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NATIONAL AUDIT OFFICE

REPORT BYTHE

COMPTRDLLER AND

AUDITOR GENERAL

The Insolvency Service Executive Agency: Company Director Disqualification

ORDERED BY THE HOUSE OF COMMONS TO BE PRINTED 18 OCTOBER 1993

LONDON: HMSO 907 f6.70 NET

THE INSOLVENCY SERVICE EX3X”WE AGENCY: COMPANY DIRECTOR DISQUALIFlCATION

This report has been prepared under Section 6 of the National Audit Act 1983 for presentation to the House of Commons in accordance with Section 9 of the Act.

John Bourn National Audit Office Comptroller and Auditor General 21 September 1993

The Comptroller and Auditor General is the head of the National Audit Office employing some 800 staff. He, and the NAO, are totally independent of Government. He certifies the accounts of all Government departments and a wide range of other public sector bodies; and he has statutory authority to report to Parliament on the economy, efficiency and effectiveness with which departments and other bodies have used their resources.

THE INSOLVENCY SERVICE EXECUTIVE AGENCY: COMPANY DIRECTOR DISOUALIFICATION

Contents

Summary and conclusions

Part 1: Introduction

Part 2: Official Receiver cases

Part 3: Insolvency Practitioner cases

Part 4: Achievement of objectives

Glossary of terms

Appendices

1. Matters for determining unfitness of directors

2. Surveys of company directors and Insolvency Practitioners

Pages

1

4

7

12

16

2.0

22

24

THE INSOLVENCY SERVICE EXECUTIVE AGENCY: COMPANY DIRECTOR DISQUALIFICATION

Summary and conclusions

1 For under ElOO, anyone in Great Britain can form a limited liability company. In the majority of cases this means that the directors/shareholders are not personally liable for any debts should the company subsequently fail, unless they are personally guaranteed.

2 The Company Directors Disqualification Act 1986 (‘the Act’) introduced new arrangements to deal with directors who abuse limited liability. Under Section 7 of the Act, the Secretary of State for the Department of Trade and Industry or, on his direction, Official Receivers, may apply to the courts within two years of insolvency for the disqualification of directors whom they have identified as unfit to manage limited liability companies. The Insolvency Service Agency (‘the Agency’), an executive agency of the Department of Trade and Industry, has delegated responsibility for the exercise of the Secretary of State’s powers. Official Receivers are officers of the Agency.

3 Since the introduction of the Act there have been around 153,000 corporate insolvencies in Great Britain. Elements of unfit conduct by directors have been identified to the Agency in around 28,000. By 31 March 1993, some 2,900 applications for disqualification have been made of which 1,700 have resulted in disqualification orders.

4 The National Audit Office examined:

. what steps the Agency have taken to ensure that unfit conduct by directors is identified and evaluated;

. to what extent the disqualification arrangements protect the commercial world and the public at large and improve the standards of company stewardship.

5 The National Audit Office examined Agency papers and held discussions with their staff. They also consulted the Society of Practitioners of Insolvency and the Institute of Directors. The National Audit Office were assisted in their work by IFF Research Limited and by Mr Hamish Anderson of Bond Pearce (Licensed Insolvency Practitioner and solicitor]. The National Audit Office acknowledge the assistance provided by all parties.

6 The National Audit Office’s main findings and conclusions are:

On the identification and evaluation of unfit conduct

(a) There are large variations between Official Receiver offices in the recording of unfit conduct, the selection and pursuit of cases, and the time taken to deal with them. These variations might suggest that, nationally, not all cases of director unfit conduct are being processed and selected for court proceedings on a consistent basis. The Agency are taking a number of steps to minimise these variations (paragraphs 2.13 to 2.16 and Figure 4).

1

THE INSOLVENCY SERVICE EXECUTIVE AGENCY: COMPANY DIRECTOR DISQUALWCATION

&I) Around 20 per cent of cases, on average, are rejected during or after preparation of detailed casework, which may indicate some unproductive effort [paragraphs 2.18 and 3.18).

(c) Under Scottish legislation, Insolvency Practitioners may in certain specific circumstances legitimately refuse to handle cases with few assets. In such cases the conduct of directors is not investigated for possible unfit conduct and disqualification (paragraph 3.19).

On protecting the commercial world and the public, and improving company stewardship

(d) Fifty eight per cent of company directors who responded to a survey carried out for the National Audit Office, had not heard of the 1986 Act; of those who had heard of it 53 per cent consider the legislation is not successful in deterring unfit conduct; and 43 per cent think that proceedings are not brought against a sufficient number of unfit directors. Some 74 per cent of Insolvency Practitioners, who responded to a survey of Insolvency Practitioners, consider that the Act is not proving successful in putting unfit directors out of action; 73 per cent consider it does not protect the public interest; and 61 per cent that it does not deter unfit conduct (paragraphs 4.3 to 4.5, Figures 7 to 9 and Appendix 2).

(e) The annual number of insolvencies has increased from 24,000 in 1987-88 to over 81,000 in 1992-93. As a result of this pressure on the Agency, up to 50 per cent of cases meriting disqualification in the public interest do not result in disqualification proceedings [paragraphs 1.6, 2.7, 2.8 and 4.7 to 4.9).

(0 In some cases up to six years have elapsed between insolvency involving unfit conduct and disqualification of the directors concerned, during which time they are at liberty to continue their business activities. Up to two years was taken by the Agency: the remainder was for legal proceedings to be concluded. The Agency are examining with the Lord Chancellor’s Department whether steps can be taken to reduce the length of time between application and the hearing of cases (paragraphs 4.11 to 4.13).

(g) There are no arrangements to ensure disqualified directors resign all their directorships or that newly registering directors are not the subject of disqualification orders. A significant number of disqualified directors are not recorded on the public register maintained by Companies House. Companies House have recently taken steps to address this latter issue (paragraphs 4.14 and 4.15).

Gl3UXd conclusions

7 Corporate insolvencies have increased significantly in recent years. This volume of work and, to a lesser extent, different procedures that apply in Scotland and inconsistencies between Official Receiver offices, mean that not all cases meriting disqualification in the public interest result in the commencement of disqualification proceedings.

2


8 The effectiveness of the Agency’s work is further limited because it can take several years to obtain a disqualification order after an insolvency, and by there being no arrangements for securing that disqualified directors resign all their directorships.

9 The Agency have achieved the disqualification of some 1700 company directors, thus providing a measure of protection against unfit conduct of directors. However, the Agency’s difficulties in pursuing all those unfit directors whom they identify as meriting disqualification in the public interest suggest that they are not folly meeting their objective of protecting the commercial world and the public at large against directors who abuse limited liability status.

Recommendations 10 The National Audit Office recommend the Agency should:

.

