When UK businesses fail spectacularly, politicians typically call for directors to be struck off. That prospect now faces eight former bosses of Carillion, a building and services group that collapsed in 2018. This week, business secretary Kwasi Kwarteng launched disqualification proceedings.
It would be wrong to prejudge these. But even when disqualification actions succeed, they look like a weak deterrent against white-collar misdeeds. Some critics blame the lack of accompanying financial penalties. For Lex, the real issue is the low incidence of successful proceedings.
There are about 4.6m companies in the UK, many with just a single director. Disqualifications peg along at about 1, 000 a year. They are inextricably linked to corporate insolvencies. Insolvency practitioners are obliged to report suspected director misconduct. They gripe that their whistleblowing is too often ignored by the Insolvency Service, the government body responsible, which they say is under-resourced.
Moreover, most directors are struck off for the same thing: withholding tax payments in the dying days of their enterprise. This is a typical fault of micro businesses. It is rarer for directors to be nabbed for misdeeds characteristic of career executives. These include misappropriation. Wrongful diversion of funds figured in the disqualification of BHS’s erstwhile owner Dominic Chappell. He was later jailed for tax evasion.
Suspected insolvent trading triggers popular fury under the colloquial banner “running the business into the ground”. But it is hard to prove.
Accounting irregularities are a marginally easier target. Allegations concerning these are likely to feature in any case against former Carillion directors. The business has been criticised for policies that permitted speedy recognition of revenues and kept reported net debt unthreateningly low.
Even then, fewer than 200 directors were struck off for accounting issues in 2019/20. Moreover, the proportion of disqualifications agreed outside court for all relevant reasons has edged up to almost 90 per cent, says Stephen Downie, a partner at law firm Francis Wilks and Jones.
The data suggest that in a single year the chances of a British director being disqualified in court for anything other than non-payment of taxes is less than one in 70,000. He or she is 160 times more likely to be injured in a road accident. As deterrents go, director disqualification is singularly ineffective.
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