Thursday, 19 August 2010

Disqualification of an Insolvency Practitioner

s.3 CDDA 1986 provides for a disqualification order to be made if any person persistently breaches company legislation in falling to file documents with the ROC. It states that being adjudged guilty of three defaults in a five year period is "conclusive proof" that there is sufficient default for an order to be made.


s.4 CDDA 1986 states that a person may be disqualified if they have been guilty, "while an officer or liquidator of the company, receiver of the company's property.... of any breach of duty.." The case of Adbury Park Estates Ltd [2003] BCC 696 makes it clear that the breach of duty must not be a trivial one.


s.16 CDDA 1986 permits the SOS, OR, subsequent liquidator, past or present member or any creditor to bring an application under s.3 or s.4.


Given the effect of a disqualification order, these provisions are a serious threat to an IP that commits either a single serious breach of duty or a series of minor ones. It would appear from the public information available that a regulator would probably issue a fine with costs for the same conduct. Is this right? Why has there been only one reported case of an attempt to disqualify an IP under these sections given the amount of litigation over IP's conduct in the public domain?

12 comments:

John Tribe, KPMG Lecturer in Restructuring, Kingston Law School, Kingston University, Surrey, UK said...

Dear Stephen

This is an interesting point. Is there only one reported case because of overall Insolvency Service funding issues with regards to directors disqualification generally? Or do the IS see these sorts of issues as being more properly dealt with by the RPBs? Funding or Fiefdoms so to speak! Parliament obviously thought there was a need for the provisions. I will have a look through the Cork materials to see if there are any positions papers on the disqualification of IPs.

Adrian Walters and Abbas Mithani both read the blog - they might have a view?

cheers
John

Stephen Hunt, Partner at Griffins Insolvency Practitioners said...

Thanks John. I look forward to seeing the fruits of your research and any other comments or suggestions.

qaziq01 said...

Dear Stephen,

(1) There are many reasons why disqualification proceedings are not brought against IPs. The two principal ones appear to be:

(a) If there are breaches of the requirement to file documents – or indeed even more serious breaches – a more appropriate course of action for the SOS is to report the conduct of the IP to his professional body and leave it to the professional body to bring disciplinary proceedings. Those proceedings may result in the loss of the IP’s licence and would be a more effective – and cheaper (at any rate for the SOS!) – way to address the misconduct of the IP.

(b) Where the misconduct amounts to the commission of an indictable criminal offence, to prosecute the IP for it and leave it to the court to impose disqualification under CDDA 1986, s 2 or subsequently to bring criminal proceedings under s 2

(c) The principal reason why ss 3 and 5 is not invoked is that there is at the disposal of the SOS (through the Registrar of Companies) wide powers to secure compliance of the filing requirements by IPs in a more effective way. Although s 4 has a potentially wide application, it appear clear from Adbury Park that its ambit is narrow because it applied essentially to cases where the conduct complained of is very serious.

The above matters are discussed in detail at various places in Mithani: Directors’ Disqualification, see especially Div II Chapter 3.

(2) The reason why persons given standing to bring disqualification proceedings under s 16 (such as creditors or contributories) do not do so is because of the reasoning in Adbury Park. The principal point it makes is that it would seldom be appropriate for an applicant - other than a public body (such as the Secretary of State) - having standing to bring disqualification proceedings to, in fact, do so. If such a person thought that a person’s conduct warranted disqualification, then the proper course would be to report it to the Secretary of State and leave it to the Secretary of State to decide whether to bring disqualification proceedings. I have reservations about the reasoning in the case but an application for leave to appeal to the Court of Appeal from the decision was refused so it must follow that the reasoning stands: see [2001] EWCA Civ 1568. Quite apart from this, even if a person having standing felt that he should take proceedings against an IP, he would have to be very careful about embarking on such a course of action given the costs consequences that might arise: see Mithani: Directors’ Disqualification at VII[50] et seq. .

It is principally for these reasons, I think, that disqualification proceedings against IPs will rarely be taken. I hope this helps.

Mohammed Qasim
Partner, Head of Insolvency,
Brindley Twist Tafft & James, Solicitors

qaziq01 said...

