Cuts to the budget of the Insolvency Service have resulted in the agency focusing on “easy” cases and “low hanging fruit” involving overdue debts to HMRC, according to law firm Hugh James LLP.
However the Service argues it has a “rigorous” method in place to identify the cases it pursues.
Hugh James has compiled data showing the level of director disqualifications due to tax debts owed to HMRC increased 62% between 2012 and 2013, up from 52% in 2011-2012.
Michael O’Maoileoin, a senior associate at Hugh James, said: “Proving that an insolvent company has run up a large debt to HMRC is pretty straightforward, but proving more significant wrongdoing may take months of painstaking work by forensic accountants.
“Since its budget was cut, the Insolvency Service simply can’t afford to do as much of that kind of work as it used to. It is still bringing in the same amount of low-hanging fruit from tax debts, however.”
Disqualifications based on other malpractices such as criminal activity, have decreased during the same time periods, from 259 in 2010-11 to 54 in 2012-13.
Disqualifications for trading while insolvent fell from 40 to just one over the same time period.
O’Maoileoin said: “There’s a risk that the full extent of bad practice by dishonest and incompetent company directors will go undocumented and unpunished, and they will be back running companies shortly afterwards.
“This can be very frustrating for insolvency practitioners who uncover signs of wrongdoing, refer the matter to the Insolvency Service and then find that it doesn’t have the capacity to do as full an investigation as it would like.”
The Insolvency Service currently employs approximately 2,000 staff after budget cuts in 2011. In February 2013, a Business, Innovation and Skills (BIS) Committee report found the Insolvency Service was under resourced, undermining stakeholder confidence in the Service’s work.
An Insolvency Service spokesman said: “The Insolvency Service takes all allegations of misconduct or negligence by company directors seriously and investigating wrong doing is a priority. On average we disqualify 1,200 directors a year. In the last 10 months to January 2014, we disqualified over 1,053 directors.
“We have a well-defined and rigorous process to determine which cases should be investigated. Not all investigations will lead to a disqualification, we have to find evidence that we can put before a court to support the making of a disqualification order.
“Over 10% of disqualifications are for 11-15 years, on average the disqualification period is around 6 year.”