.

continue to monitor performance of Official Receiver offices; identify reasons for any variations and take appropriate action, including adjusting office workloads;

consider whether arrangements could be introduced whereby directors of companies which have failed in Scotland, when no Insolvency Practitioner is appointed, can be made the subject of conduct reports;

further improve the processing of cases, prioritising as necessary, to ensure that disqualification proceedings are taken against as many as possible of those directors who, in the public interest, should be disqualified;

continue to liaise with the Lord Chancellor’s Department to minimise the period between company failure and disqualification of directors;

continue to work with Companies House to secure: the completeness of the public register of disqualified directors; and that there are arrangements in place to ensure disqualified directors resign all their directorships and are not reappointed to new companies;

promote greater awareness among company directors of disqualification arrangements, to help further reduce the incidence of unfit conduct.

3

THE INSOLVENCY SERVICE EXECUTIVE AGENCY: COMPANY DIRECTOR DISQUALIFICATlON

Part 1: Introduction

1.1 Up to 31 March 1993 some 1,700 company directors had been adjudged by the courts as unfit to manage a company. They had been disqualified for periods of between 2 and 1.5 years from being company directors or in any way taking part in the promotion, formation or management of a limited liability company. The disqualifications were secured under Section 6 of the Company Directors Disqualification Act 1986 (‘the Act’) after proceedings were brought by the Insolvency Service Executive Agency (‘the Agency’) on behalf of the Secretary of State for Trade and

themselves unfit to have the benefit of limited liability status through negligence, incompetence or lack of commercial integrity. Disqualification is not aimed at penalising the individual concerned, but that is one of its effects. The courts accordingly require compelling evidence of unfit conduct in cases brought before them, and the Act requires cases to be presented within 2 years of the insolvency. Contravention of a disqualification order is a criminal offence.

Industry.

The Insolvency Service Executive Agency

1.2 The Agency operate in Great Britain through Headquarters Units in London, Birmingham and Edinburgh. and a network of 33 Official Receiver offices in England and Wales. They have a staff of around 1.700, and running costs for 1992-93 were f46 million. Their work includes:

l preliminary administration and investigation of bankruptcy and compulsory insolvencies:

1.4 :

Case example 1: A typical case

A retail company went into liquidation in 1992, leaving debts of f400,OOO. The directors had previously been responsible for two companies which had failed in similar circumstances.

Matters of unfit conduct of the directors put before the court included misapplication of goods and company funds, excessive director remuneration and expenses, retention of customer deposits while knowingly insolvent, and failure to keep adequate books 01 account.

The case is pending.

The Agency’s objectives under the Act are:

. acting as trustee or liquidator;

. reporting evidence of criminal offences;

. taking disqualification proceedings against unfit directors of failed companies.

This report focuses on the role of the Agency in taking disqualification proceedings.

Director disqualification

1.3 The Act introduced new arrangements to deal with company directors who abuse limited liability status. These are aimed at protecting businesses and consumers from directors who may not have committed a criminal offence such as theft or fraud, but have rendered

. to protect the con&ercial world and the public at large by effective action against the abuse of limited liability through

disqualification of individuals for periods determined by the courts of between 7. and 15 years;

. further, by deterrence and by the promulgation of orders made by the courts, to contribute to fostering the integrity of markets generally and improving the standards of company stewardship in particular, but without inhibiting genuine enterprise and entrepreneurial management.

4

THE INSOLVENCY SERVICE EXECUTIVE AGENCY: COMPANY DIRECTOR DISQ”ALIFICATION

Identifying and reporting unfit conduct

1.5 The identification and reporting of unfit conduct is undertaken by:

. Official Receivers who are Agency staff and who prepare detailed reports for the Agency in compulsory insolvencies; and

l private sector Insolvency Practitioners, typically qualified accountants, who, through their appointment to act in voluntary insolvencies, are required to report any unfit conduct to the Agency.

Note: The term ‘voluntary insolvency’ is used in this report to refer collectively to voluntary liquidations, administrations and administrative receiverships.

1.6 The increase in the number of insolvencies - from nearly 24,000 in 1987-88 to cwer 81,000 in 1992-93 (Figure 1) - has placed considerable messure on the Aeencv. and its network of I ” i,

Official Receivers, who have to undertake statutory administrative duties in every bankruptcy and corporate insolvency in addition to disqualification aspects. Since the introduction of the Act there have been around 153,000 corporate insolvencies in Great

Britain. Evidence of unfit conduct by directors has been reported to the Agency in around 28,000 of these company failures, involving an estimated 43,000 directors. Over the same period, the Agency have secured 1,712 disqualifications (Figure 21 - on average 285 each year.

Scope of the National Audit Office examination

1.7 Against this background the National Audit Office examined:

. what steps the Agency have taken to ensure that unfit conduct by directors is identified and evaluated in relation to

- Official Receiver cases (Part 2 of the report);

- Insolvency Practitioner cases (Part 3 of the report); and

. to what extent the disqualification arrangements protect the commercial world and the public at large and improve the standards of company stewardship (Part 4 of the report).

Figure 1: Personal and corporate insolvency 1987-88 lo 1992-93

Number

90,000

80,000

70,000

60,000

5lwlo

40.000

0 1987-88 ,988-K ,989-K 1990-91 199,152

Yeal 1992-93

m Penonal Comp”lSo~ corporate 0 “Dl”mary coiporafe

Source: ln%~lvency Service Executive Agency

Fiaure 1 shows the increase in the number of wsonal and coruorate insolvencies, rising from 24,000 to 61,500 in the period 1967-88 to 1992-93

5

THE INSOLVENCY SERVICE EXECUTIVE AGENCY: COMPANY DIRECTOR DISQ”AIJFICATION

Figure 2: Numbers of corporate insolvencies and director disqualifications, 1987-M lo 1992-93

Companies

I”601w”cies

\ 1

28.541

!

Directors

On average, proceedings are taken against jusf under 1.5 directors in eachcompany

Source: National Audit Office

Note: (i) National Audit Office estimate (approximates to 4,300 companies)

Figure 2 shows the number of corporate insolvencies where unfit conduct has been identified resultin(l in disoualification.

1.8 The National Audit Office conducted case 1.9 The National Audit Office commissioned IFF examinations and interviews at the Agency’s Research Limited to undertake surveys of Disqualification Unit offices in London and (i) Insolvency Practitioners and [ii) company Edinburgh, and at a representative sample of directors, to ascertain their understanding of, seven Official Receiver offices: Birmingham and views on, the workings of the Act. (B), Liverpool, London (B), London(D). Appendix 2 gives summary details of these Newcastle, Plymouth and Swansea. In surveys. addition, the National Audit Office held discussions with staff of the Treasury Solicitor and Companies House.