(1) There are many reasons why disqualification proceedings are not brought against IPs. The two principal ones appear to be:
(a) If there are breaches of the requirement to file documents – or indeed even more serious breaches – a more appropriate course of action for the SOS is to report the conduct of the IP to his professional body and leave it to the professional body to bring disciplinary proceedings. Those proceedings may result in the loss of the IP’s licence and would be a more effective – and cheaper (at any rate for the SOS!) – way to address the misconduct of the IP.
(b) Where the misconduct amounts to the commission of an indictable criminal offence, to prosecute the IP for it and leave it to the court to impose disqualification under CDDA 1986, s 2 or subsequently to bring criminal proceedings under s 2
(c) The principal reason why ss 3 and 5 is not invoked is that there is at the disposal of the SOS (through the Registrar of Companies) wide powers to secure compliance of the filing requirements by IPs in a more effective way. Although s 4 has a potentially wide application, it appear clear from Adbury Park that its ambit is narrow because it applied essentially to cases where the conduct complained of is very serious.The above matters are discussed in detail at various places in Mithani: Directors’ Disqualification, see especially Div II Chapter 3.
(2) The reason why persons given standing to bring disqualification proceedings under s 16 (such as creditors or contributories) do not do so is because of the reasoning in Adbury Park. The principal point it makes is that it would seldom be appropriate for an applicant - other than a public body (such as the Secretary of State) - having standing to bring disqualification proceedings to, in fact, do so. If such a person thought that a person’s conduct warranted disqualification, then the proper course would be to report it to the Secretary of State and leave it to the Secretary of State to decide whether to bring disqualification proceedings. I have reservations about the reasoning in the case but an application for leave to appeal to the Court of Appeal from the decision was refused so it must follow that the reasoning stands: see [2001] EWCA Civ 1568. Quite apart from this, even if a person having standing felt that he should take proceedings against an IP, he would have to be very careful about embarking on such a course of action given the costs consequences that might arise: see Mithani: Directors’ Disqualification at VII[50] et seq.
It is principally for these reasons, I think, that disqualification proceedings against IPs will rarely be taken. I hope this helps.

Mohammed Qasim,
Partner, Head of Insolvency,
Brindley Twist Tafft & James, Solicitors

qaziq01 said...

Sorry, I have noticed a small mistake in the last line of my above post at 1(b. It should read 'civil proceedings under s 2'

Mohammed Qasim
Partner, Head of Insolvency
Brindley Twist Tafft & James, Solicitors

Stephen Hunt, Partner at Griffins Insolvency Practitioners said...

1.a) I think s.3 has a number of problems and I suspect that it is hardly ever used against directors let alone IPs.

It is clear that regulatory action is not a substitute for criminal or other action and one should not be confused with another. The burden of proof in a disqualification will be different from a regulatory offence, as will the wording of the offence. I would say that it is more logical for a disqualification to deal with the matter than a regulator because it provides better protection for the public.

b) In the case of an IP a conviction a loss of licence is automatic so the further disqualification may seem unecessary. However, there is strong evidence that struck off IPs are able to make a significant income as unlicensed insolvency advisors who receive payments to refer work to licence holders. A disqualification might help further inhibit these individuals.

I have suggested elsewhere that perhaps RPBs ought to routinely refer the matter to the SOS after they have withdrawn a licence so a disqualification can also take place.

c) I have heard many negative comments about Adbury. My view from reading the case is that the concept that an applicant must have an interest in the disqualification is entirely false and has no place in this sort of case. By creating that test the judge has effectively ruled out applications by most of those permitted to do so by statute. He has applied a sort of financial interest test in a disqualification.

From a practical point of view, it seems odd that I must make a D report on the directors in an insolvency but if I find the identical misconduct in an IP then there is no reporting system to the SOS. I have seen examples of insolvent trading, fabrication or destruction of records, timesheet fraud and falsification of accounting records to name just a few. There is a long raft of caselaw against which an IP might be judged against a director who has done the same. It makes little sense to instead leave it to the lottery of a self-regulatory system which by no means has the same scale of sanctions.

I began examining this area by looking at the published list of offences and punishments that are available on the insolvency service website. I wondered whether it could be said that for the same conduct that would disqualify a director an IP would only receive a fine. What do you think?

http://www.insolvency.gov.uk/insolvencyprofessionandlegislation/Table%20A%20-%20Comparison%20of%20outcomes.doc

qaziq01 said...

