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What can be learnt from the latest Insolvency Service criminal prosecutions?
Corporate crime analysis: Kim Potts, senior associate at Corker Binning, outlines the latest prosecution statistics from the Insolvency Service Criminal Enforcement Team and considers what these mean for practitioners.
What criminal offences is the Insolvency Service Criminal Enforcement Team (ISCET) involved in prosecuting?
On 1 January 2017, the Department for Business, Energy and Industrial Strategy’s Criminal Enforcement Team transferred to the Insolvency Service, making it the lead criminal enforcement agency for insolvency-related fraud and associated corporate misconduct. The team’s remit and focus is said to be the deterrence of fraud in companies and by bankrupts, by prosecuting breaches of insolvency and company law referred to them by other teams within the Insolvency Service, such as Companies House and other agencies.
Recent statistics published from the Department for Business Innovation and Skills (BIS) report that between April 2016 and March 2017, BIS and latterly ISCET successfully prosecuted 97 defendants. BIS/ISCET prosecute a range of offences but, unlike other agencies, such as the Serious Fraud Office, the focus of the prosecution is on breaches of company law rather than on wider offences of fraud.
Prosecutions take place for a variety of offences that involve breaching company and insolvency law. Examples of the types of offences that are prosecuted are:
• acting as a director when disqualified or adjudicated bankrupt contrary to the Company Directors Disqualification Act 1986
• fraudulent trading contrary to section 993 of the Companies Act 2006 (CA 2006)
• offences contrary to the Insolvency Act 1986 (IA 1986)
Other offences that relate to administrative failings are also prosecuted such as the failure to preserve company accounting records (CA 2006, s 389), failure to keep accounting records (CA 2006, s 387) and the failure to disclose property to the Official Receiver (IA 1986, s 353).
Recent examples of successful prosecutions released by ISCET include the prosecution of an individual for acting as a director while disqualified, the prosecution of a bankrupt individual acting as a director while disqualified, the prosecution of an individual for failing to disclose property to the Official Receiver and fraudulently removing property and the prosecution of an individual for failing to preserve company accounting records.
Can we learn anything from the recently released prosecution statistics?
Nearly two thirds of the individuals prosecuted in 2016/17 received immediate or suspended custodial sentences ranging from eight weeks to four years. This is a stark message to individuals that the court will take breaches of company law very seriously and the sentences passed to date could be said to be deterrent sentences. In addition, nearly one third of the individuals that were convicted of a criminal offence were also disqualified from being involved in the running of limited companies. It is also worth noting that in 2016/17 the Insolvency Service disqualified a total of 1,214 directors and made 430 referrals to prosecuting authorities where they believed criminal conduct had taken place.
It is apparent that the Insolvency Service are committed to continuing their pursuit of ‘rogue directors’ and that they will continue to seek ancillary orders such as director’s disqualification when convictions are obtained.
The 2016/17 Annual Report of the Insolvency Service also states:
‘We are now able to use information provided by other regulators as part of our considerations, gathering additional information where needed, rather than having to undertake fresh investigations ourselves to gather the same information.’
This presents a clear message that information sharing is taking place between regulators which could be used to bring additional criminal prosecutions.
What does all this mean for practitioners? Do you have any practical tips for practitioners in relation to these types of cases?
Practitioners need to be aware of the tools available to ISCET to pursue criminal cases against individuals. Practitioners must consider the role of ISCET when thinking about the potential liability for their clients. No longer can an individual just be concerned about a potential approach by the CPS, HMRC or the SFO—ISCET presents a real threat to individuals that may have breached company law or have acted contrary to existing prohibitions such as disqualification orders.
How does this fit in with other developments in this area of the law? Do you have any predictions for future developments?
For broader white collar criminal offences, the government has remained committed to introducing tougher laws which clamp down on offenders. The recent introduction of the Criminal Finances Act 2017 is an example of this.
The merging of the BIS criminal prosecution team into the Insolvency Service means that the Insolvency Service now has oversight of the full range of investigation and enforcement action that is being pursued. It is reflective of a commitment to continue to pursue white collar offenders. It is predicted that information sharing with ISCET will continue and will support future criminal prosecutions. It is anticipated that this will strengthen its arm in pursuing corporate officers that are suspected of committing criminal offences. Offences such as breaches of the CA 2006 are often combined on an indictment with other more substantive dishonesty offences such as conspiracy to defraud or cheat. It is likely that this will continue but that ISCET will also continue to pursue independent criminal prosecutions where they have gathered sufficient evidence to do so.
Interviewed by Alex Heshmaty.
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