6

THE INSOLVENCY SERVICE EXECUTIVE AGENCY: COMPANY DIRECTOR 0ISQ”ALIFICATION

Part 2: Official Receiver cases

2.1 Official Receivers are responsible for investigating the affairs of companies in England and Wales which are to be the subject of compulsory liquidation. Their role covers, among other things, identifying and investigating unfit conduct of directors and preparing detailed case reports. They submit these reports to the Agency’s Disqualification Unit where a final decision is made as to whether disqualification proceedings should be taken in the public interest.

Case example 2: An Official Receiver disqualification case

In 1987 a retail company went into compulsory liquidation leaving unpaid debts of nearly f500,OOO

Matters of unfit conduct put before the court were that the directors concerned had allowed the company to continue to trade after they were aware that there was no reasonable prospect of all creditors being paid; and that preferred payments were made lo other companies connected to the directors.

In 1992 the court disqualified three directors for a period of 10 years and one for 2 years.

2.2 This part of the report examines what steps the Agency have taken to secure that (i) Official Receivers identify cases of unfit conduct and submit timely reports of good quality to the Agency in appropriate cases, and [ii] these cases are properly evaluated by the Agency to identify those which should be taken to the courts in the public interest, and properly progressed. Figure 3 shows the main stages in which Official Receivers identify and investigate compulsory insolvency cases for disqualification.

Guidance and training

2.3 The Agency provide detailed guidance to Official Receivers for undertaking casework. In the light of the rising number of insolvencies

Figure 3: The role of the Official Receiver and the Agency’s Disqualification Unit in selecting compulsory insolvency cases for disqualification

WINOINC UP CROER

I

“NflTCONO”CT S”SPECTEO?

I YES NC

MERITS FURTHER No NC FURTHER

IN”ESIIGATlON? INVESTIGATION

YES

INlilAL NlOENCE OF “NFITCCNO”cT?

NO

FURTHER OETMEO lN”ESTlGATlON a PREPAREREPORT A SUBMITTCAGENCY’S PISO”~Lll;cATIcN YES NC

A i

NC

1

Figure 3 shows the main stages of identifying and selecting compulsory insolvency cases for disqualification.


2.4

2.5

2.6

2.7

2.6

the Agency have taken a series of initiatives commencing in March 1991 and culminating in further guidance to Official Receivers in March 1992. In relation to disqualification procedures this aimed: to facilitate early identification of unfit conduct; to improve the allocation of resources to unfit conduct cases: to standardise procedures and documentation to ensure consistent criteria were applied to case selection; and to facilitate the re-allocation of cases between offices to even out the workload.

Agency staff undertake a mix of in-house and external training and work experience, over a three year period. Continuing professional training and guidance is provided thereafter.

Monitoring and supervision of Official Receivers

The Disqualification Unit Plan for 1992-93 contains a number of targets and performance indicators such as: to review reports submitted by Official Receivers within 28 days of receipt. Performance against the Unit Plan is reviewed every six months and for the first six months of 1992-93 most targets and indicators were met.

Cases which require further information but which may not necessarily feature unfit conduct, and which should be investigated if resources permit, are recorded on Register A. Register B records those cases which merit consideration for a disqualification application. See Figure 3. Register B cases are graded according to their seriousness. Details from Register B are sent quarterly to the Senior Official Receiver at the Agency’s Headquarters in London, to provide information about case load and case progression by Official Receivers.

In practice most Official Receivers do not further investigate any cases on Register A because of pressure of other work. The National Audit Office estimate that for every case selected for further investigation (Register B), there are 2.6 on Register A in which there could be some level of unfit conduct but no further investigation occurs.

The Senior Official Receiver is responsible for securing the operational effectiveness of Official Receiver offices. He advises them on priorities, resources and policy, visits each at least once a year, and monitors cases which

2.9

2.10

2.11

they are taking forward and those they are unable to pursue because of pressure of work. He considers the need to reallocate cases and staff so that the workload of offices can be evened out. Few cases and staff have been reallocated between offices since mid-1991, very little of which relates to disqualification work, because of the priority accorded to prosecutions.

Independently of the Senior Official Receiver, the Official Receiver Inspectorate carry out a rolling programme of visits. Their reports in 1992 identified inconsistencies in applying standards for selecting cases for investigation and in recording decisions. The Agency’s Disqualification Unit also undertake visits to Official Receiver offices to ensure the consistent selection of cases, and that important case elements are identified and evaluated. Their reports in 1992 identified differences between offices in the disqualification workload, and varying standards in preparing cases at those offices visited. The problems in the individual cases identified have been addressed.

Workload

The number of compulsory insolvencies in England and Wales increased by 160 per cent between 1987-88 and 1992-93. The number of cases in which Official Receivers recorded unfit conduct rose over the same period by 123 per cent, while the number of unfit conduct reports they submitted in cases selected for disqualification proceedings has, other than in 1991.92, fallen each year (Table l), because of the escalation in case load.

Timeliness and consistency

Official Receivers

Since April 1992, Official Receivers have had a target to send completed reports on unfit conduct to the Disqualification Unit within 1.5 months of the insolvency, in 80 per cent of cases. Previously the target was to report within 10 months. Applying, for comparative purposes, the 15 month target to 1991-92, there is a declining rate of achievement - 35 per cent for the first six months of 1992-93, compared with 49 per cent for the whole of the preceding yf?.W.

8

THE INSOLVENCY SERVICE ExEC”nvE AGF,NCY: COMPANY DIRECTOR DISQUALIFICATION

2.12

2.13

2.14

Table 1: Compulsory insolvencies (England and Wales) and unlit conduct recorded by Official Receivers 1987-88 to 1992-93

Year Compulsory Unfit conduct Unlit conduct Insolvencies # recorded # reports

submitted #

1987-00 3,667 1,138 354

1966-69 3,554 1.204 219

1969-90 4.269 1,358 197

1990-91 6.786 1,617 173

1991-92 8,911 2,402 236

1992-93 9,542 2,657 121

Totals 36,749 10,376 1,300

Source: insolvency Service Executive Agency

Motes: A further 1.574 compulsory insolvencies were recorded in Scotland over the period

# Companies: on average, proceedings are issued againstjust under 1.5 directors in each company

This table shows a reduction, other than in 1991-92. in unfit conduct reports submitted, against a background of increasing numbers of insolvencies and recorded instances oi unfit conduct.

The National Audit Office examined a representative sample of insolvencies referred to seven Official Receiver offices in the period April to June 1992. The results showed that the average time to select a case for further investigation varied from 21 days [Liverpool) to 57 days (London (B) -where particular operational difficulties can apply). The average time taken at the offices visited was 41 days.