Dear Stephen,

1 (a): I am not sure that s 3 has ever been used since the passing of the CDDA 1986. I think the real difficulty with using s 3 to deal with filing defaults is that by the time the application comes to the court for hearing, the IP normally gets his filing obligations up to date and even if the defaults have been serious, the court usually gives the IP the benefit of the doubt and refuses to order disqualification – see Re Arctic Engineering. However, the practical difficulty of using s 3 or for that manner s 4 is the unfortunate case of Adbury Park which – essentially - only allows the SOS to bring proceedings. The SOS considers, for whatever reason, that breaches of filing requirements are really a matter for the RPB and as John rightly points out the SOS probably proceeds on the basis ‘why use public funds to bring CDDA proceedings when the RPB can achieve the same objective by bringing disciplinary proceedings.’

1 (b): I think disqualification following conviction is an extremely important safeguard and as you say may prohibit activities that may otherwise be taken once the convicted person has served his sentence. Your suggestion about the SOS considering an IP’s disqualification after his insolvency licence is withdrawn is interesting. The only basis upon which the SOS could bring CDDA proceedings would be under s 4 and as already noted by you the allegations have to be very serious before he did. Also, for some mysterious reason, s 4 applies to the now defunct administrative receiver, it does not apply to an administrator.

c) I share your concerns about Adbury Park. It is an unfortunate case and goes against the clear language of s 16. However, we are stuck with it. I also entirely agree with the difficulties about there not being adequate machinery to report an IP to the SOS. However, the SOS appears to think that a report to the RPB is the right medium for referral in such cases, although, of course, in an appropriate case, there may be a report to the Police or the DPP and also to the SOS and the RPB may also take that course of action anyway.

I agree that where an IP is dealt with by his RPB, conduct that might justify disqualification for a director might only result in a fine, although the RPB may withdraw his licence. The difficulty is the medium in which the IP is dealt with. If the conduct amounted to the commission of an indictable criminal offence and the IP was convicted for it (some of the examples you give are particularly appropriate), unless he was an administrator, he would also risk being disqualified under s 2 and losing his licence automatically as a result.

Mohammed Qasim
Partner, Head of Insolvency
Brindley Twist Tafft & James, Solicitors

Stephen Hunt, Partner at Griffins Insolvency Practitioners said...

1.a) I agree.
1.b) I have looked at the administrator point, particularly with regard to dishonest or very negligent pre-packs. I have speculated on where an Administrator would fall within the definition of officer of the company for this section. It is odd that it is missing.
1.c)If Adbury is wrong, and I think it clearly is, then a case is needed to get to COA and set out a more coherent code. I am aware of at least one case that may be doing this.

I am having real trouble with concept of leaving it to the RPB. Most of the caselaw is about lawyers and the issues of running or delaying disciplinary proceedings and the effect on civil and criminal actions and vice versa. In Archer v South West Thames Regional Health Authority Steyn J remarked that the issues in civil and disciplinary proceedings are rarely the same. Lipman Bray v Hillhouse states "it is only if there is a risk that the investigation of misconduct will somehow muddy the waters...should the SCB refrain from investigating."

In summary, from my reading of the textbooks on this, an RPB should not delay an investigation because of other action. A criminal or civil trial judge should be the only person who can call a halt to a subsidiary investigation because of its possible prejudice to the trial. I see little in the way of support for the principle of leaving it to the RPB which appear to be considered lower tribunals than any other forum. If you are going to take a licence away, isn't that best dealt with by a judge?

qaziq01 said...

Your point deals with a completely seperate matter. Adbury Park was considered by the Court of Appeal and permission to appeal refused. I cannot see too many cases being taken against IPs given that ruling. If there is to be a change in the law it will have to be by way of clarification (in the form of primary legislation) to the existing section 16 (2).

Stephen Hunt, Partner at Griffins Insolvency Practitioners said...

Have you got any links on this? I was not aware that the COA had considered it and what point was considered as grounds for appeal.

qaziq01 said...

As pointed out in my initial response, permission to appeal to the C/A was refused: see the judgment of Robert Walker LJ which is reported in [20001] EWCA Civ 1568'

Stephen Hunt, Partner at Griffins Insolvency Practitioners said...

I am told that a case has been issued by a successor IP to disqualify his predecessor using s.16. The claim must be under s.4 for a serious breach of duty. This must lead to a direct challenge to Adbury Park. No doubt we shall all hear more about it.

There was an error in this gadget