Investigations launched by the Insolvency Service into directors of insolvent companies for alleged misconduct have risen 36% from an average 142 per month in 2021/22 to an average of 193 per month between April 1 and December 31 2022, shows data from international law firm, RPC.
The increase in investigations is partly driven by insolvency practitioners identifying more instances of fraud by directors of insolvent businesses in the reports that they send to the Insolvency Service.
The number of cases referred to the Insolvency Service compliance and targeting department – which investigates corporate abuse – more than doubled from an average of 528 per monthto 1,077 during 2022.
Insolvency practitioners have also been told to be on the lookout for any misuse of Covid support schemes such as Coronavirus Business Interruption Loan Scheme (CBILS) and Bounce Back Loan Scheme (BBLS). In 2022/23 the Insolvency Service disqualified 459 directors for COVID support scheme abuse.
As higher interest rates contribute to an increase in insolvencies, directors of insolvent businesses are likely to come under scrutiny for suspected wrongdoing. This may include behaviour, such as continuing to trade whilst being insolvent (wrongful trading) and carrying on the business with the intent to defraud creditors (fraudulent trading).
James Wickes, Partner in the RPC Professional & Financial Risks team in London, says the increase in Insolvency Service investigations will likely lead to more claims being made under Director and Officer’s (D&O) insurance policies. These policies will usually cover the director’s legal costs of having to face a formal investigation or legal action taken by shareholders, creditors or regulators. Wickes said “With insolvencies on the rise, we can expect to see more instances of fraud and other types of misconduct coming to light. As directors of insolvent companies come under heightened scrutiny, D&O insurers will be anticipating an uptick in claims to cover the cost of investigations or penalties.”
“Post insolvency actions against directors has historically been one of the main sources of claims on D&O policies.”