The examination identified inconsistencies between what Official Receiver offices recorded* as unfit conduct in cases which do not merit further consideration for disqualification. For example, minor unfit conduct and first offences may not be recorded by the Official Receiver at Birmingham (B), whereas the Official Receiver at Liverpool records all perceived unfit conduct.

The National Audit Office noted inconsistent use of the investigation register (Register B). In particular, some Official Receiver offices failed to grade cases a matter which the Agency have now rectified; and while srxne placed all

cases with clear evidence of unfit conduct on Register B, others recorded only those cases which they had the resources to investigate.

2.15 The National Audit Office’s analysis of investigation register records at 30 September 1992 indicated that some Official Receivers were investigating less important public interest cases in preference to more serious ones. The Agency consider that the prioritisation of work introduced in mid 1992 is remedying this. There were also variations in disqualification workloads between Official Receiver offices which in part reflects differences in workload generally. For example, at the end of September 1992, the Official Receiver at Bournemouth was taking no disqualification cases forward, while the Official Receiver at Birmingham [B) had 16 active cases on the investigation register.

2.16 The National Audit Office reviewed the levels of unfit conduct recorded* by Official Receiver offices in 1991-92 (Figure 4 overleafJ. The incidence of recorded unfit conduct as a percentage of compulsory insolvency workload ranged from less than two per cent (Reading) to 56 per cent [Liverpool). Reports submitted by Official Receiver offices measured on the same basis, showed a variation from under one per cent of cases (Southampton/Bournemouth) to 10 per cent [Newcastle).

Disqualification Unit

2.17 The Agency’s Disqualification Unit are responsible for the final decision on whether cases should be taken to the courts in the public interest. They review all reports of unfit conduct submitted to them by Official Receiver offices. Until 1990 they also regularly reviewed those cases in which Official Receivers recorded unfit conduct but which had not been selected for preparation of a disqualification report, referring a proportion back to Official Receivers for re-consideration. This review was discontinued as being unnecessary in that form, but has been partially replaced by Disqualification Unit visits to Official Receivers.

* recording in this context indicates that Official Receivers have submitted a statutoryform summarising unfit conduct.

9

TIE INSOLVENCY SERVICE EXiXUTI”E AGENCY: COMPANY DIRECTOR DISOUALIFICATION

Fioure 4: Variation in recorded’ and reoorted unfit conduct bv Official Receivers. 1991-92

mm ReceNel omces

Reading .-. “,%.^_^ b- .,I. N”aIIs ,_ Blighton

,ymotiNExeter NBo”memo”th Birmingham B

swansea ,,. ++I

LeedE Ml, :,:

“‘~ ~‘Y

b\, cards ”

m/ca”terbJry simlin~hamn ,i ,~

>lW”l@l

ROChe!

Gmyoo” ( NOnhampfORiCambridge i;:Q:

Swtiwld ‘:i: LeicewriNo”i”gP’- “’

a Pin 1m11

_.. Ales StPwcheEtel Manchester A mmeSfer B

London E mwic~~~~;

BtiSfO”GlO”E~St~l Nwaw~~~~~

London A LiwQPDl

q up CO,“d”C, repted to n,rn,,rldirrti”n I,“,, “._)YYY ,,.,““1,“,. “1111

c Recolded “Ilot CO”d”ct

Source: lnsolvencv Se~ice Executive Aoencv

IVOte: Main and sub oflices are shown together

Figure 4 shows the wide variation in the incidence of unfit conduct recorded‘ and the repot% generated by Official Receivers, as a percentage of comwlsow insolvencies in 1992-93.

2.18 The percentage of cases submitted by Official Receiver offices and rejected outright by the Disqualification Unit has risen from 19 per cent in 1990-91 to 22 per cent for 1992-93. The rate of rejection varies among Official Receiver offices. For those submitting ten or more reports in 1991-92, the rate of rejection varied from none (Northampton and London (Al) to 27 per cent (Newcastle). The Agency feel that

Case example 3: Qualify of Official Receiver repark

In a case involving seven company failures with cumulative debts in excess of f2.5 million, the Official Receiver submitted a case report 22 months after the winding up of the lead company.

The Disqualification Unit raised a number of matters, in particular that the report did not sufficiently address the role of the director in the unfit conduct identified in the supporting companies. Directions were issued and the Official Receiver made a number of amendments.

The case is pending.

some rejections, end hence unproductive effort, are inevitable in any investigative legal p*OCeSS.

2.19 The Disqualification Unit have not undertaken formal reviews of the reasons for variations in quality, timeliness and number of reports submitted by Official Receiver offices. From their general monitoring of Official Receiver operations the Agency conclude that they are largely due to ~source differentials.

2.20 The National Audit Office selected a representative sample of cases received by the Disqualification Unit between April and June 1992. The examination showed that the Unit completed their work on average within three weeks of receipt of reports from Official Receiver offices, and that they had regard to the criteria in the Act for the selection of cases to be taken to the courts. Of the 15 cases examined, II were accepted and directions to proceed were made. In five of these 11 cases, however, significant changes to the reports were required.

10


2.21 The National Audit Office also examined all 28 cases rejected by the Disqualification Unit in 1991-92. The Unit had identified weaknesses in allegations of unfit conduct, the poor quality of some reports, and a concern that mitigating circumstances might carry substantial weight in court. In eight cases, insufficient time remained within the statutory 2 year deadline to resolve outstanding points.

Case example 4: Case rejected as not in the public

In a case involving two directors, live companies and an overall debt of more than f500,000, the Official Receiver submitted a report some 20 months after the insolvency.

The report identified the responsibility of the directors for the failure; the absence of proper accounting records; and the failure to provide returns and accounts as justification for disqualilication of the directors concerned.

The Disqualification Unit rejected the case on the grounds that the pattern of unfit conduct was not sufficiently serious and that a strong defence could be put forward.

11

THE INSOLVENCY SERVICE EXECUTIVE AGENCY: COMPANY DIRECTOR DISOUALIFICATION

Part 3: Insolvency Practitioner cases

3.1 Insolvency Practitioners are licensed by the Department of Trade and Industry or a recognised professional body, to act in the principal forms of insolvency proceedings. Practitioners are required to report to the Agency any unfit conduct encountered in voluntary insolvencies. The Agency’s Disqualification Unit decide whether proceedings should be taken in the public interest, and carry out the detailed casework (Figure 5).

Case example 5: An Insolvency Practitioner disqualification case

I A manufacturing company went into voluntary liquidation in 1989 with debts of over f500,OOO.

Matters of unfit conduct put before the court were that two directors had advanced monies to a connected company without due consideration; had carried out transactions to the detriment of specific creditors: had maintained insufficient accounting records and had traded without reasonable prospecl of payment of creditors.

