Dear insolvency
practitioner > Chapter 10 > Disqualification
New guidance was issued by Disqualification Unit in December 1999; the following article has been reissued to remind insolvency practitioners of the compliance issues. 1. Company Directors Disqualification Act ComplianceArticle withdrawn October 2012 (First published in Dear IP no. 38, May 1997) 2. Disqualification cases and IP’s costs Article Withdrawn July 2012 3. CDDA Guidance visits Article Withdrawn July 2012 4. INSOLVENCY ACT 2000 (IA 2000) AND THE COMPANY DIRECTORS DISQUALIFICATION ACT 1986 (CDDA) The various amendments to the CDDA brought about by the IA 2000 come into effect on 2 April 2001. Those principally affecting office holders are set out below: ‘D’ forms The form of the report to be made under Section 7 (3) of the CDDA has been amended (by The Insolvency Companies (Report on Conduct of Directors)(Amendment) Rules SI 764 of 2001) to include the details of the insolvent company’s registered office in the 6 months prior to the office holder’s appointment as administrative receiver, the making of the administration order or the passing of the resolution to voluntarily wind up. This is because of the changes to Section 6 in particular the court in which the disqualification proceedings are issued. In effect the disqualification proceedings will now generally be issued where the company traded rather than where the office holder is located. Also in calculating the date for the registered office in S.6 (3A)(a) it is important to know the date that the company passed the resolution for winding up. Disqualification Undertakings It is now possible for a defendant to offer to the Secretary of State a disqualification undertaking rather than the case having to go to court. This will enable proceedings to be conducted more quickly and cheaply. However, if it is going to be quicker there is a need for office holders to adhere to the reporting guidelines and comply with section 7 (3) which requires unfitted conduct to be reported forthwith to the Secretary of State. Another advantage for a potential defendant will be that if a disqualification undertaking is offered prior to the issue of proceedings the Secretary of State will not usually seek to recover his costs. It will still be possible for the Secretary of State to accept an undertaking after proceedings have been issued, but in that situation the Secretary of State would normally seek his costs. A disqualification undertaking will normally include a schedule setting out the basis on which it has been accepted by the Secretary of State and will be a public document in the same way as a court order. It will normally come into effect 21 days after acceptance by the Secretary of State. . Permission to act and applications to vary a disqualification undertaking Section 1(A)(b) of the CDDA as amended absolutely prohibits a person who is subject to a disqualification undertaking from acting as an insolvency practitioner as is the case where a person is subject to a disqualification order (see section 1 CDDA as amended). The court does not have any power to give leave. In addition S.17 CDDA has been amended. The amended section also provides that only the Secretary of State is required to appear on any application for permission. It will also be open to a person who has been disqualified by giving a disqualification undertaking to apply under S.8 (A) of the CDDA for the court to reduce the period or discharge the undertaking. Limited Liability Partnerships (LLP) When the legislation introducing LLPs comes into effect a disqualified person will also be unable to be a member of an LLP. General enquiries may be directed to enforcement.technical@insolvency.gov.uk 5.
Update on procedures where an IP needs an extension of time for
submission of a final disqualification return/report and clarification
of roles of IPCU and Disqualification Unit Article withdrawn October 2012 6. D Return Reminder LettersArticle withdrawn October 2012 7. Company Director Disqualification Act 1986 – "D" Forms Following on from the Enterprise Act 2002, there are some consequential amendments to be made to the D Forms. The references to "administration order" in these forms should be read as to include all appointments of an administrator. IPs are also reminded that there were changes to the D form brought about by the Insolvency Act 2000, article 4 Dear IP March 2001 refers, and that from now on, any incorrect forms submitted will be returned. Any enquiries may be addressed to the disqualification team in Birmingham – see Dear IP no.11 for contact details. 8.
Update on the procedure on disclosure of the D report or decision Article Withdrawn July 2012 9. Extensions for Submission of D
Reports/Returns Article withdrawn October 2012
10.
New Reminder Letters
Article withdrawn October 2012 11.
Disqualification Undertakings In Northern Ireland Legislation recently introduced in
Northern Ireland allows disqualification undertakings to
be accepted from directors, which will have the same effect as if they
were disqualification orders made by the court.
Those whose undertakings are accepted in Northern Ireland are
banned from being involved in the management of a company in Northern
Ireland. Parliament anticipated that this
legislation would be introduced in Northern Ireland, and section 7(2) of
the Insolvency Act 2000 incorporates a power to allow the Secretary
of State to make an Order to provide that a person subject to a Northern
Ireland disqualification undertaking is also prohibited from running a
company in Great Britain. This power has now been exercised
and The Insolvency Act 2000 (Company Directors Disqualification
Undertakings) Order 2004 (S.I 2004 No. 1941) came
into force on 1 September 2004.
This will provide a greater degree of protection for the public
by preventing those considered “unfit” in Northern Ireland from
running companies here. The
effect of this new Order is to mimic provisions that already exist here
(section 12A Company Directors Disqualification Act 1986) which prevent
those subject to disqualification orders made by the courts in Northern
Ireland from acting as directors in Great Britain. Simultaneously, The Companies
(Disqualification Orders) (Amendment) Regulations 2004 (S.I 2004
No. 1940) have been made, which permit information about
disqualification undertakings accepted in Northern Ireland to be kept on
the disqualified directors register at Companies House.
This means that those searching the register will be able to
obtain information about persons who are banned from running companies
in both Great Britain and Northern Ireland. 12. Changes to
the procedure for filing D returns/reports in respect of Scottish
registered companies Article Withdrawn July 2012 13.
Submission of Conduct Reports under the
Company Director Disqualification Act 1986 Article Withdrawn July 2012 14. Targeting D1 Conduct Reports for
Investigation Article Withdrawn July 2012 15. Creation of the Initial
Investigation Team Article Withdrawn July 2012 16.
Changes in procedure affecting Scottish cases Since
April 2006 the Insolvency Service’s Case Targeting Team, based in
Birmingham, has reviewed all D1 full reports, including all those
reports submitted by insolvency practitioners in Scotland.
Centralising the targeting resource has lead to efficiency gains
while also allowing the Disqualification Team in Edinburgh to focus on
their core activity of investigating disqualification matters in
Scotland. To this end, the
Insolvency Service has been looking, where possible, to further unify
the targeting, investigation and post section 16 letter processes
irrespective of whether the case originated in Scotland or in England
and Wales. As
a result, from 1 April 2008 cases originating in Scotland, England and
Wales will be subject to the same vetting, investigation and review
procedures. This will mean that once an investigation is complete, cases
will be submitted to the Authorisation Team in London who will take the
decision as to whether misconduct is made out and whether it is in the
public interest to issue proceedings. Thereafter the Defendant Liaison
Team in Birmingham will progress the matters to completion of the case
(with reference to the investigation team). Defendant Liaison Team will
negotiate undertakings and, where appropriate, instruct Solicitors to
bring proceedings at court. A
further change within the process will see the Chief Examiner in
Edinburgh take the role of the principal witness in disqualification
matters. This change properly reflects the different roles of the
investigator and the insolvency practitioner, and as has happened in
English and Welsh cases (where it has been in operation since 2002) it
will result in a reduction in the need for insolvency practitioners to
review and swear affidavits and reports, or to attend court as a
witness. However, there will continue to be cases where the
Insolvency Service would like the insolvency practitioner to act as
witness of fact, particularly where the alleged misconduct occurred
during the course of the insolvency administration and may have caused
difficulties to the insolvency practitioner or losses to the estate. As
now, where an insolvency practitioner is fulfilling such a role beyond
his/her statutory duty the Insolvency Service will pay the cost of the
practitioners’ time, although we would wish to discuss and agree the
detail with the practitioner beforehand for cost control purposes. Any enquiries regarding the above should be directed toward Enforcement.Technical@insolvency.gov.uk 17. New approach to “D” conduct reports Article Withdrawn July 2012 18. The Secretary of State’s investigations of insolvency practitioner disqualification cases A vital part of the disqualification investigation carried out in cases administered by insolvency practitioners is the visit made to the insolvency practitioner. Such investigations are carried out by The Insolvency Service on behalf of the Secretary of State. During these visits information crucial to the investigation is obtained from the insolvent company’s records and the insolvency practitioner’s own working files. The information obtained is also persuasive in the decision of whether to proceed with the investigation. Authority for the provision of this information is found in section 7(4) of The Company Directors Disqualification Act 1986, which provides. “The Secretary of State or the Official Receiver may require the liquidator, administrator or administrative receiver of a company, or the former liquidator, administrator or administrative receiver of a company – a. to furnish him with such information with respect to any person’s conduct as a director of the company, and b. to produce and permit inspection of such books, papers, and other records relevant to that person’s conduct as such a director, as the Secretary of State or the Official Receiver may reasonably require for the purpose of determining whether to exercise, or of exercising, any function of his under this section.” Latterly The Insolvency Service’s investigators have experienced resistance from some insolvency practitioners and their administrators regarding entitlement to view, in particular, the contents of the insolvency practitioner’s working files. The Insolvency Service has therefore sought legal advice regarding the authority given by Section 7(4). The advice received is summarised below: · Section 7(4) is expressed in the widest terms and requires an office holder to provide all documents to the Secretary of State which are relevant to a person’s conduct as a director. · Relevant information and documents include the provision of any confidential documents, although insolvency practitioners may wish to consider notifying anybody to whom the confidential information belongs. · Section 35(1) of the Data Protection Act 1998 permits the disclosure of personal data in these circumstances. · Section 7(4) does not require an office holder to provide any documents created in the insolvency proceedings that are subject to legal professional privilege (LPP). The advice provided took into account available case law on the subject, and in particular;
