Getting to grips with insolvency

It is now more than a year since it was reported that outspoken TV chef and pub owner Gordon Ramsay had breached the terms of a £10.5m loan and had been advised by his bank to place his company into administration.

While Ramsay was able to raise the finance he needed to avoid insolvency, many less well-known businesses have not been so fortunate.

Officially the UK is now technically out of recession, but the fragile economy and more precisely the health of all our small and medium-sized enterprises remains a hot and often controversial topic, not just for the new government but in the minds of the general public.

Never has this been more evident than within the hospitality industry. In 2009 more than 2,000 businesses failed in the sector alone, 40 per cent of which were bars ­ five per cent up on 2008.

A further 340 tried to save their businesses through procedures that included receiverships, administrations, and company voluntary arrangements.

With so many businesses leaving the industry because of financial failure it is more important than ever that everyone from company director to employee understands how the insolvency regime works. 

How the process works

Our chief executive, Stephen Speed, outlines our service as aiming ³to create a fair and straightforward environment for businesses struggling with debt, while working to secure the best results for creditors².

We do this through a statutory framework ­ mainly using the Insolvency Acts 1986 and 2000, the Company Directors Disqualifications Act 1986 and the Employment Rights Act 1996. Our staff are based across England and Wales, responsible for administering and investigating the affairs of all bankrupts, companies, and partnerships wound up by the court and establishing in the process why they became insolvent.

At the service we are responsible for regulating the insolvency profession, advising the government on insolvency law and taking action against wrong-doing or abuse through the investigation and enforcement team ­ something that is critical to maintain business confidence. We take effective action when misconduct is discovered and ensure that dishonest, negligent and incompetent people are excluded from the business world.

As in the case of one Surrey-based wine investment company which, following an investigation by our Company Investigations unit, was found to offer potential investors wine at prices up to 90 per cent higher than offered by other sellers. People who purchased the wine were therefore likely to have suffered loss or at the very least not achieved the return on their investment that the company¹s literature had promised.

The business refused to co-operate with our investigation and it was unclear if any wine had ever even been received by its customers. Following a hearing at the High Court the company was wound up in the public interest.

This case represents a classic Œtoo good to be true¹ opportunity with investors seeing no return on their capital.
Protecting the public

We are committed to protecting good businesses and the public from companies such as this. However, it is not just companies which can be stopped from trading; we will also, where appropriate, use our powers to disqualify individual company directors.

Each month, more than 100 company directors are disqualified for wrong-doing, fraud or negligence, or other misconduct. Once disqualified they cannot take part in the formation or management of any company for as long as 15 years.

The service also investigates individuals who become bankrupt ­ some 93,000 last year. Where the investigation concludes that a bankrupt has acted in a dishonest, reckless or culpable way, they can be made subject to a bankruptcy restriction order which would limit their ability to incur credit in the future.

In once case, after the collapse of his business, a Birmingham pub owner made a legitimate claim for redundancy. But during the course of the next three months he went on to submit 12 different claims using a number of fake identities. He claimed a total of £45,000, which was paid into different bank accounts. After the investigation by the service he was arrested by police and charged with 12 counts of fraud and has also received a bankruptcy restriction order.

In the current economic climate it is more important than ever that good businesses have the help they need to remain solvent.

However, if a business does get into difficulty it is critical that it, its employees and the wider hospitality industry understands the insolvency regime, the measures that can be taken to protect the company, and its own statutory responsibilities.

Robert Burns is head of Insolvency Service Investigation and Enforcement Services ​

More information

For further information on insolvency, including how to wind up a company that owes you money, please log on to www.insolvency.gov.uk

Check out the disqualified director database at www.insolvency.gov.uk/doitonline/ddbase.htm

A further search of individual bankrupts can be found at www.insolvency.gov.uk/eiir/

Report concerns about directors' activities to the Insolvency Enforcement Hotline on 0845 601 3546.