In 1992 the two directors were each disqualified for 10 years.

3.2 This part of the report examines what steps the Agency have taken to secure that: [i) Insolvency Practitioners report cases of unfit conduct encountered and submit timely reports of good quality to the Agency: and (ii) cases are evaluated by the Agency to identify those which should be taken to the courts in the public interest, and properly progressed.

Guidance and training

3.3 In 1987 the Agency issued guidance to Insolvency Practitioners on identifying and initial reporting on cases of unfit conduct, in line with that issued to Official Receivers. Further guidance was contained in communications with Insolvency Practitioners. With the aim of securing greater consistency of

Figure 5: The role of Insolvency Practitioners (IPs) and the Agency’s Disqualification Unit in identifying and selecting voluntary insolvency cases for disoualification

IP APPOINTED TO HANOLE THE lNSOL”ENCY

UNFIT CONDUCT UNFIT CuNoUCT IDENTIFIED NOTSUSPECTED

8 =

REPORT MAOE RMRN MADE TOTHEAGENCY TOTHE.4GENCY

AGREE SWORN

0 STATEMENT WITH IP

Figure 5 shows the main stages of identifying and selecting voluntan insolvencv cases for disoualification.

12


3.4

i

3.5

3.6

3.7 t

3.8

reporting in the light of case experience, and in consultation with the Society of Practitioners of Insolvency, the Agency revised the guidance and published it in March 1993. The National Audit Office survey by IFF Research Limited showed that 83 per cent of the Practitioners consulted consider the current Agency guidance satisfactory.

The survey found that 87 per cent of Insolvency Practitioners had taken further training since receiving their licences. This consisted primarily of “update” courses and seminars provided within their own practices or by the Society of Practitioners of Insolvency.

Monitoring and supervision of Insolvency Practitioners

Since April 1992, Insolvency Practitioners have received monitoring visits from the Agency on a random basis. The visits have prompted the recognised professional bodies to have discussions with the Agency aimed at reaching agreement over greater self-regulation, with the professional bodies being responsible for monitoring the compliance of their members. In 1993-94 the Agency plan to target their visits on Insolvency Practitioners with poor compliance records.

Workload

Over the period 1987-88 to 1992-93, the number of initial reports of unfit conduct submitted by Insolvency Practitioners increased by 72 Per cent (see Table 2)~

Timeliness and consistency

l”s01ve*cy Practitioners

The statutory reporting rules require Practitioners to submit within six months of their being approved to act in the case: a report of unfit conduct: a holding response; or a return indicating no unfit conduct. To secure responses the Agency issue a series of reminder letters to Insolvency Practitioners, the first one six months after their appointment.

The National Audit Office examined a representative sample of 102 initial reports identifying unfit conduct submitted by

3.9

3.10

Table 2: Voluntary insolvencies and reports of unfit conduct by Insolvency Practitioners 1987-88 to 1992-93

Year Voluntary Initial reports of insolvencies# unfit conduct #

1987-88 11,438 2.361

198849 14,513 3,005 1989-90 13,779 2,086 1990-91 20,599 2,891 1991-92 27,041 3,769 1992-93 26.627 4,053

Totals 114.197 18,165

Source: Insolvency Service Executive Agency

Note: #’ Companies: on average, proceedings are issued against just under 1.5 directors in each company.

Table 2 shows the increase in the number of voIuntaTy insolvencies and repotts of unfit conduct.

Practitioners between April and June 1992. The examination showed that 78 per cent of reports were received more than six months from the date of insolvency, of which 22 per cent were received after 12 months (see Figure 6 overleaf).

Some 34 per cent of reports in the sample were incomplete in that key documentation, such as statements of affairs and audited accounts, had to be requested from Insolvency Practitioners. In November 1992 the Agency reminded Practitioners of the information which should be attached to all reports.

Disqualification Unit

Cases are vetted to determine which are in the public interest to pursue, graded A, B or C according to their seriousness and passed to a holding area, prior to more detailed casework leading to directions to proceed. A sample of reports examined by the National Audit Office revealed that in 96 per cent of cases vetted, a decision was made within 2 months, compared with the section’s target of 85 per cent; and that decisions taken on case selection had proper regard to the criteria laid down in the Act (Appendix 1). The National Audit Office found that some 81 per cent of cases reported by Insolvency Practitioners are rejected at the vetting stage as not being in the public interest to pursue. The Agency analyse the reasons for rejection, which include incomplete reports and insufficient evidence of unfit conduct.

13

TEE INSOLVENCY SERVICE EXECUTIVE AGENCY: COMPANY DIRECTOR DISQUALIFICATION

Figure 6: Timeliness of receipt of unfit conduct reports from Insolvency Practitioners

Months after lnSOlYency Practitioner appointed

3 mDnthS 7 [I

93 I 0 % received

0 % outstanding

,,::,: ~;:‘- 9rmmhS ,:I’: : : ‘. 65

~

15 months ‘...:.;~“y$+

,4,,-:, ,83 x 17

18manihs ““, ‘94 6

21 months 98 I

,,, 24 months ,,.’ ,: ‘*:‘ 99 ,,

. . . . . . . . . . . :.................................................................... End of 2 yeal cJ&tOly period

27 months 100

0 50 100

Cumulative percentage of sampled unfit conduct reports received

Source: National Audit OfICe samok

Figure 6 shows. for a sample of Insolvency Practitioner reports, that 79 percent are still outstanding 6 months from the date of appointment.

Office found that the Insolvency Practitioners 3.11 As an indication of the growing caseload, the concerned were not informed of the reasons for

National Audit Office found that at the end of rejection. The Agency have taken steps to 1992 there were 493 cases awaiting vetting address these issues. decisions, compared with 131 at the end of 1991. During 1992, on average 332 new cases entered the vetting section each month and vetting decisions were taken on 302.

Case example 6: Case abandoned

3.12 The Agency rely on feedback to Insolvency An engineering and construction services company Practitioners on rejected cases as a key means became insolvent in November 1990 with debts of of ensuring that they apply the guidance overLQ50,OOO. satisfactorily. In the National Audit Office survey of Insolvency Practitioners, 30 per cent

The case was selected by the Disqualification Unit’s

of Insolvency Practitioners who submitted vetting section for further investigation in the public

reports say they had rarely or never received interest, graded ‘B’ and placed in the holding area

feedback on cases reported to the Agency. in January 1992.