In summary, the legal advice received stated that the Secretary of State is entitled to be provided with all documents from the company’s files and from the insolvency practitioner’s working files which are relevant to a person’s conduct as a director with the exception of those which fall into the classification of legal professional privilege. It is not anticipated that insolvency practitioners will seek to withhold all documents which fall into the classification of LPP. When LPP is claimed it would be helpful to receive a list of those documents, particularly when they relate to contemplated litigation as they may impact on the decision to bring disqualification proceedings. Any enquiries regarding the above should be directed towards Clive Tranter at clive.tranter@insolvency.gov.uk or 0779 1118726. General enquiries may be directed to: Enforcement.Directorate@insolvency.gov.uk 19. Advertising of appointment and submission of a conduct return in CVL following administration Corporate Conduct Team has noticed a marked increase in the number of omissions in the submission of a conduct return following appointment as liquidator when this is preceded by an appointment as administrator. Insolvency practitioners are reminded that section 109 of the Insolvency Act 1986 states :- “The liquidator shall, within 14 days of his appointment, publish in the Gazette and deliver to the registrar of companies for registration a notice of his appointment in the form prescribed by statutory instrument made by the Secretary of State.” Failure to provide relevant notification may subject the liquidator to a fine and daily default fine. In addition, the lack of notification means that The Insolvency Service’s central index system will not be updated and therefore the necessary entries on the estate account and enforcement management systems will not be made. Rule 4 of The Insolvent Companies (Reports on the Conduct of Directors) Rules 1996 sets out the reporting duties of insolvency office-holders and applies to each appointment held. Insolvency practitioners are therefore required to submit a separate conduct return in relation to each insolvency appointment held. Insolvency practitioners are reminded that failure to comply with reporting obligations may render them subject to fine as per rule 4 (7) of these Rules and may result in referral to their regulatory body by the Corporate Conduct Team. Any enquiries regarding the above should be directed towards Elizabeth Pigney Corporate Conduct Team, Third Floor, Cannon House, 18 Priory Queensway, Birmingham, B4 6FD. Telephone: 0121 698 4397, email: elizabeth.pigney@insolvency.gov.uk General enquiries may be directed to: Enforcement.Directorate@insolvency.gov.uk 20. Submitting a D2 conduct return with additional information Article withdrawn October 2012 21. Conduct return reminder letters issued by Corporate Conduct Team Article withdrawn October 2012
22. Conduct and Complaints Directorate changes Article Withdrawn July 2012 23. Conduct and Complaints Directorate changes – new contact details Further to the details provided in Article 22 in Issue 49 of Dear IP, regarding the creation of the new Intelligence & Enforcement Directorate and the installation of “Intelligence Operations Reception” as a single reception point for all referrals of misconduct in both insolvent and live companies, the relevant e-mail contacts have been updated and are as follows:
These e-mail addresses replace the following:
which are no longer in use, although temporary diverts to the new e-mail addresses exist to cover the change over period. The correspondence address and fax number remain as before. Any referrals or complaints concerning live companies may also be sent to Intelligence Operations by using the Online Complaint Form and associated guidance available on our website. General enquiries about this article may be directed to intelligence.insolvent@insolvency.gov.uk 24. Update on the procedure for dealing with requests for disclosure of the D report or decision. This article replaces chapter 10, article 8 of the same title. The purpose of this article is to provide an update on the procedure for dealing with disclosure requests and to provide insolvency practitioners with a brief overview of how, and on what grounds, The Insolvency Service responds to those requests. All enquiries made direct to practitioners about the D decision and requests for copy returns or reports must be referred in the first instance to the Intelligence Hub, Investigations and Enforcement Services, The Insolvency Service, 3rd Floor Cannon House, 18 Priory Queensway, Birmingham, B4 6FD or by email to Intelligence.insolvent@insolvency.gov.uk. This includes all requests made under the Data Protection Act 1998 (“DPA”) and the Freedom of Information Act 2000 (“FOIA”) for a report or return. Depending on the request, this unit will either deal with the request or forward the request to the appropriate business unit. This also includes all such requests from creditors, licensing bodies, regulators and investigating authorities such as the Police and HM Revenue and Customs. This is because the report is produced in compliance with a statutory obligation under Section 7(3) of the Company Directors Disqualification Act 1986; the sole purpose being to enable the Secretary of State to use the report when considering whether further action with a view to disqualification is appropriate. It therefore follows that generally the Secretary of State cannot make use of the report for other purposes. Insolvency practitioners should bear in mind that disclosure of a D report is probable in some circumstances (see below) and therefore the report should contain only relevant and pertinent facts and information. The Insolvency Service is not responsible for checking whether the report may contain defamatory matters. Depending on the nature of the request and the identity of the requestor, the Secretary of State’s current policy is as follows: -
25. Targeting D1 disqualification reports for investigation The Insolvency Service reviews over 4,500 D1 reports from Insolvency Practitioners every year. The D1 reports that are targeted for investigation come from a body of reports that contain sufficient information (or it is readily available from the insolvency practitioner) to enable the Secretary of State to make an informed decision on whether the case should progress further. These reports will also be expected to meet a public interest test to determine whether to investigate further. That does not mean that those reports are fully “evidenced” and ready to go to court, nor does The Service expect them to be fully evidenced at the six month point. It does however mean that decisions can be made by The Service. Of the reports that are not targeted at the initial stage, a high proportion of those are not targeted because the unfitness identified is not sufficiently serious to warrant action in the public interest. The same reports may also lack adequate initial evidence. That does not mean that the Secretary of State is expressing a view that the behaviour reported is, in some way, “acceptable”, or “fitted”. It means that the behaviour does not justify the application of resources which are needed to address more damaging, or potentially damaging, misconduct. In addition, some of reports are not targeted at the initial review because, although they appear to describe more serious misconduct, there is insufficient initial factual evidence available. Sometimes reports are not targeted because the insolvency practitioner fails to respond to The Service’s enquiries aimed at identifying whether further evidence exists. In many respects there is often little distinction between a “lack of seriousness” and “lack of evidence”. The reason that most reports are not targeted at the initial review do not go further could be summarised as insufficient evidence demonstrating sufficiently serious misconduct to warrant further investigation. Further, the targeting decision which looks at the public interest, is not predicated solely on the need for the unfit conduct reported to be “serious” enough (or purely to have breached a statutory provision). It requires the consideration of other competing or complimentary factors including timeliness, the existence of other ongoing and publically funded enforcement action, practicality, the circumstances of the target directors and other matters. All relevant factors have to be balanced against each other in reaching a targeting decision and the weight given to any one of those factors will change depending on the circumstances. For example the public interest in pursing a report in which the misconduct is relatively less serious, and the evidence is not readily available, is reduced if the matter is also well into the two year period in which proceedings would have to be taken. A proportion of the investigations started as a result of these reports will be concluded and not investigated further. There can be many reasons why this occurs, but usually it is as a result of the investigation turning up new information that means it is no longer in the public interest to take matters further. The remainder that are progressed will be recommended for a final decision on whether to pursue the disqualification of one or more directors. The great majority of those recommendations will result in action in the public interest by the Secretary of State against directors. Example of a good report A D1 alleged various matters including trading whilst insolvent and the (mis)use of Crown monies together with some less serious allegations. To support the detailed allegations within the D1 the insolvency practitioner exhibited the following documents in support:
