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Enhancing transparency and trust: Will IPs welcome BIS proposals?

In April 2014, the Department for Business, Innovation & Skills (BIS) published the UK Government’s response to its discussion paper of July 2013 entitled “Transparency & Trust: Enhancing the Transparency of UK Company Ownership and Increasing Trust in UK Business” in which it confirmed its intention to adopt the majority of the consultation proposals.

The proposals, which may prove to have some adverse consequences for Insolvency Practitioners (IPs), include:  

  • The implementation of a central registry of company beneficial ownership information (to include where a beneficial interest in a company is held through a trust)
  • A move to prohibit the use of one company as the director of another company, but with specific exemptions where the use of corporate directors is of higher value and lower risk
  • A tightening of the legal system to hold to account both directors who front for others and those who use front directors
  • A move to permit certain causes of action that arise in insolvency to be sold or assigned to another party to pursue
  • Broadening the proposals to allow administrators the same rights as liquidators to bring fraudulent and wrongful trading actions
  • To update of the directors’ disqualification regime through: 
    a) Increasing the time limit for instituting disqualification proceedings under section 6 of the CDDA from 2 to 3 years of the earliest insolvency event
    b) Providing the court with power to make a compensation order against a director who has been disqualified where creditors have suffered identifiable losses from their misconduct.

Relevance for IPs

Increased transparency

It is not uncommon for IPs, when investigating an individual’s or a company’s business, dealings and affairs, to find that complex corporate and trust structures are adopted in order to conceal assets or evade sanctions. As a result, IPs are often required to call upon their investigatory powers under the Insolvency Act 1986 in order to ascertain the beneficial ownership of a particular company.

Such investigations are often expensive, time consuming and ultimately inconclusive. The implementation of a central registry of company beneficial ownership information may assist IPs in quickly and cheaply understanding an individual’s or company’s assets through routine searches.

At the same time, the proposals set out the removal of barriers to information sharing between sector regulators and the Insolvency Service and the use of joint investigations in appropriate cases. We must wait and see whether this will serve to increase the reach of investigations by IPs.

Creditor Remedies

The current legislation only allows the liquidator of a company to bring an action for fraudulent and wrongful trading under section 213 and 214 of the IA 1986 (since 1986 there have only been around 30 reported wrongful trading cases). Two proposals have been set out with the aim of compensating creditors for their losses, namely:

  • Allowing liquidators to assign fraudulent and wrongful trading actions
  • Allowing the courts to make compensation orders against directors they have disqualified. It is proposed that the court and the Insolvency Service would have discretion to make the compensation award to a particular creditor, a group or class of creditors, or the creditors as a whole.

It is likely that creditors, who are already reluctant to support or fund actions by IPs against directors as a group remedy, may now prefer to wait and see whether the Insolvency Service will pursue disqualification proceedings against a director(s) with the possibility of a compensation order being made in their favour.

The proposals appear to be aimed at easing the way for insolvency actions to be pursued by the Insolvency Service and other stakeholders rather than IPs. However, without an increase in resource, the Insolvency Service will be limited as to how many actions it can realistically pursue and creditors are likely to face the same inherent risks as IPs in bringing such claims.

It remains to be seen whether the proposed changes will have any material impact on the number of insolvency actions being pursued or, indeed, enhance transparency and trust in UK business.

If you have any questions or would like more information please contact Martyn Kolankiewicz, Associate, Business Restructuring

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

Martyn Kolankiewicz

Director

I am a Director in the Finance and Recoveries team with experience in all aspects of corporate recovery and insolvency work.