The case became time-expired in Novemher 1992 3.13 In a sample of cases rejected by the vetting and was abandoned from the holding area.

section between April and June 1992, the National Audit Office found evidence of feedback being provided to the Practitioners in 95 per cent of the cases. In a further sample of [six) cases selected for disqualification but subsequently abandoned, the National Audit

3.14 The National Audit Office reviewed cases in the holding area to determine the number, age and grade of those held at May and November 1992. Between these dates some 40 cases were

14

THE INSOLVENCY SERVICE EXECUTIVE AGENCY: COMPANY DIRECTOR DISQUALlFICATION

abandoned because the statutory two year deadline since the date of insolvency had expired.

3.15 At 30 November 1992 there wcrc 709 CBSCS in the holding area, including 414 more serious cases classified as ‘A’ or ‘B’ grade, which represent about three years work for the nine case preparation teams. In nearly three quarters of the 709 cases more than a year had expired since the date of insolvency, and around 40 per cent were more than 18 months old. The number of cases held at November 1992 had * increased by around 60 per cent over those held at 31 May 1992.

3.16 The National Audit Office found that case preparation teams did not, for operational reasons, always give priority to the most serious cases, but noted that the Unit are piloting a points system at the vetting stage which is intended to improve the allocation to case preparation teams.

3.17 From January 1993 no less serious ‘c’ grade cases will in principle be taken from the holding area by case preparation teams and are likely to become time expired. Such cases include:

. a conference and exhibitions organising company which became insolvent in 1991 with debts of more than f1.25 million:

. a furniture manufacturing and retailing company which became insolvent in 1992 with debts of more than f600,OOO;

. a manufacturer of childrens’ clothes which became insolvent in 1991 with debts of more than El.1 million.

3.18 The National Audit Office identified all cases selected in October and November 1991 for further work, to assess the rate of, and reasons for, rejection of cases by the preparation teams after casework had commenced. Four out of the 22 selected cases (18 per cent) were rejected. In over half of rejected cases the reason was that the evidence in the case was considered insufficient to justify a disqualification application being made. The Agency feel that some rejections, and hence unproductive effort, are inevitable in any investigative and legal process.

Case example 7: Rejection by the case preparation team

A building company became insolvent in January 1991 and the Insolvency Practitioner submitted a report in October 1991.

The ‘B’ grade case was selected for disqualification in November 1991 and allocated to a case preparation team in May 1992. It was rejected by them in November 1992 on the grounds that there was insufficient evidence to sustain proceedings for disqualification.

Scotland

3.19 There are no Official Receivers in Scotland. Initial reports in both voluntary and compulsory insolvencies are prepared by Insolvency Practitioners. Insolvency Practitioners in Scotland may, in certain specific circumstances, refuse to handle cases where there are few assets. In such cases, no report is prepared on the conduct of the directors concerned. A representative of a leading firm of Insolvency Practitioners told the National Audit Office that he estimated there were hundreds of such cases each year.

3.20 Reports from Insolvency Practitioners are reviewed by the Edinburgh Disqualification Unit. The National Audit Office found that the Unit do not follow the formal selection process as used in the Londuu Disqualificatiun Unit fur the selection and grading of cases. The head of the Unit makes a judgmental decision based on, for example, effect of unfit conduct on the creditors, whether the unfit conduct is wilful and availability of evidence.

3.21 Currently, the small Edinburgh Unit have the capacity to process to completion all selected cases, including those of low priority. All cases require approval by the London Disqualification Unit prior to proceedings being taken. Any cases which the Unit conclude should be abandoned, should be referred to the London Disqualification Unit first. Review by the National Audit Office of the six cases abandoned during April to June 1992 indicated that two had not been formally referred prior to abandonment.

15


-

4.1

4.2

Part 4: Achievement of objectives

This part of the report examines how well the Agency are meeting their objectives of protecting the commercial world and the public at large and improving the standards of company stewardship. It does so by [il giving the results of two surveys specifically commissioned by the National Audit Office for this report, (ii] examining the incidence of unfit conduct, (iii) considering the extent to which the Agency issues proceedings against all directors that it is in the public interest to disqualify and [iv) reviewing the disqualification timetable and other related matters.

4.3

Surveys commissioned by the National Audit office

The National Audit Office commissioned IFF Research Limited to carry out surveys of representative samples of(i) company directors

and [ii] Insolvency Practitioners, to ascertain their knowledge of and views on the disqualification arrangements and the effectiveness of such. The representative samples obtained were 517 company directors and 103 Insolvency Practitioners - 639 and 106 respectively were approached to take part (see Appendix 2).

Company directors’ survey

In the survey, 58 per cent of company directors taking part said that they are not aware of the 1986 Act. Of those that are aware, some 63 per cent consider that the Act has little or no relevance to their business, and 90 per cent said that it has no impact on them personally. Of those that said they are aware of the circumstances in which a director may be disqualified, 57 per cent said they are not well informed about the procedures (see Figure 7).

Figure 7: Directors’ awareness of the arrangements for disqualification

(i) Are you aware of the Company Directors Disqualification Act?

(ii) How relevant are the disqt@fication arrangements to your busmess? (1)

(iii) Are the disqualification arrangements relevant to you personally? ~1)

(iv) How well informed are you about director disqualification procedures? (2)

Don’t know 6%

0 20 40 60 80 100

Percentage of responses

Source: National Audit OfficeNFF Research Limited, Survey of company directors

Notes: (1) Based on the views of a weighted sample of 218 directors who said they were aware of the Act. (2) The 383 directors who indicated that they were aware of the circumstances fhat might lead to disqualification were asked whether they

were well informed about the procedures.

Figure 7 shows the questions and respowes tc the wrvev about company directors’ awareness of disqualification arrangements.

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THE INSOLVENCY SERVICE EXECUTWE AGENCY: COMPANY DIRECTOR DISQ”ALIFICATION

Figure 8: Directors’ views on the success of the arrangements for director disoealification

(0

(ii)

(iii)

(iv)

Are disqualification arrangements successful in deterring unfit conduct7 ,tt

Are disqualification arran ements successful in protecting t 4, from unfit directors? (t)

e public

How Successful are the arrangements

disqualifie% (,) in disquali ~ng those that should be

Are sufficient numbers of unfit directors disqualified? (t,

0 20

Percentage Of responses

40 60 80 100

Source: National Audit OffMlFFResearch Limited, Survey of company directors

Note: (I) Based on the views of a weighted sample of 218 directors who said they were aware of the 1986 Act,

Figure 8 shows the questions and responses to the surrey about company directors’ views on the success of arrangements for director disqualification.

4.4

4.5

The survey provides further analysis of the views of those directors who are aware of the Act. Around 53 per cent hold the view that the Act has not been successful in deterring unfit conduct by directors; 56 per cent think that the Act does not protect the public interest; 66 per cent consider that the Act has not been successful in disqualifying unfit directors; and 43 per cent think that the Agency do not bring proceedings against a sufficient number of unfit directors. A significant number of directors who are aware of the Act did not express an opinion in response to these questions (see Figure 8).