The detail contained within the report, and the supporting evidence, allowed the case to be targeted without further reference to the insolvency practitioner. In particular, the material provided to support the Crown allegation allowed the Secretary of State to determine that the Crown had been treated in an unfairly differential way as the evidence showed the age of trade creditors compared to the Crown debt. The trading whilst insolvent allegation was also supported by evidence that allowed the insolvency practitioner to demonstrate why, and how, he considered the company to have traded whilst insolvent. The other allegations were weaker but their inclusion in the report, and the evidence provided in support of them, added weight to the overall (mis)conduct of the director and enabled the public interest to be more accurately assessed. Example of a report that was not targeted A D1 report made allegations (against two directors) of a lack of co-operation, (one of the directors) acting as a shadow director, and a use of the company’s money by the shadow director. The deficiency totalled only £2,500 and the total unsecured creditors were £5,000, of which the de-jure director had personally guaranteed £1,000. No evidence was provided by the insolvency practitioner as to the detriment caused by either the lack of cooperation or by the apparent use of monies by the shadow director. In any event, acting as a shadow director is not, in itself, misconduct and the existence of material harm relating to this allegation was not clear from the information provided. If this report had been better supplemented by further information, given the apparently very low deficiency, it is still possible that it would not have been considered in the public interest to target for investigation but, in either scenario, the example indicates some of the reasons why reports are not targeted. Any enquiries regarding this article should be directed towards Jeremy Hawksley, Head of Intelligence: Targeting, Zone E 4th Floor, 21 Bloomsbury Street, London WC1B 3QW, telephone: 020 7291 6818 email: Jeremy.hawksley@insolvency.gov.uk General enquiries may be directed to email intelligence.insolvent@insolvency.gov.uk 26. D reports - Talks and Presentations from The Insolvency Service The Insolvency Service operates an extensive programme of talks and presentations to insolvency practitioners regarding what The Service is looking for in a well-drafted, well-evidenced D-report. Recent talks have covered a wide range of subjects including public interest, evidence required to back up allegations, and reasons why cases are not progressed. If you would like a presentation to your firm, or to attend a meeting or conference, please contact Karen McConnell. Any enquiries regarding this article should be directed towards Karen McConnell, 3rd Floor, Cannon House, 18 Priory Queensway, Birmingham B4 6FD, telephone: 0121 698 4236; email: Karen.mcconnell@insolvency.gov.uk
27. Revised Guidance Notes for the Completion of Statutory Reports and Returns The Insolvency Service has issued revised guidance notes for the completion of statutory reports and returns. The revised guidance notes expand guidance regarding unfit conduct, completion of the return/report and include:
The guidance notes are available on The Insolvency Service’s website at http://www.bis.gov.uk/assets/insolvency/docs/publication-word/guidance-notes-completion-of-stat-reports.doc. Better quality information at the outset could reduce the risk of wasted resource, save practitioners’ time and reduce estate costs. We are therefore aiming to improve the information that we receive under section 7 by;
The more relevant information we have on the D1, the easier it is to assess and prioritise the case. That also means that there is less chance of investigations faltering at a later stage. Once an investigation has been commenced, it is by no means automatic that proceedings will be brought, since the whole purpose of the investigation is to discover facts and collate evidence; inevitably there are cases where new information means the case is no longer in the public interest. We are in the process of reviewing the letters that we send to practitioners to ensure that these fully explain the reasons behind our decisions and practitioners are invited to contact us if they require further clarification on those decisions. Any enquiries regarding this article should be directed towards Claire Barker of IES Technical Team, The Insolvency Service, 3rd Floor, 4 Abbey Orchard Street, London SW1P 2HT; telephone: 01772 760091, email: Claire.barker@insolvency.gov.uk General enquiries may be directed to email: enforcement.technical@insolvency.gov.uk 28. Review of existing articles following the reissue of “Guidance Notes for the Completion of Statutory Reports and Returns” The Insolvency Service’s publication “Guidance Notes for the Completion of Statutory Reports and Returns” has now been updated. The publication is also available on the Insolvency Service’s website. To coincide with this update; The Insolvency Service has undertaken a review of existing guidance available within Dear IP; the intention being to withdraw or consolidate old articles where up to date information is available in the guide. The following Dear IP articles have now been withdrawn:
Articles 10.1, 10.5, 10.6, 10.9, 10.10, 10.20 and 10.21 concerning the submission of D reports and returns, interim returns and reminder letters will be withdrawn/ consolidated at a later date. Please refer to the publication “Guidance Notes for the Completion of Statutory Reports and Returns” in the first instance.
Any enquiries regarding this article should be directed towards Claire
Barker of IES Technical Team, The Insolvency Service, 3rd Floor, General enquiries may be directed to email: enforcement.technical@insolvency.gov.uk 29. Reminder letters to insolvency practitioners in respect of outstanding D-returns The Insolvency Service will now be sending reminder letters to insolvency practitioners five months after the date of their appointment advising them they have one more month before they have to submit a D1 report or D2 return. Insolvency practitioners will not however, be sent any further reminder letters. If a return has not been submitted after six months, then the insolvency practitioner will receive a telephone call asking for the reason as to why the return is late and for the likely date of submission. If a return still hasn’t been received by the seven month stage, then The Service will consider reporting the insolvency practitioner’s conduct to their Regulatory Professional Body. Insolvency practitioners are also reminded that if their enquiries are on-going, this should be expressed by way of a D2 interim, rather than failing to submit any type of return. As a result of this notice regarding reminder letters and the timely submission of D reports and returns and the recently reissued publication “Company Directors Disqualification Act 1986: Guidance Notes for the Completion of Statutory Reports and Returns” the following Dear IP articles have been withdrawn:
Any enquiries regarding this article should be directed towards Karen McConnell 3rd Floor, Cannon House, 18 Priory Queensway, Birmingham B4 6FD telephone: 0121 698 4236, email: Karen.McConnell@insolvency.gov.uk General enquiries may be directed to email: intelligence.services@insolvency.gov.uk Telephone 0121 698 4000. 30. Introducing the Insolvency Service Disqualification Stakeholder Group and explaining the D1 vetting, targeting and investigation processes behind the statistics. The Disqualification Stakeholder Group On 3 October The Insolvency Service held the first meeting of its Disqualification Stakeholder Group (DQSG). The DQSG was introduced as a forum for The Service, Recognised Professional Bodies and insolvency practitioners’ representatives to discuss issues around reporting under section 7 of the CDDA. It provides an opportunity for stakeholders to understand and influence The Service’s enforcement strategy in relation to disqualification. It also provides an active channel of communication with the aim of promoting improved reporting processes. At the first meeting Tony Wilkin, The Service’s Director of Intelligence and Enforcement provided an insight into what lies behind the disqualification statistics. When dealing with D1s, The Services understands both that practitioners might not have been able to undertake a thorough investigation at the six month submission point, so may be dealing with indicative opinion, but also that they have a statutory duty to report that opinion. The Secretary of State, however, has to exercise his discretion as to whether to launch disqualification proceedings against individual directors. He also has to consider the possibility of success of bringing litigation, in terms of the seriousness of the allegations and the available evidence, and exercise a duty of fairness as a ‘clean hands litigator’. This duty goes further than the average person litigating. As the Secretary of State of a large department is litigating against an individual, it is necessary to consider the facts on the part of the defendant as well as the strength of the case against them. In the media, there are often simple comparisons made between the number of D1s submitted and the number of disqualifications obtained. These comparisons ignore some important issues;
The investigation process
before making a relatively subjective judgement on whether the case warrants more detailed investigation. Reasons for cases not being targeted for disqualification action are covered in article 31 of this edition headed: ‘Analysis of reasons why some insolvency practitioners’ D1 conduct reports are not targeted for further investigation’. During recent Outreach visits to insolvency practitioner firms, practitioners reported that they tend towards a D1 submission even where they know that the case will not be progressed. Practitioners stated that this was often because they thought that The Service may have additional intelligence which might be improved with D1 information or that their Recognised Professional Body would expect it. The Service’s message is that it is not wrong for practitioners to submit D1s as they are, but it is important, however, to understand that cases may fall out of the investigative process for good reason. The next stage of the process is where:
