What’s involved in the insolvency process?

As an insolvency practitioner (“IP”), in my dealings with many, many business insolvencies over the years, there is a recurring issue that it is very rare not to encounter – one of the injured parties wants someone to pay for the hurt that has been caused. It is easy to empathise with that feeling; there are always a number of innocent parties that suffer and it is human nature to look to see who is to blame for that.

Therefore, shouldn’t the insolvency process include some element of punishment for those that caused the suffering? Some of the people I speak to– particularly in the early days of a case, where tensions are running at their highest – want to know what will happen to the directors, and how they will be held to account.

The starting point for me is that I must be act independently of all parties. I am not appointed to crucify the directors, but equally I am not there to act in their interests. I am there to dispassionately review the position and take the appropriate action. That can be a difficult balancing act to perform, and in the heat of the moment, many parties have assumed that I must be on one side or the other. I can assure you I am not!

In every insolvency case in the UK, anyone who was a director in the three years leading up to the insolvency event (including “shadow” directors, who are not formally directors but act as if they are) will have a report on their conduct in that period prepared by the insolvency practitioner, which is sent to the Government’s Insolvency Service. If there is evidence of “unfit conduct” by a director, and the Insolvency Service consider it to be in the public interest to act, then they can take steps to have the director disqualified from acting as a director for a period up to 15 years.

Additionally, if the director’s conduct has caused loss to the company and its creditors – eg assets disposed of for less than their true value, or trading continued when it was clear that insolvency was unavoidable – then the IP can take legal action to have the director held financially liable for some or all of the losses suffered and get a court order for those funds to be paid into the pot for the benefit of creditors.

The key issue is always the need for evidence, and IPs need help from creditors to come forward with any such evidence. Not every insolvency happens because someone has acted inappropriately, but where it has happened, we need interested parties to come forward and help us fill in the blanks, so we can take the appropriate action.

For more information contact Duncan Raggett, Insolvency Practitioner (duncan.raggett@aab.uk) or your usual AAB contact.