4.6

insolvency Practitioners’ survey

Among Insolvency Practitioners, a5 per cent of those surveyed identified putting unfit directors out of action as one of the objectives of the Act, but only 38 per cent identified protection of the public interest. On effectiveness, as shown in Figure 9 (overleaf), 74 per cent of Insolvency Practitioners sampled consider the Act is not proving successful in putting unfit directors out of action; 73 per cent consider that it does not protect the public interest; and 61 per cent

4.7

believe that it does not deter unfit conduct by directors. Some 75 per cent consider that the Agency are not bringing proceedings against a sufficient number of unfit directors; the principal reason given being the Agency’s lack of resources.

The incidence of unfit conduct

The growth in the number of cases of corporate insolvency has been accompanied by a reduction in the percentage of unfit conduct recorded by Official Receivers and Insolvency Practitioners from 23 per cent to 18 per cent between 1987-88 and 1992.93. While there may be a number of reasons for this, it may indicate a deterrent effect of the Agency and/or a growing proportion of responsibly managed companies failing.

The extent to which proceedings are issued in all public interest cases

As noted in Part 2 of this report, the National Audit Office found that for every compulsory insolvency selected for further investigation by

- 17


Figure 9: Insolvency Practitioners views on the effectiveness of the arrangements for disqualification of directors

(i) Are the arrangements for disqualification SUCCESSFUL in putting unfit directors out Of action?

(ii) Are the arrangements for disqualification successfuI in protecfing the public?

(iii) How succe*sfut are the arrangements for disqualification in deterring unfit conduct?

(iv) Are SuRicient numbers of unfit directors disqualified?

Source: National Audit OfficeeNFF Research Limited, Survey of insolvency Practitioners

Figure 9 shows the questions and responses to the survey of Insolvency Practitioners about the effectiveness of the arrangements for director disqualification.

4.8

4.9

Official Receiver offices, there are 2.8 in which

some level of unfit conduct is suspected but no further investigation occurs. This, along with other factors already noted, indicates that not all cases of unfit conduct meriting disqualification in the public interest are identified and selected for court proceedings.

Part 3 of this report noted that for voluntary insolvencies, cases in the Disqualification Unit holding area represent some three years work for the case preparation teams. Most of these will become time expired. Further, in Scotland there are no arrangements for reporting the unfit conduct of directors where there are insufficient company assets to secure the appointment of an Insolvency Practitioner.

From their examination of cases, the National Audit Office estimate that currently the Agency are identifying around 15 per cent of cases of unfit conduct as being in the public interest to pursue. Assuming this rate applied in earlier years, before allowing for cases in the pipeline and other cases possibly withdrawn at a subsequent review or pursued as prosecutions, the Agency have issued directions to commence court proceedings, on average, in around half of these public interest cases (see Table 3 overleafl.

4.10

4.11

4.12

Between 1987-88 and 1992.93. the Agency had applied to the courts for the disqualification of 2,891 directors. By 31 March 1993 some 1,841 had been determined by the courts, of which 1,712 (93 per cent) had resulted in disqualification orders.

Disqualification timetable

Analysis by the National Audit Office showed that several years may elapse between alleged unfit conduct taking place and a court decision. In most cases nearly two years will elapse before the Agency are in a position to apply for a disqualification. A further four years may elapse before the legal action is completed. Several factors may contribute to this, including: the complexity of the case; the number of other cases awaiting hearings; extra time being allowed for the preparation of defences: and time allowed to secure legal aid.

During the period before a court decision, a director is of course at liberty to continue his business interests. Lengthy delays in bringing cases to court may adversely prejudice the final outcome of a disqualification application.

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Table 3: Incidence of unfit conduct and number of directions to proceed in the period 1987238 to 1992-93

Incidence 01 unlit conduct

Companies in which unfit Public interest cases’ conduct was identified

Directions to proceed issued

Companies Directors

1967.86 3,499 524 183 247 1988-89 4,209 631 313 419 1989.90 3,444 516 311 462 1990.91 4,508 676 336 499 1991-92 6,171 925 470 700 1992-93 6.710 1006 322 564

Totals 28,541 4,278 1,935 2,891

Source: National Audit Office

Note: * An estimate bv the NationalAudit Office

Table 3 compares the number of directions to proceed issued with the number of companies in which unfit conduct was identified, and those which it was in the public interest to PUISUB.

4.13 The National Audit Office found that of the of disqualification orders. The National Audit 1,000 cases which were awaiting Office examined the register and found that, determination, 37 per cent related to out of a sample of over 100 disqualification insolvencies which took place between 1986 orders secured by the Agency between and 1989. The Agency are examining with the December 1991 and November 1992,58 per Lord Chancellor’s Department whether steps cent were not recorded some three months can be taken to reduce the length of time later. Companies House have recently taken between application and the hearing of cases. steps to address this issue.

Register of disqualified directors

4.14 The public register of disqualified directors maintained by Companies House provides the means for verifying the status of company directors or potential directors. As such the register has an important part to play in maintaining standards of company stewardship. It is compiled by Companies House from information supplied by the courts

4.15 In addition, the National Audit Office noted the documentation for new companies and returns from existing companies, which identify the directors of the companies concerned, are not checked against the register of disqualified directors. They also noted that there are no arrangements for securing that disqualified directors resign all their directorships.

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THE INSOLVENCY SERVICE EXECUTIVE AGENCY: COMPANY DIRECTOR DISQ”AIXICATION

Glossary of terms

Bankruptcy:

Compulsory liquidation (or compulsmy insolvency):

Direction to proceed:

Disqualification:

Disqualification order: A court order which disqualifies a named person for a specified period.

Fiduciary duties: Duties which must be exercised in good faith by a person for the benefit of others.

Insolvency (corporate): A company becomes insolvent for disqualification purposes if it goes into liquidation when its assets are insufficient to pay its debts, liabilities and winding up expenses; or an administration order is made or an administrative receiver is appointed.

Insolvency (personal):

Insolvency Practitioner:

The principal insolvency procedure for individuals (not companies). The debtor’s property is sold to pay as much as possible to creditors.

Compulsory liquidation is the equivalent of bankruptcy for companies. It follows from a winding up order made by the tout. In this report “compulsory insolvency” and “voluntary insolvency” (see below) are used to distinguish insolvency procedures which are treated differently for disqualification purposes.

Instruction to take disqualification proceedings against named directors, issued by the Inspector General of the Agency or his Deputy, on behalf of the Secretary of State for Trade and Industry.