At the first DQSG, The Service demonstrated the rigour that it brought to the consideration of D1s and the issues faced in bringing effective, well evidenced cases to court. Media coverage comparing the number of D1s to the number of disqualifications is misleading and simplistic as the comparison does not acknowledge the issues of litigating against defendants, a “judicial contest”, as opposed to just getting directors disqualified. The next DQSG is scheduled to take place on 17 January 2012. External DQSG members due to attend include: Alan Brown/Ann Condick – ICAS David Kerr – IPA Sundeep Takwani – ACCA Tracy Stanhope – ICAEW Tim Pearce – SRA Rachael Grant – Law Society of Scotland Steven Law – R3 Any enquiries regarding the investigation process, should be directed towards Karen McConnell Intelligence: Operations 3rd Floor, Cannon House, 18 Priory Queensway, Birmingham B4 6FD telephone: 0121 698 4236 (Direct) email: Karen.McConnell@insolvency.gov.uk Enquiries about the DQSG should be addressed to Clare Quirk email: Clare.Quirk@insolvency.gov.uk 31. Analysis of reasons why some Insolvency Practitioners’ D1 conduct reports are not targeted for further investigation The process whereby D1 reports submitted by insolvency practitioners are considered for further action by The Service is described elsewhere within this edition in the article “Introducing the Insolvency Service Disqualification Stakeholder Group and explaining the D1 vetting, targeting and investigation processes behind the statistics”. The Service recently conducted a survey of 206 decisions made between 1 January 2012 and 31 August 2012 that a D1 should not be targeted for more detailed investigation. In other words, D1s that had been looked at by The Service’s Intelligence: Targeting team, and given the initial consideration (also referred to as “Vetting”) described in the article referred to above, but were not passed on to an investigation team for more comprehensive enquiries to be made. The sample was chosen so as to include a spread of cases from each of the eight months January to August but was otherwise random. The review was conducted by managers from within Intelligence: Targeting. Cases were reviewed in two ways. Firstly, in terms of the level of consideration that had to be brought to each decision. This took into account of the level and quality of information provided and the facts of the case. For instance: · whether it was a potentially promising “marginal” case where the downsides needed careful weighing up but, on balance, the decision was still “no”; · a weaker “marginal” case with some merit but clear downsides; · a case in which it was clear that there were technically matters of misconduct but which were obviously insubstantial; · a case quickly identified as suffering from a lack of evidence or consequence relating to the alleged misconduct; or a case obviously flawed by inadequate information or irrelevance. Secondly, the appropriateness (in the review team’s view) of the insolvency practitioners’ decision to submit a D1 was looked at. This part of the review considered factors such as:
The findings of the survey were that:
It is The Service’s view that these findings support its message that in the majority of cases it is not wrong for insolvency practitioners to submit D1s as they are, but it is important, however, to understand that cases may fall out of the investigative process for good reason. Further, cases not targeted, nevertheless, provide an intelligence resource that is drawn on the event the same directors are the subject of future reports relating to both insolvent and live companies, and may contribute to cases being taken forward where patterns of unfit conduct begin to emerge. NB: It should be emphasised, that the above percentages are of a sample of D1s not targeted for further investigation, not of total D1s. Of total D1s received so far since 1st April 2012 some 28% have been initially identified for further investigation. Further, the survey only considered cases not targeted at the initial stage. It did not deal with those cases that are looked into in more detail but are subsequently not taken forward for reasons that arise during the further investigation process. Enquiries about the survey should be addressed to Clare Quirk email: Clare.Quirk@insolvency.gov.uk Any enquiries to discuss the opportunity for Outreach visits should be directed towards Karen McConnell Intelligence: Operations 3rd Floor Cannon House 18 Priory Queensway Birmingham B4 6FD telephone: 0121 698 4236 (Direct), email: Karen.McConnell@insolvency.gov.uk 32. Insolvency Practitioner evidence in Disqualification proceedings A recent disqualification trial has highlighted the importance of insolvency practitioners taking, and retaining, accurate notes of meetings with/advice provided to directors prior to formal appointment. In brief, the case in point involved a pre-appointment sale of the company’s assets to an associated company controlled by the director. The sale proceeds were paid into the company’s overdrawn business bank account, a transaction which had the effect of expunging the overdraft thereon and releasing the director from his obligations under a personal guarantee. An allegation was raised to the effect that the director had breached his fiduciary duty to the company in utilising the payment made for the assets to reduce the overdraft and release himself from the guarantee provided to the bank. The matter progressed to trial and both the insolvency practitioner, and the case manager, adduced evidence and were cross examined by defence Counsel. During the presentation of evidence for the defence it was highlighted that this was the defendant’s first failure, he would have been reliant upon professional advice due to that inexperience and the bank account into which the funds were paid was the company’s only account. As a result a great emphasis was placed upon meetings held with the insolvency practitioner and her staff, and in particular whether or not the director was specifically advised not to pay the sale proceeds into the company’s overdrawn loan account. The insolvency practitioner maintained that she “would have” provided that specific advice, but was unable to evidence that she “did” due to the lack of a contemporaneous note of the meeting. Criticism was made of inadequacies within diary entries maintained by the insolvency practitioner’s office and the fact that the case manager’s recollection of the matters discussed was inconsistent with that of the insolvency practitioner. The evidence adduced by the insolvency practitioner on behalf of the Secretary of State was also tainted by a failure to inform the investigator of a further transaction which came to her attention subsequent to the submission of her conduct report, her failure to make enquiries of the director in that regard and the defensive and evasive manner in which responses were provided to questions during cross-examination. In dismissing the Claimant’s allegation in respect of the payment into the overdrawn bank account, the judge commented that “I do not consider that I can rely on her [the insolvency practitioner’s] “knowledge and experience” as proof of a certain standard for all her actions and thus proof of what she would have said when there are patently inadequacies in her investigation.” The case highlights the need to be able to evidence, by way of contemporaneous notes of meetings, advice provided to directors if a defence that he/she was told a particular course of action was acceptable is to be defeated and a finding of unfitness established. Although this is a single case which progressed to a full trial, there have been other cases in respect of which the investigation, and/or proposed proceedings, were dropped as a consequence of a contradiction between what the director states he was advised, and what the insolvency practitioner reports occurred. It is apparent that the Court will take into account the relative experience of the director and his consequent reliance upon the professionalism of the insolvency practitioner in weighing the evidence before it, whilst the Defence will seek to exploit any weakness in the credibility of the witnesses providing evidence on behalf of the Secretary of State. Whilst the case discussed above is very specific in its nature, it is more common to encounter a dispute between the director and the insolvency practitioner in the context of the delivery up of accounting records. Many investigations are abandoned due to an inability to evidence the audit trail in respect of the receipt and custody of records. It is not uncommon, when confronted with an allegation that there has been a failure to deliver up accounting records, for the director(s) concerned to maintain that records were provided - at the meeting of creditors for example, or by delivery to the front desk of the practitioner’s office - whilst there is no record of such a receipt within the case papers. Where there is a clear gap in the evidence relating to the receipt and custody of records it is extremely difficult for the Secretary of State to adequately disprove the director’s contention that other records were made available and have since “disappeared”. Such difficulties can be significantly mitigated by insolvency practitioners having a robust procedure in place when it comes to the receipt and custody of a company’s records and in particular by maintaining a full record of requests for books and papers, as well as a schedule of the records that are received, the date(s) that they are recovered, the circumstances of the receipt and details of the individual from whom they are obtained. Any enquiries regarding this article should be directed towards Robert Clarke, Head of Company Investigations, 3rd Floor, Cannon House, 18 Priory Queensway, Birmingham B4 6FD telephone: 0121 698 4164 email: Robert.Clarke@insolvency.gov.uk 33. Director misconduct relating to miscellaneous statutory duties Recent liaison between The Insolvency Service’s Intelligence team and other regulators prompted a review of submissions by office-holders to The Insolvency Service where company directors had not adhered to regulations relevant to those individual regulators. Analysis of data provided by other regulators showed in many cases, failure to comply with regulatory obligations was not recorded in submissions. It is therefore appropriate to remind practitioners that a failure to comply with regulatory obligations may give rise to disqualification action and as such, should be considered when submitting their conduct report. It will often be in the public interest to disqualify directors for failing to comply with their regulatory obligations; obligations which vary greatly depending on the nature of the company’s business. Such obligations may be imposed largely through legislation, such as immigration law, health & safety law, environmental law and financial services law, but they may also stem from rules created by private bodies, for example the Football Association. Circumstances where disqualification will be considered include:
