disqualification proceedings
Q61: Given the concerns about the capacity of the Insolvency Service to process disqualification reports through to finalisation, we would be in favour of an extension of the time available for proceedings to be brought.
Q62: Three years would be an appropriate time limit.
Q64: We strongly agree that more needs to be done to address the issue of directors’ level of preparedness to carry out their duties. One of the purposes of the re-statement of statutory duties in the CA2006 was to increase the level of awareness and understanding of these duties among directors. It is not evident that this has in fact occurred. This is despite the fact the re-stated duties incorporate extensions and elaborations of existing responsibilities. Given the fact that there are no qualifications or eligibility criteria to act as directors of UK companies, and yet the responsibilities are considerable, it would be understandable if the general public believed that regulation in this area was inadequate. We consider that some meaningful form of director education initiative would be well received and increase confidence in the regime.
Q67: We consider it would be appropriate for the undertaking of education or training by a disqualified director to result in a modest reduction in their tariff. We agree also with the proposal that a director making an application under s17 of the CDDA should be required to demonstrate that they have undertaken the education or training. It would also be appropriate, in cases where particular deficiencies have been identified, for the courts to require disqualified directors to demonstrate that they have successfully undertaken approved education or training in relation to those areas of deficiency.