What happens when a company is wound up in the public interest, but those responsible remain free to manage another business? Or when value has been transferred before insolvency, but the officeholder struggles to recover it?
The Insolvency Service’s Corporate Civil Enforcement Reforms consultation seeks to address both problems. The Insolvency Service investigates corporate misconduct, seeks director disqualification and asks the court to wind up companies in the public interest. However, much of the legal framework supporting that work is nearly 40 years old.
The consultation proposes significant changes. On enforcement, these include five-year disqualification following specified public-interest winding-up orders and transferring first-instance disqualification decisions from the court to the secretary of state. On recovery, the proposals include evidential burden changes for certain antecedent transactions, a lower threshold for extortionate credit, and the overdue inclusion of shadow directors as targets for breach of duty claims under the provisions of the Insolvency Act 1986.
The distinction between speed and efficacy matters. Faster disqualification may prevent further harm but must remain procedurally fair. Stronger recovery provisions may assist officeholders, but new liabilities do not necessarily put money into creditors’ hands. The reforms should therefore be assessed by whether they accelerate enforcement without weakening safeguards and materially improve recoveries.
Cost of faster enforcement
Proposal 1 is the consultation’s most immediate protective intervention. When making a public-interest winding-up order under section 124A(1)(a), the court would impose a five-year disqualification on directors brought to its attention, taking effect 21 days later. The initial disqualification would not depend on a separate assessment of each director’s conduct, although limited exceptions, an appeal and later proceedings for a longer period are proposed.
Proposal 3 would transfer first-instance disqualification decisions from the court to the secretary of state. Decisions would be taken separately from the investigating team, with appeals heard by the First-tier Tribunal.
The case for change is principally one of speed. The consultation reports that, in 2024/25, 81% of disqualifications were obtained through pre-issue undertakings. The average period from insolvency was 22 months for a pre-issue undertaking, compared with 37 months for a court order.
That is not a like-for-like comparison. Undertakings are voluntary, while court proceedings may be contested and evidence-heavy. The difference cannot safely be attributed entirely to judicial inefficiency.
A more streamlined route may be justified, but speed is not the only consideration. Separating investigation from decision-making and providing tribunal appeal rights would offer safeguards, though their practical sufficiency requires scrutiny. Re Lo-Line Electric Motors remains an important warning: disqualification is principally protective, but its serious and penal consequences mean that procedural fairness cannot simply be characterised as administrative delay.
Who falls within the regime?
Shadow directors already fall within relevant parts of the Company Directors Disqualification Act 1986. Existing provisions can also reach certain people who direct or instruct an unfit director. ‘Nominee director’ is not a separate statutory category determining liability.
Deverell confirms that shadow-director status depends on the practical relationship between the alleged shadow and the board, including whether directions or instructions were communicated to and customarily acted upon by the directors. Labels or influence alone are insufficient.
New information-gathering powers may help investigators establish that relationship but cannot remove the need to prove the statutory test. The effectiveness of any expanded regime will continue to depend on evidence showing how decisions were made.
Disqualification protects the public against future misconduct. It does not establish a civil claim, freeze assets or return money to creditors.
Compensation under sections 15A to 15C is separate. It requires a disqualification order or undertaking and creditor loss caused by the relevant conduct. Even then, the face value of an order records a liability to pay, not necessarily money collected or distributed.
Re Pure Zanzibar Ltd, also reported as Barnsby, illustrates the distinction. Compensation was ordered for identifiable customer losses where the insolvency process had produced no distribution. The judgment does not establish that the award was paid. Identifying assets and enforcing payment remain separate stages.
For connected-party transactions at an undervalue, the consultation proposes reversing the burden so the recipient must demonstrate that the transaction was for value (rather than the claimant proving that it was not). This may assist where relevant information is principally held by the recipient and is likely to require a connected party to explain the transaction and evidence the value provided rather than simply be responsive to the claimant’s evidence (as things effectively stand).
The court would still determine the claim on the evidence. Valuation disputes will still require documents, witness evidence and expert opinion. The remaining statutory conditions and good-faith protection would also apply. The reversal may therefore alter pre-action and settlement dynamics without necessarily improving outcomes for insolvency officeholders (and therefore creditors) litigating such claims.
The connected-party preference proposal is similarly targeted, by placing the burden on the recipient to prove that the transferring entity was not insolvent at the time of the transaction (insolvency being a key requirement to prove a preference). The significance of the change is mild, however, as in practice no insolvency officeholder will substantially rely on the presumption when bringing a claim, not least as it is rebuttable.
The extortionate-credit proposal appears more substantive. Section 244 currently requires ‘grossly exorbitant payments’ or a transaction that ‘grossly contravened ordinary principles of fair dealing’. Replacing this with a test such as whether the lending was ‘commercially disproportionate’ would lower the legal threshold. It could make section 244 more useful, though careful drafting would be required to avoid deterring legitimate rescue finance.
Expressly including shadow directors within section 212 would also fix a long-standing lacuna. Holland illustrates the problem where an individual acts through a corporate director. The amendment would remove an avoidable argument about the procedure’s scope, while still requiring proof of shadow-director status and the relevant misfeasance or breach.
Measure outcomes, not activity
The consultation points in a constructive direction. Faster disqualification could prevent further harm, provided procedural safeguards remain effective. The changes are more than cosmetic, but their substantive effect on reducing misconduct and increasing recoveries is much less certain.
More orders will not necessarily mean more compensation, and compensation liabilities will not necessarily mean money returning to creditors. Success should be measured by harm prevented, assets restored, compensation collected, sums contributed to company assets and the resulting benefit to creditors. That is the standard by which faster corporate enforcement should ultimately be judged.
Tim Symes is a partner and Jamie Seed a paralegal in the insolvency and asset recovery team at Stewarts
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