The fact that enforcement action has already been brought by the relevant regulator should not be viewed as a reason not to consider disqualification proceedings. The same principle applies if the regulator has declined to bring enforcement action or enforcement action has failed. The objectives and evidential requirements of other regulators and regulatory regimes will differ from the disqualification regime. It should be considered that in many cases no further action by the regulator may be possible and/ or in the public interest once a company has ceased to trade. In such cases disqualification may be appropriate. Recent cases where disqualification undertakings/orders have been obtained include: The Red Fox Indian Cuisine Ltd The director received an eight year disqualification order for employing illegal workers. The company had been fined by the UKBA for employing five workers, all of whom were not entitled to undertake paid employment in the UK at the time their employment with the company was discovered. In employing these workers the director had failed to act in accordance with the Immigration, Asylum and Nationality Act 2006. Had he complied with his duties as an employer, including making proper documentary checks that the employees were entitled to work in the UK, the company would have had a statutory excuse to the offence of employing illegal workers, thus avoiding a fine. HKM Solutions Ltd The director gave an undertaking for seven and a half years in respect of allegations which included a failure to ensure the company complied with its obligations under the Gangmasters (Licensing Authority) Regulations 2005. His failure meant that the company was found to have operated in a way that caused the Gangmasters Licensing Authority (‘GLA’) to revoke the director’s licence. The director’s regulatory failings in this case were widespread and included failures to: notify the GLA of a change of business address and business sector; maintain workers’ annual leave records; provide worker training; assess risks to workers’ safety and put in place adequate first aid provision; provide drinking water to agricultural workers; verify workers’ entitlement to work in the UK; and to ensure proper vehicle licences were obtained. Goldtrail Travel Ltd This case resulted in a 15 year order, primarily in respect of breaches of fiduciary duties, but included a secondary allegation of failing to comply with Civil Aviation Authority and the Air Travel Trust rules. Any enquiries regarding this article should be directed towards Robert Mak, The Insolvency Service, Intelligence: Surveillance, Investigations and Enforcement Services, 3rd Floor, 4 Abbey Orchard Street, London, SW1P 2HT telephone: 020 7291 6708 email: robert.mak@insolvency.gov.uk General enquiries may be directed by email to: intelligence.insolvent@insolvency.gov.uk 34) Changes to Investigation and Enforcement Services (IES) Following restructuring within IES, insolvency practitioners should note the following changes to the teams which handle the vetting of conduct reports and subsequent investigations into insolvent companies and the conduct of their directors: Intelligence: Operations and Intelligence: Targeting have merged to become Insolvent Targeting Team (“ITT”). The address (Cannon House, Birmingham), telephone numbers and email addresses are unchanged. ITT is responsible for the receipt and vetting of all conduct reports from insolvency practitioners. The teams in IES which deal with investigations are now known by the following names: Insolvent Investigations North Insolvent Investigations South Insolvent Investigations Midlands & West The locations, telephone numbers and email addresses of individual investigators have not changed. Any enquiries regarding this article should be directed towards Mark Danks, Head of ITT, 3rd Floor Cannon House, 18 Priory Queensway, Birmingham, B4 6FD, telephone: 0121 698 4236 email: mark.danks@insolvency.gov.uk 35. D2 Conduct Returns – Provision of Information in Covering Letters Insolvent Targeting Team(“ITT”) receives approximately 900 D2 conduct returns a month from insolvency practitioners which are entered onto “ISCIS” the Insolvency Service’s case management system, to record the fact that a conduct report has been received in that case and avoid the need to issue reminders to the practitioner. In view of the numbers involved, ITT does not apply any staff resource to D2s apart from what is required to update ISCIS. Occasionally practitioners will provide information within the letter which accompanies the D2, when they consider that a case is possibly a marginal D1, but they have decided to submit a D2 rather than a D1. These letters often contain valuable intelligence which could result in the current case being targeted for investigation or may be useful in the event of future failures involving that director. There is a significant risk that information provided in covering letters will not be taken into account and the letters destroyed without the information being considered or captured for future reference. Insolvency practitioners are therefore requested to submit a D1 in marginal cases or alternatively contact one of the following members of staff for advice prior to the submission of a conduct report in a marginal case: Mike Ashford – michael.ashford@insolvency.gov.uk – Telephone 0121 698 4348 Neil Brydon – neil.brydon@insolvency.gov.uk – Telephone 0121 698 4451 Any enquiries regarding this article should be directed towards Mark Danks, Insolvent Targeting Team, 3rd Floor, Cannon House, 18 Priory Queensway, Birmingham, B4 6FD telephone: 0121 698 4236 email: mark.danks@insolvency.gov.uk General enquiries may be directed to email intelligence.insolvent@insolvency.gov.uk 36. Submission of Conduct Reports via Email Insolvent Targeting Team is happy to receive electronic versions of D1, D2 (Interim and Final) and Section 218 Reports via email to intelligence.insolvent@insolvency.gov.uk. Insolvency practitioners should not to send a duplicate paper version of anything already sent via email. If the enclosures to the report are bulky and the practitioners are unable to scan these into an electronic format to submit via email, paper copies should be sent, but the covering letter must provide details of the case which they relate to and state whether or not the conduct report has already been submitted by email. Any enquiries regarding this article should be directed toward Mark Danks, Insolvent Targeting Team, 3rd Floor, Cannon House, 18 Priory Queensway, Birmingham, B4 6FD telephone: 0121 698 4236 email: mark.danks@insolvency.gov.uk General enquiries may be directed to email: intelligence.insolvent@insolvency.gov.uk 37. Timeliness of D1 Reports and Rejection Letters Timeliness Insolvency practitioners are required to submit conduct reports to Insolvent Targeting Team (“ITT”) within six months of the date of the insolvency. ITT will consider requests via a D2 interim report for an extension of time of up to two months, so that the D1 or D2 final is received no later than eight months from the date of the first insolvency. ITT issues a reminder letter at five months and will telephone practitioners after six months if a report has still not been received. Insolvency practitioners will be aware that disqualification proceedings must be issued within two years from the first insolvency event and late cases create substantial difficulties for the Insolvency Service in that it reduces the amount of time available to target, investigate and in appropriate cases, negotiate disqualification undertakings with defendants and avoid the need to issue proceedings. ITT is happy to enter into early discussions with insolvency practitioners on a case by case basis, where the practitioner is considering submitting a late D1 whilst additional information is being gathered. It is possible that an agreement could be reached to accept an incomplete D1 if that contains sufficient information to target the case for investigation. The investigator will then liaise with the practitioner over the further information. Practitioners should contact either of the following members of ITT’s staff to discuss cases where they are considering submitting a late D1. Mike Ashford – michael.ashford@insolvency.gov.uk – Telephone 0121 698 4348 Neil Brydon – neil.brydon@insolvency.gov.uk – Telephone 0121 698 4451 Rejection Letters When ITT rejects a D1 as being unsuitable for further investigation, a letter will be issued to the insolvency practitioner setting out the reasons for rejection. This letter will always contain details of a named person within ITT for the practitioner to contact in the event that he/she does not agree with the reasons for the rejection. Practitioners are encouraged to contact ITT if they do not agree with the reasons set out in the rejection letter. In a recent case such contact resulted in further information coming to light which resulted in the original decision being reversed and the case being targeted for investigation. Any enquiries regarding this
article should be directed towards Mark Danks, Insolvent Targeting Team,
3rd Floor, Cannon House, General enquiries may be directed to email 38. Extension of CDDA to Industrial and Provident Societies On 6 April 2014 several legislative changes came into force which affect Industrial and Provident Societies, including credit unions. These include: Disqualification The Company Directors Disqualification Act 1986 (CDDA) was extended, by a new s22E CDDA, to Industrial and Provident Societies, including credit unions. (Note 1) ‘Directors’ of an Industrial and Provident Society are, in essence, committee members of the society. Conduct returns for Industrial and Provident Societies will be required where the winding up, voluntary arrangement or administration commenced on or after 6 April 2014, and should be submitted in the same way as conduct returns in other cases. Voluntary arrangements and administration orders Industrial and Provident Societies can now use the voluntary arrangement and administration procedures contained in Parts I and II of the Insolvency Act 1986. Before 6 April, Industrial and Provident Societies could only be dissolved or wound up by the court as unregistered companies under Part V of the Act. (Note 2) Further information Mutual societies, including Industrial and Provident Societies and credit unions, are regulated by the FCA. There is a summary of these and some other legislative changes on their website. Reminder – other extensions of the CDDA Practitioners are reminded that over the last five years the CDDA has also been applied to various other corporate bodies: (From 1 October 2009)
(From 2 January 2013)
The CDDA has also been applied to various special insolvency procedures for financial institutions: (From 21 February 2009)
(From 29 March 2009)
(From 8 February 2011)
Note 1 - s22E CDDA was enacted by s3 of the Co-operative and Community Benefit Societies and Credit Unions Act 2010, and brought into force on 6 April 2014 by article 2 of the Co-operative and Community Benefit Societies and Credit Unions Act (Commencement No 2) Order 2014 Note 2 - applied by the Industrial and Provident Societies and Credit Unions (Arrangements, Reconstructions and Administration) Order Any enquiries regarding this article should be directed towards Nic Stoker, Senior Technical Advisor, Investigations and Enforcement Technical Team, The Insolvency Service, Floor 3, 4 Abbey Orchard Street , London SW1P 2HT telephone: 01482 861892 email: enforcement.technical@insolvency.gov.uk 39. Amendments to the publication ‘CDDA 1986: Guidance Notes for the Completion of Statutory Reports and Returns’ As previously reported our publications are being updated to reflect changes consequential to the transfer of our old website content to GOV.UK. These guidance notes have now been updated and are available at www.gov.uk/government/publications/company-directors-disqualification-act-1986-guidance-notes-completion-of-statutory-reports-and-returns. Links to the D1 and D2 forms on the legislation.gov.uk site can now be found within our collection ‘Insolvency Service forms: Directors’ conduct ‘D’ returns and reports’. There is also a link to the guidance notes within this collection. The guidance notes can also be found within our Company Director Disqualification collection which is accessible directly from our new home page. Contact details in the publication have been updated to reflect our current structure and section head (the address and other contact details are unchanged). These details are also displayed on the web pages for ease of reference. Please send or email all D reports and returns to: The Insolvency Service Investigations and Enforcement Services
