The approach of the Insolvency Service appears to have shifted, no longer can directors rely on receiving a disqualification upon conviction of an insolvency related criminal offence.
Traditionally, directors who were convicted of wrongdoing would have been handed a director’s disqualification order from the Insolvency Service and held to be personally liable for the debts of the insolvent company. However, in the last 18 months we have seen a shift with directors being given increasingly serious penalties, including prison sentences.
Custodial sentences have always been available for the most serious criminal insolvency offenses, for example:
- fraudulent trading has a maximum sentence of up to 10 years; and
- failing to comply with a director’s disqualification order has a maximum sentence of up to two years,
however, in practice, it was uncommon for such sentences to be handed out.
Recent cases suggest the Insolvency Service, through its dedicated Insolvency Service Legal Services Directorate team are now actively pursuing custodial sentences in the most serious circumstances:
- Vezubuhle Ndlovu was a director of an electrician company which went into liquidation owing HMRC in excess of £200,000. Mr Ndlovu failed to engage with the liquidator and the Insolvency Service. The liquidator, therefore, was unable to take the necessary steps to recover the company’s assets. The Insolvency Service initially imposed a seven-year disqualification order, however, there was still a lack of engagement from Mr Ndlovu. As a result, Mr Ndlovu received a 10-month prison sentence on 15 October 2024.
- Michael Corcoran had been operating as a builder taking on large renovation projects. Mr Corcoran was making dishonest claims about the price and timetable for completing the work, routinely asking his clients to lodge funds with his companies to ensure that the renovations would be completed and then failed to deliver. In August 2023, Mr Corcoran was sentenced at Reading Crown Court to four years and three months imprisonment after pleading guilty to three counts of fraudulent trading.
Whilst the above two cases are exceptional and involve criminal offences, it should act as a reminder to all company directors that they are required to be on top their company’s financial position. If there is a risk that the company is insolvent, the best thing that a director can do is take professional advice at the earliest possible opportunity. A friendly insolvency practitioner can discuss the available options and help directors plot through their next steps during difficult periods.
If a company is subject to an insolvent liquidation, the appointed liquidator and, in some circumstances, government investigators will go through the company’s trading history with a fine-tooth comb. The evidence suggests that the Insolvency Service will use all the tools at its disposal when pursuing directors who have acted improperly. Seeking professional advice at an early stage is the best way to mitigate this risk.
Please feel free to contact the authors of this article if you have any questions regarding the contents, or insolvency law generally. We work closely with insolvency practitioners and are always happy to make the necessary introductions should you have any concerns.