The Ethical Seesaw of Insolvency Practitioners

Following recent high-profile insolvency cases against sports stars, company directors and high-net-worth individuals, the consideration of many competing interests has created an ‘ethical seesaw’ of professional obligations for Insolvency Practitioners.

While the actions of Insolvency Practitioners can sometimes face criticism for seeming overly harsh and personally invasive, their practice is crucial in upholding a fair business environment, including personal tax obligations. Regardless of the way in which they are perceived by many, their role is crucial to ensure that those who flout the rules are brought to book, by being made to pay what they owe as well as facing sufficiently-robust sanctions to avoid repeat occurrences in the future.

As a fundamental tenet of a properly functioning, tax-based economic system, it is incumbent on every member of society to pay their taxes promptly and in full, in order to fairly contribute to the outgoings of the country. Those who evade this moral and fiscal responsibility must therefore be held to account to avoid the burden falling on the taxpayer, with Insolvency Practitioners playing a crucial part in ensuring wrongdoers face justice.

The recent trial of Boris Becker, in which the former tennis champion was handed a prison sentence of two and a half years for hiding millions of pounds of assets and loans to avoid paying debts, highlights how no one is above the law. The highly-publicised case was paramount for the industry, with the verdict acting as a strong deterrent to those illegally profiting from tax evasion across the United Kingdom. The securing of Becker’s conviction was a rare success, coming at a time when court victories had been thin on the ground for the Insolvency Service’s prosecution department, and thus provided a much-needed shot in the arm for the organisation.

In Becker’s case, he had gone to great lengths to hide assets belonging to him, including a share of a property, shares in a publicly-listed technology company, and a bank loan worth £1.1m with interest. Despite claiming that, far from funding a “lavish lifestyle”, his money had been spent solely on child support, rent, and legal and business expenses, Becker was found to have acted wilfully and with intent to deceive, resulting in the heavy sentence he received following the jury’s guilty verdict.

Another recent seminal case involved company directors, professional sport players and other wealthy individuals trying to avoid paying tax by putting money into Employee Benefit Trusts, a practice that the Supreme Court ultimately found to be illegal. The Supreme Court’s ruling resulted in significant financial impairment for those caught carrying out the illegitimate scheme, as the verdict forced them to find monies to repay HMRC, resulting in bankruptcy for many of the defendants.

Interestingly, those affected were arguably given poor financial advice by various well-known financial advisory companies, but there is no sign that any prosecutorial action against those advisors has to date been successful. While the role of Insolvency Practitioners is generally to seek remedies after the event, there is also a rationale for more stress to be put by regulators on prevention rather than cure. Were advisory companies sufficiently deterred from offering poor or illegitimate advice in the first place – whether by the threat of financial penalties or criminal convictions – there would doubtless be far fewer instances of evasion requiring post-hoc action by Insolvency Practitioners.

The inclination of most Insolvency Practitioners is, as would be expected, to resolve situations in as non-contentious and constructive manner as possible, according to the circumstances of each case. However, often the malfeasance of their opponents means that litigation is an inevitable and necessary route to take, in order to make recoveries on behalf of creditors - with HMRC often the largest creditor.

If a significant number of people are allowed free rein to avoid paying tax, an increasing burden is placed on the shrinking pool of honest taxpayers who are left to carry the can. As such, the role of Insolvency Practitioners continues to serve a vital interest to the nation at large, helping to recover funds illegally diverted from the public purse, and acting as a pre-emptive deterrent to would-be tax evaders when secured convictions are publicised via the press and other channels.

Insolvencies are always a stressful time for those involved, whether creditor, debtor or those tasked with the role of achieving fair settlement for all parties. Insolvency Practitioners are keenly aware that there is always a fine line to tread to avoid unnecessary distress and upset en route to a case’s conclusion. At the same time, success stories such as the conviction of Boris Becker highlight the need for tough probing of defendants in order to fully prove, and win, the type of case which benefits all honest taxpayers, and protects the integrity of the entire taxation system.

Tom Davey is a co-founder and director of Factor Risk Management.

www.factor-risk.com