Insolvent Targeting
Team
Cannon House
Tel: 0121 698 4000
Email: Intelligence.Insolvent@insolvency.gov.uk
Any enquiries
regarding this article should be directed towards Claire Barker of
Investigations and Enforcement Technical Team, The Insolvency Service,
3rd Floor, General enquiries may be directed to email: enforcement.technical@insolvency.gov.uk. 40. Letters of Authority to Insolvent Targeting Team Insolvency practitioners will be aware that before the Insolvency Service can contact third parties such as banks and HMRC to make case related enquiries either in connection with the work necessary to make a targeting decision or the substantive investigation following that, they must provide the Service with a letter of authority. One of the amendments which the Deregulation Act 2015 will make to the Company Directors Disqualification Act 1986 mean that letters of authority will no longer be required although this is unlikely to be implemented and have an impact on new cases until 2016. In the meantime, the Service is experiencing some delays in obtaining letters of authority from some insolvency practitioners which is causing a consequential delay in making targeting decisions and the progress of investigations. It would, therefore be very helpful if practitioners would submit D1s to the Insolvent Targeting Team with a signed letter of authority on their firm’s headed paper using the following words: To whom it may concern Re: Limited (in Liquidation/Receivership/Administration) On I was appointed as of Limited. Following the submission of my report under the Company Directors Disqualification Act 1986 (CDDA) the Secretary of State has required me to provide further information pursuant to my reporting duty under section 7 (4) of the (CDDA). To enable me to discharge that duty I authorise you to make available to the staff of The Insolvency Service, or any agent instructed on their behalf, any information which they may request concerning the company, its affairs or dealings. Liquidator/Receiver/Administrator Date: Any enquiries regarding this article should be directed towards Mark Danks, Insolvent Targeting Team 4th Floor, Cannon House, 18 Priory Queensway, Birmingham, B4 6FD telephone: 0121 698 4236 email: mark.danks@insolvency.gov.uk General enquiries may be directed to email: intelligence.insolvent@insolvency.gov.uk 41. Changes to the Director Conduct Reporting Process Insolvency practitioners will be aware that the Small Business Enterprise and Employment Act 2015 made a number of amendments to the Company Directors Disqualification Act 1986 (see Dear IP October 2015), some of which came into effect on 1 October 2015, but the changes to the process under which practitioners report on director conduct are due to be implemented from April 2016. The main change is that practitioners will be required to report on director conduct within three months of their appointment using a single online return, which will replace the current D1/D2 forms which need to be submitted within six months. A small team based in Birmingham is responsible for delivering the changes necessary to implement the new process and this is a digital project subject to governance by the Government Digital Service. User Research is vital to the development process and a number of insolvency practitioners have already provided some assistance to the project but the team is keen to carry out research with as many practitioner firms (ranging from small sole practitioner firms to the large multi-national accountancy practices) as possible. It is also important that research is carried out with the staff that will likely be using the service to enter and save information as well as the office-holders who will be responsible for the submission of the report. The project team would welcome approaches from practitioners who are interested in helping out with User Research to David Thomas, the team’s User Researcher, at David.Thomas@insolvency.gov.uk. The online return can be accessed via the GOV.UK website. To help us build the best service possible, we need to know whether the internet browser you regularly use has Java Script enabled. However, we need your help in order to do this. All you need to do is click on the link below. This will take you to an online page through which we can check whether your browser has Java Script enabled. The whole process shouldn't take more than 30 seconds http://insolvencyservice.github.io/cas-prototypes/UR_5/javatest.html Any enquiries regarding this article should be directed towards Mark Danks, Insolvent Targeting Team 4th Floor, Cannon House, 18 Priory Queensway, Birmingham, B4 6FD telephone: 0121 698 4236 email: mark.danks@insolvency.gov.uk General enquiries may be directed to intelligence.insolvent@insolvency.gov.uk 42. Providing Information under Section 7(4) of the CDDA 1986 This article relates to the new powers conferred by the change in section 7(4) of the Company Directors Disqualification Act 1986 (CDDA1986). The powers now enable the Secretary of State (“SoS”) or the Official Receiver (“OR”), in respect of a non-compulsory insolvency case to request information relevant to a person’s conduct, as a director of a company that has been insolvent, directly from any person. The intention was to remove the administrative burden on the office holder which can result in delays in providing information and/or documents. Where an insolvent partnership is wound up as an unregistered company, the provisions of section 7 CDDA 1986 will apply. The new power is applicable to all company insolvencies from 01 October 2015. Section 7(4) of the CDDA 1986 now states: The SoS or the OR may require any person (a) to furnish him or her with such information with respect to that person’s or another person’s conduct as a director of a company which has at any time become insolvent (whether while the person was a director or subsequently), and (b) to produce and permit inspection of such books, papers and other records as are considered by the Secretary of State or (as the case may be) the official receiver to be relevant to that person’s or another person’s conduct as such a director, as the SoS or OR may reasonably require for the purpose of determining whether to exercise, or of exercising, any function of his or her under this section. What information can be required? The SoS or OR may request any information and/or documents that the SoS or OR may consider to be relevant to any person’s conduct as a director of a company. In respect of insolvency practitioners (IP) usually the SoS or OR will require access to all the files created and maintained by the IP(s) in relation to the company, which includes:
Who can be required to provide information? The SoS or OR can request information relevant to a person’s conduct as a director of a company that has been insolvent directly from any person, which includes, for example:
Data Protection An IP who handles personal information about an individual has a number of legal obligations to that individual under the Data Protection Act 1998 (“DPA”). However under Schedule 2 of the DPA an IP may provide personal information to the SoS or OR. Confidential/Private and Confidential The IP in respect of Polly Peck International Plc obtained information and documentation for the purpose of the Administration. In an application under Section 235 of the Insolvency Act 1986 (“IA1986”), the Court decided that the IP could disclose that information and documentation to the SoS for the purpose of disqualification proceedings. In light of the above, documentation cannot be withheld from the SoS or OR on the basis that it is confidential and endorsing a document ‘private and confidential’ does not necessarily make the document and any follow up documents confidential. Documentation obtained under Section 235 and 236 of the IA86 The OR or an IP can obtain information from third parties by invoking their compulsory powers under Section 235 and/or 236 of the IA1986. However part of the functions of an OR or an IP includes the investigation of the company affairs and such was confirmed in the matter of Polly Peck International Plc (1994, BCC 15) when the Court commented: “… it is quite clear that the purposes of the administration must include the gathering of information as to the conduct of the affairs of the company and those responsible for it by an administrator in order that he can report to the Secretary of State as he is required to do” and went on to say “In my judgement there is in this context no balancing of public interest or, to put it another way, the public interest is itself identified and given priority by imposing these duties” (i.e. reporting to the SoS under Section 7(3)). Additionally in the case of Pantmaenog Timber Co Limited (OR v Wadge Rapps & Hunt (a firm) and another and two other actions 2003 UKHL 49) the court decided that the powers conferred by section 236 of the IA 1986 could be lawfully exercised solely for the purposes of obtaining evidence for use in disqualification proceedings as the following comment was made: “… The overriding purpose of the disqualification regime is to protect the public interest. Success or otherwise in the prosecution of cases for an order under section 6 of the Disqualification Act will depend on the amount and quality of the information that is available. Success or otherwise in the prosecution of cases for an order under section 6 of the Disqualification Act will depend on the amount and quality of the information that is available. A narrow interpretation of section 236, confining its reach to information which the office-holder needs to get in the property of the company, would increase the risk that instances of commerciality culpable conduct will go unpunished. That would not serve the public interest…”. Documents covered by Legal Professional Privilege (LPP) LPP is the principal reason why inspection of documents can be refused and is regarded as a fundamental principle of justice. However, LPP can be expressly or impliedly waived by the client or his agent including an office holder. The two forms of LPP are: 1. Legal Advice Privilege which protects confidential communications between lawyers and their clients for the purposes of giving or obtaining legal advice which can be written or oral. It protects confidential communications with the sole or dominant purpose of giving or obtaining legal advice or assistance. LPP does not cover business advice given by legal practitioners on matters such as investment or financial policy or just setting out the law (as per Three Rivers District Council v Bank of England (No 6 [2004] UKHL48)). The House of Lords further confirmed that the correct test to be applied was that laid down by the Court of Appeal in Balabel v Air India (1998) Ch 317 that said “Legal advice is not confined to telling the client the law: it must include advice as to what should prudently and sensibly done in the relevant legal context…” 2. Litigation Privilege which protects confidential communications between lawyers, clients