The prohibition of an unfit person from being: a director, liquidator or administrator of a company: a receiver or manager of a company’s property and being in any way concerned in the promotion, formation or management of a company.

For the purposes of this report individuals become insolvent either if a bankruptcy order is made or they enter into an individual voluntary arrangement with their creditors.

A person who is licensed to act as the office-holder in any of the principal forms of insolvency proceedings.

Limited Liability (company): A company is said to be incorporated with limited liability where it is responsible for its own debts and the liability of shareholders is limited to their commitment on their personal shareholding.

Liquidation: The winding up of a company with its assets being sold to pay as much as possible to creditors. Liquidation may be either “compulsory” (see above) resulting from a court order or “voluntary” resulting from a shareholders’ resolution.

Misfeasance: A general term used to describe breach of legal duties and obligations by directors.

Official Receiver: Civil servant employed by the Insolvency Service Executive Agency whose principal functions relate to bankruptcies and compulsory liquidations.

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Register A:

Register B:

Senior Official Receiver:

Treasury Solicitor:

Unfit conduct:

Voluntary insolvency:

Voluntary liquidation:

Winding up order:

List of cases suitable for prosecution or disqualification in which the Official Receiver suspects unfit conduct but has not found clear evidence to support selecting it for disqualification.

List of cases selected for disqualification in which there is prima facie evidence of unfit conduct.

The Agency’s Deputy Inspector General with oversight of all Official Receivers.

Legal officer responsible for representation of government departments in court,

Indicative conduct as defined in Schedule 1 of the Company Directors Disqualification Act 1966 [see Appendix 1).

This term is used in this report to refer collectively to voluntary liquidations (see below), administrations and administrative receiverships. These are three separate company insolvency procedures of which voluntary liquidations are the most numerous. The procedures are grouped together for the purposes of this report because the disqualification procedures are substantially the same.

Liquidation (see above) resulting from shareholders’ resolution and not involving a court order.

The court order from which compulsory liquidation follows.

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THE INSOLVENCY SERVICE EXECUTIVE AGENCY: COMPANY DIRRCTOR DISQUALIFICATION

Appendix 1 Matters for determining unfitness of directors

Source: Schedule 1 to the Company Directors Disqualification Act 1988

Matten applicable in 1 Any misfeasance 01‘ breach of any fiduciary or other duty by the director in relation to the all cases company.

2 Any misapplication or retention by the director of, or any conduct by the directors giving rise to the obligation to account for any money or other property of the company.

3 The extent of the director’s responsibility for the company entering into any transaction liable to be set aside under Part XVI of the Insolvency Act [provisions against debt avoidance).

4 The extent of the director’s responsibility for any failure by the company to comply with any of various provisions of the Companies Act, namely:

. companies to keep accounting records

. where and for how long records to be kept

. register of directors and secretaries

. obligation to keep and enter up register of members

l location of register of members

. company’s duty to make annual return

. time for completion of annual return

. duty of company to deliver particulars of charges on its property.

5 The extent of the director’s responsibility for any failure by the directors of the company to comply with section 227 (directors’ duty to prepare annual accounts) or section 238 (signing of balance sheet and documents to he annexed) of the Companies Act.

Matters applicable 6 The extent of the director’s responsibility for: where company has

become insolvent . the causes of the company becoming insolvent

. any failure by the company to supply any goods or services which have been paid for

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. the company entering into any transaction or giving any preference, being a transaction or preference liable to be challenged or set aside under the Insolvency Act or under any rule of law in Scotland

. any failure by the directors of the company to comply with section 98 of the Insolvency Act (duty to call creditors’ meeting in creditors’ voluntary winding up).

7 Any failure by the director to comply with any obligation imposed on him by or under any of various provisions of the Insolvency Act:

. company’s statement of affairs in administration

. statement of affairs to administrative receiver

. statement of affairs in Scottish receivership

. directors’ duty to attend meeting: statement of affairs in creditors’ voluntary winding up

. statement of affairs in winding up by the court

. duty of anyone with company property to deliver it up

. duty to co-operate with liquidator, etc.

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THE INSOLVENCY SERVICE ExECuTIvE AGENCY: COMPANY DEWXOR DISQUALIFICAnON

Appendix 2 Surveys of company directors and Insolvency Practitioners

Background

1 The National Audit Office commissioned IFF Research Limited to undertake surveys of representative samples of company directors and Insolvency Practitioners. The purpose was to assess the degree of awareness of these groups of the Company Directors Disqualification Act 1986 and to ascertain their views on director disqualification procedures. Key results are included in Parts 3 and 4 ofthis report. The full results are available separately from the National Audit Office.

Methodology

2 In consultation with the Insolvency Service Agency, telephone questionnaires were finalised following exploratory face-to-face interviews. Telephone interviews were conducted by IFF Research Limited with 103 licensed Insolvency Practitioners selected randomly from a list provided by the Agency; and with 517 company directors of public and private limited companies selected to ensure a representative sample in terms of company size.

3 Survey interviews were carried out on a geographically random basis. Response rates were 68 per cent and 78 per cent for the company director and Insolvency Practitioner surveys respectively. Sampling errors for the company director survey are estimated to be less than + or - 3.5-4.0 per cent at a 95 per cent confidence level. For the smaller survey of Insolvency Practitioners, statistical measures of sampling errors are not appropriate. However, responses to survey questions which can be verified indicate that other responses are also representative.

Company director survey

4 Material covered by the company director survey included:

. extent of companies being owed money by another company in administration, receivership or liquidation, and awareness of any subsequent civil or criminal proceedings:

. experience of being a director of a company that went into administration, receivership or liquidation:

. written material and training received on the duties and responsibilities of directors and on the Company Directors Disqualification Act 1966:

. awareness of circumstances leading to director disqualification;

l knowledge about procedures for disqualifying directors and of the 1986 Act and its objectives:

24


. views on the success of the 1986 Act in meeting its objectives;

. knowledge and views on criteria for determining unfitness of directors;

. impact of the 1986 Act, both personally and on the company;

. success of the Act in disqualifying u&it directors and views on whether the Agency bring proceedings against a sufficient number of unfit directors to protect the public interest and the interests of creditors.

Insolvency Practitioner survey

5 Material covered by the Insolvency Practitioner survey included:

training and experience in insolvency work and of the director disqualification process;

knowledge of the objectives of the 1986 Act and views on the success ofthe Act in meeting them;

knowledge of responsibilities as an Insolvency Practitioner, and of the responsibilities of the Agency within the director disqualification procedures:

views on guidelines and forms issued by the Agency;

feedback Tom the Agency:

views on the length of disqualification orders;

views on whether the Agency bring proceedings against a sufficient number of unfit directors and whether it deals with cases quickly enough to protect the public interest and the interests of creditors.

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