DTI under attack on rogue directors law: Pauline Springett reports on worries over the rare use of the disqualification penalty

INSOLVENCY practitioners are frustrated by it; the Forum of Private Business says it is 'a major problem'; the Institute of Credit Management views it with 'cynicism and resignation'; and the Institute of Directors admits to being unhappy.

The offending article is the Company Directors Disqualification Act, introduced at the same time as the revamped Insolvency Act in 1986. Its aim was to clamp down on crooked company directors but critics say it has not been sufficiently used. Peter Martin, chairman of the Institute of Credit Management, sums up the problem: 'There have not been enough disqualifications under the Act to provide the necessary deterrent.'

Critics are now worried that the Department of Trade and Industry is receiving many adverse reports on company directors that it does not, or cannot, follow up. Directors who ought to have been investigated and possibly disqualified are left to prey on the unsuspecting business community and ordinary people.

The Forum of Private Business, a pressure group for small companies, believes that its 20,000 members are suffering as a result of the weak application of the Disqualification Act and intends to lobby the Government on the issue.

'The law might be there but it is certainly very ineffectual,' a spokesman said. 'There is very little protection for our members who provide goods and services in good faith. People are losing terrible amounts of money to rogue directors who walk away scot-free.'

Even if the Government listens, change will come too late for the creditors of a money-lending business on the south coast that went under last year. The business lent money to residents of local council estates at an annual interest rate of more than 1,000 per cent. Despite this inflated charge, the company still managed to fold.

Immediately before the collapse, the managing director had sold the main asset, a property, so putting it out of the creditors' reach. Predictably the money paid for the building did not find its way into the company's coffers.

The insolvency practitioner dealing with this case is still angry that it was not investigated and recalls the letter he received from the DTI after he had sent in his adverse report.

'They said while it was clear that the conduct of the director may be considered unfit, it was not in the public interest to pursue the matter. That really stuck in my craw,' he said.

This is not an isolated experience. Insolvency practitioners accept that the DTI cannot justify pursuing cases unlikely to stand up in court, or where the director is considered too old or infirm to pose a threat for the future, but they insist that many directors go unpunished.

Reports on the conduct of directors are filed with the DTI by insolvency practitioners and official receivers. If the DTI thinks the matter is in the public interest it will ask the practitioner for more information and will build a case for presentation to the court where it applies for a disqualification order.

Since the Act came into operation there have been about 300 disqualifications a year. But the number of unfit conduct reports submitted to the DTI has been rising because of the increase in corporate collapses. It topped 6,500 in the financial year 1991/2.

The DTI argues that it is impossible to say whether this is the 'right' number of disqualifications. Insolvency practitioners are convinced it is too low. Ian Bond, a partner with the insolvency specialists Cork Gully, says he is aware of adverse reports that have not been acted on by the DTI.

'I would like to see more disqualifications,' he says. 'The numbers at the moment are disappointing. I don't know if lack of DTI funding is the reason. But I really do believe we need a number of high-profile disqualifications to concentrate the minds of directors.'

Not surprisingly the DTI will not admit that it cannot cope with the volume of reports it receives. But it confesses that it could deal with more cases if it had more resources.

The DTI keeps a blacklist of directors on whom it has received adverse reports but it is not available to the public. The department is also aware that the system is open to abuse and has noticed, for instance, that the excuse of being too unwell to face the court has presaged some miraculous recoveries. The latest ruse to avoid investigation is to flee the country - Australia is a popular choice.