and third parties made for the purposes of litigation, either actual or contemplated. The litigation or other adversarial proceedings must have already commenced or there must be a real likelihood of litigation at the time the communication is made and the communication must have been made with a view to those proceedings. LPP does not cover communication made in response to a general concern about future litigation or the possibility that sooner or later someone might make a claim. LPP does not extend to advisors who are not legally qualified or to communications with members of other professions. Any enquiries regarding the above including any requests to meet with any IP and their compliance & risk teams should be directed towards either: Anthea Simpson 2nd Floor, 3 Piccadilly Place, London Rd, Manchester, M1 3BN tel: 0161 234 8498, Mobile 07794 274561, email: anthea.simpson@insolvency.gov.uk Or Joanne Covell, 3rd Floor, 4 Abbey Orchard Street, London, SW1P 2HT, Joanne.Covell@insolvency.gov.uk, Tel: 0789 678 3653 both Investigation & Enforcement Services 43. Launch of the Director Conduct Reporting Service The Insolvent Companies (Reports on Conduct of Directors) (England and Wales) Rules 2016: (http://www.legislation.gov.uk/uksi/2016/180/pdfs/uksi_20160180_en.pdf) and The Insolvent Companies (Reports on Conduct of Directors)(Scotland) Rules 2016: (http://www.legislation.gov.uk/uksi/2016/185/pdfs/uksi_20160185_en.pdf) which come into force on 6 April 2016 will require office-holders to submit director conduct reports to the Secretary of State via an online service. This will be hosted on GOV.UK and a link to the service and guidance will appear here on or shortly before 6 April 2016. Office-holders will need to use the service to submit conduct reports on all cases where the date of appointment was on or after 6 April 2016. D1 and D2 forms should continue to be used for all cases where the appointment date is on or before 5 April 2016. Further details of the transitional arrangements will be included in the guidance. In order to register to use the service insolvency practitioners will be required to:
Letters were issued to all practitioners in February using the addresses held on the Insolvency Service’s insolvency practitioner database. The purpose of this letter was to provide an update on the new Service and ask practitioners to check that their email address was correct because this will be used as part of the verification process when a practitioner registers as a user. A number of these letters have been returned by the post office marked “not known at this address” and because of this some practitioners may be unaware of the imminent launch of the new service and the importance of the database containing their correct email address, which must also be unique and personal to them. Insolvency practitioners can use the “Find an Insolvency practitioner” tool (https://www.gov.uk/find-an-insolvency-practitioner) to check their entry on the database. Any corrections should be notified to CustomerServices.EAS@insolvency.gov.uk and please include “IP Database” in the subject field. The new service has been developed with the assistance of a significant number of practitioners and their staff and the project team would like to thank all those who have provided their time to attend the various user research workshops and other events which have been vital to the project. For April, we have focused on providing a front end system that complies with the legislation and allows office holders to be able to register and log in here. Individual office holders will gradually see their cases populate the new system as and when they take appointments from 6 April 2016 onwards. We don’t anticipate the first of the new reports to be received in any number until June 2016 and the last of the old D1/D2s will not be received until September/October 2016. Any enquiries regarding this article should be directed towards Mark Danks, Insolvent Targeting Team, 4th Floor, Cannon House, 18 Priory Queensway, Birmingham, B4 6FD telephone: 0121 698 4236 email: mark.danks@insolvency.gov.uk General enquiries may be directed to email: DCAS@insolvency.gov.uk 44. Update on the Director Conduct Reporting Service (DCRS) Article 43 of Chapter 10 of Dear IP provided information on the launch of the DCRS, the online reporting tool for the submission of director conduct reports for all cases where the office-holder was appointed on from 6 April 2016. A link to the start page for the DCRS and the guidance issued so far is here: https://www.gov.uk/government/publications/director-conduct-report-service The DCRS has been improved since the version launched on 6 April and insolvency practitioners are now able to add staff to their cases and guidance has been issued on that subject. A recent development has been that the automated sifting of reports using a rules engine has commenced and practitioners and all staff assigned to the case receive email notifications of the outcome of the sift which is used to identify those cases which are suitable for a further assessment to determine if they are should be targeted for investigation. As at 22 June 2016, 694 insolvency practitioners had successfully registered for the DCRS. A number of reports have already been submitted within the three month deadline provided by the new rules, however, it’s recommended that any active corporate appointment takers who have not yet already registered do so as soon as possible, especially if they have been appointed as office-holders in cases requiring a conduct report since 6 April 2016. If they have not, they will not be able to submit a report using the DCRS and, with very limited exceptions, D1/D2 forms cannot not be used for post 6 April 2016 cases. It has not yet been possible to add the function to send reminder for overdue emails and, therefore, practitioners and their staff should use the dashboard to monitor the status of their cases. Any enquiries
regarding this article should be directed towards Mark Danks, Insolvent
Targeting Team, 4th Floor, Cannon House, 18 Priory Queensway,
Birmingham, B4 6FD, telephone: 0121 698 4236, General enquiries may be directed to email DCAS@insolvency.gov.uk
45. Enforcement of Requirement to
Provide Information under Section 7(4) of the CDDA 1986
This article relates to the Court’s consideration of requests made by The Insolvency Service (in the context of contemplated proceedings under the Company Directors Disqualification Act 1986 (CDDA)) to the joint administrators for the provision of documentation and further information in respect of a failed business which had traded as a solicitors firm. Background Prior to 01 April 2016 (when the ambit of the section was extended to “any person”), Section 7(4) of the CDDA effectively stated that the Secretary of State may require the Office Holder to furnish such information/permit inspection of books and records relevant to an individual’s conduct as a director, as the Secretary of State may reasonably require, to determine whether it was appropriate to seek disqualification of that individual. In accordance with their duties under Section 7(3) of the CDDA (since replaced by section 7A of the CDDA) and under the provisions of the Insolvent Companies (Reports on Conduct of Directors) Rules 1996 (since replaced by the Insolvent Companies (Reports on Conduct of Directors) (England and Wales) Rules 2016) the joint administrators filed a conduct report in respect of the members of the firm. The conduct report set out a number of potential allegations of unfit conduct against some of the firm’s members. After review of the conduct report, it was decided that further investigation was merited. The Insolvency Service then met with the joint administrators to discuss the firm and the investigation process, and to agree terms of access to the firm’s books and records (both electronic and hard copy) and the joint administrators’ files (the papers). Terms of access were also agreed to the firm’s servers. The investigation team then reviewed and copied some of the papers, and also requested copy documentation, which was contained within the joint administrators’ files. The joint administrators provided copies of some, but not all of the copy documentation requested, and refused access to the firm’s servers. During the following four months the joint administrators and/or their compliance & risk team provided various reasons for not providing the outstanding documentation/information and access to the firm’s servers. Ultimately, the Insolvency Service issued a claim against the joint administrators seeking release of the outstanding documents/information and access to the firm’s servers, and a hearing date was set. Between the issue of the claim and the hearing, a draft order was agreed between the parties covering the release of the majority of the requested documentation/information, which included (but was not limited to), from the firm’s books and records; board meeting minutes, management accounts, cash-flow forecasts, and details of distributions to members and from the joint administrators’ files; correspondence with members, government and regulatory bodies, the purchasers of the firm’s business, court proceedings, bank documentation, and creditors committee meeting notes. However some issues remained outstanding, in particular access to the firm’s servers. At the hearing the Judge made an order in the terms agreed by the parties which directed the joint administrators to provide the Insolvency Service with all of the outstanding documentation/information (excluding documentation/information which was subject to Legal Professional Privilege, such documentation/information which had not been sought by the Insolvency Service). In respect of the firm’s servers, the Judge further directed that the investigation team be allowed to review and obtain extracts from the firm’s server and that the joint administrators bear their costs of the interrogation (the joint administrators having refused to allow the Insolvency Service to undertake the interrogation themselves). The Insolvency Service were awarded their legal costs of taking the action. The Court’s approach, in directing the release of documentation/information to the Insolvency Service, should provide comfort to office holders, and their risk and compliance teams. Any enquiries regarding the above including any requests to meet with any IP and their compliance & risk teams should be directed towards Business.DevelopmentTeam@insolvency.gov.uk 46. What the compensation regime means for the Office Holder Top Messages
The Provisions The compensation regime [sections 15A to 15C of the Company Directors Disqualification Act 1986 (CDDA)] was introduced in the Small Business, Enterprise and Employment Act (SBEEA) 2015, and came into effect on 1 October 2015. Rules governing the process for the institution and conduct of compensation proceedings will be contained in a stand alone Statutory Instrument, the Compensation Orders (Disqualified Directors) Proceedings Rules 2016, which is targeted for an October 2016 commencement date. 15A to 15C CDDA provide that where a director of an insolvent company has been disqualified and the unfit conduct for which he or she was disqualified has caused quantifiable loss to some or all of the creditors, the Secretary of State can seek a compensation order or undertaking requiring the director to compensate creditors for that loss. The compensation can either be paid to the Secretary of State for the benefit of a creditor or class of creditors or as a contribution to the assets of the company. Compensation can be sought for conduct that occurs on or after 1 October 2015. What does the Compensation Regime mean for the Office Holder? The compensation regime is aimed at making directors account for the consequences of their unfit conduct where other remedies have either failed or for, whatever reason, are not available. It is not intended to usurp the asset recovery role of the Office Holder, whether an insolvency practitioner or Official Receiver. Indeed, a primary matter that the Secretary of State must take into account in deciding whether to seek a compensation order or undertaking is whether the director has made any other financial contribution in recompense for the conduct (whether under a statutory provision or otherwise)[1] . For the Insolvency Service, this means that in targeting, investigating and enforcing a potential compensation case it is vital to maintain a constructive dialogue with the insolvency practitioner from the outset and throughout the life of the case. If we are made aware that the practitioner is taking or contemplating action against the director or is not doing so because the director is without means, then we would be less likely to seek compensation, as it is unlikely to be in the public interest to do so. For the practitioner, it means being ready to share information about what they are doing to hold the director to account. Although every case will be treated on its merits, where recovery proceedings are contemplated or are already under way, it would not be the Insolvency Service’s intention to pursue compensation. How will the Insolvency Service select which cases are suitable for compensation? The Service will treat every case on its own merits. Our primary emphasis will be on the victim. What (quantifiable) loss has the conduct caused them? Do, or should, they have an alternative route to recovery? For example:
Other considerations revolve around the need to establish a causal link between conduct and loss:
Finally account will need to be taken of the director’s ability to pay the compensation. Any enquiries regarding this article should be directed towards email: Business.DevelopmentTeam@insolvency.gov.uk [1] Section 15B (3) (c) 47. Director Conduct Reporting Service – Feedback Survey The Director Conduct Reporting Service (DCRS) was launched on 6 April 2016. With insolvency practitioners having three months to submit a report, the majority of reports started to flow through the process from mid-June 2016. Almost immediately, practitioners and their staff started making use of the online survey to provide constructive feedback on this new digital service. As with most new processes, there was initially an influx of feedback, but the use of the online survey reduced considerably as user experience increased. Although not much has changed with the DCRS form over the past 14 months, the Insolvency Service has been reviewing all the feedback received. This has been used to influence planned changes to the DCRS form, which should improve completion and provide more relevant information upon which to make a decision. These improvements will be implemented over the next few months and further communications will be issued nearer the time of release. Ongoing feedback from insolvency practitioners and their staff is important in helping the Insolvency Service develop its digital service. It will also help to establish how well our changes are working. Access to the online survey can be found at the top of each page within DCRS by clicking on the word “feedback”. The survey takes less than five minutes to complete and can help shape how DCRS looks in future. Any enquiries regarding this article may be sent to DCAS@insolvency.gov.uk 48. Insolvency Practitioners compliance with books and records obligations Following a review of insolvency practitioner practice flowing from a public interest winding up, it has been identified that in some cases Insolvency Practitioners (“IPs”) have failed to collect books and records or have taken a conscious decision to leave them with the director, often to minimise costs. Neither approach is acceptable and an IP may be criticised for failing to collect and use the books and records and/or maintain the audit trail for those records. It is important that an IP collects the books and records of a trading insolvent in order to support the integrity of the business environment and economy in the UK. When seeking information about an insolvent entity and to carry out an initial assessment, an IP is required to secure and list the books and records (in whatever form) in compliance with SIP 2 and ensure that they are then used to discharge statutory duties placed upon them. This includes any declarations made by the IP certifying that the information contained in the submission is true and correct. Often decisions will be taken on the basis of the reassurance that certification provides. It is difficult to see how an IP can fulfil such duties or make such declarations without having secured and examined the books and records. Securing the books and records IPs should ensure the books and records are safe and secure and that means taking delivery and reviewing the records, preparing a schedule and issuing a receipt in order to maintain the audit trail. That way, should there be any matters of misconduct to be brought to the courts attention, the audit trail of the books and records is maintained. Digital and electronic records Most trading ventures have some form of computerised books and records which summarise the transactions. Unless the insolvent traded in a paperless fashion, it is not sufficient to take a backup or download these without securing the physical books and records to support any entries on the digital system. If an IP is appointed officeholder of an insolvent trading venture, they should be securing the physical books and records which support the transactions listed in any electronic records. Failure to secure and review the books and records Where an IP encounters difficulty in obtaining the insolvent’s books and records, as an officer of the court, there are available procedures under the Insolvency Act to assist in obtaining the full co operation of relevant persons and in these circumstances it should be clearly documented why the courts assistance has not been obtained. Misconduct The Insolvency Service, on behalf of the Secretary of State, investigates the affairs of an insolvent before deciding whether civil proceedings for misconduct should be brought via available legislation. An IPs failure to obtain, schedule and provide a receipt for books and records can result in a case otherwise targeted for possible misconduct action, being withdrawn. This could be deemed as an IP failing to discharge their duty correctly and undermines public confidence in the insolvency regime and the IP profession in general. Criminality In addition to the above, an IP has a statutory duty to report suspected criminality and this can include destroying or failing to deliver up the books and records, or where the records are insufficient to explain transactions. By failing to collect and use the books and records, or report the insolvents failure to deliver them up, an IP is failing to discharge this duty and this failure will cause a loss in public confidence and the IP profession in general. Some examples of insolvency offences are listed below: Insolvency Act 1986 offences s208 - Failure of director to deliver up company property to the liquidator s208(1)(c) - Failure to deliver up accounting records s209 - Destruction/ mutilation/ falsification of company records Companies Act 2006 offences s387 - Failure to maintain adequate accounting records s389 - Failure to preserve accounting records Conclusion IPs should take reasonable steps to obtain, document and use the books and records of an insolvent in every case and commerciality should not outweigh the public interest or an office holders statutory duty. Any enquiries regarding this article may be sent to IPRegulation.Section@insolvency.gov.uk Following queries and feedback regarding completion of the Director Conduct Reporting Service form (DCRS) and submission of additional information, this article provides guidance for the most common matters raised. Books and Records In cases where no books and records have been delivered up, insolvency practitioners should answer “yes” to the question “Having regard to the size and nature of the company's trading, are there material deficiencies in the company's available books and records?” If there are no books and records (including computerised records) insolvency practitioners and their staff will be unable to verify the accuracy of transactions and the financial position of the company. An examiner from the Insolvency Service will contact the insolvency practitioner to clarify the exact position regarding the books and records and any detriment that has stemmed from their absence. Liabilities to HMRC When asking what percentage of the company's unsecured liabilities is owed to HMRC, the form does not give an option between 0 and 39%. Insolvency practitioners are advised to select the option of 40-60% in these circumstances. Additional/New Information Insolvency practitioners have provided feedback that on occasions, the DCRS does not cover the misconduct they wish to report and that it would be helpful to be able to enter free text. When the DCRS is submitted, it passes through an initial rules engine that recognises set answers to specific questions. This rules engine is unable to process free text responses and therefore any reports containing free text would be automatically rejected by the rules engine. In cases where the misconduct is not connected to the question set in the DCRS, insolvency practitioners can send this information separately by clicking on “contact” at the bottom of each page of the DCRS. Any new information that comes to light after the report has been submitted or after the Insolvency Service has made a decision on whether further investigation is appropriate should also be submitted using this method. Any new or additional information submitted will automatically be received by the Insolvent Targeting Team and will be reviewed. Yes or No Answers Some insolvency practitioners have raised concerns that they do not always have sufficient information to be able to satisfactorily answer questions where the option is “yes” or “no”. Practitioners should answer these questions based on the balance of probabilities. If further information comes to light that would have changed the original opinion, this can be submitted as new information Any enquiries regarding this article may be sent to intelligence.insolvent@insolvency.gov.uk
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