Monday, 20 January 2014 09:09

The limited company system is broken

It's good to know that, when a dodgy dealer makes off with client money and there's no record of where it's gone, they will face prosecution to the fullest extent of the law.

New figures from the Department of Business, Innovation and Skills show that the BIS Criminal Enforcement Team achieved 198 successful prosecutions in the 2012-13 financial year.

Strangely though, only 50 people were disqualified from running a limited company - meaning around 150 could potentially set up in business again immediately.

The figures show that 123 were given 'custodial sentences', but it's not immediately clear if they actually served any time - take the example below, for instance...

Mugged for a million

One dodgy dealer named only as Mr L did not keep any accounting records for his company, meaning that when his company was wound up, there was no paper trail to explain £1.1 million in cheques cashed from the company account, or further cash withdrawals of nearly £125,000.

Mr L was also unable to prove what wages, if any, had been paid to his staff or to anyone else who had undertaken work for the company.

His punishment for 'losing' over a million pounds with no trace of where it had gone? Four months' imprisonment. Suspended for a year.

That means, unless Mr L manages to set up a new company, go bust again and fail to keep any records, all within the next 12 months, it's highly unlikely that he will serve any time at all.

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Britain's broken businesses

It's impossible to tell where the £1.2 million in missing cash and cheques went - Mr L could have paid it into his own account or towards personal costs, or it may have been paid to suppliers as it should have been.

The point is, nobody knows, and this is just one case study from the almost 200 successful prosecutions - if the others are all on the same scale, that's a quarter-billion pound problem facing the UK's small business economy.

Despite this, the punishment is a fairly short jail sentence, suspended so that Mr L and his dodgy counterparts might never see the inside of a cell at all.

It's a familiar tale that's bound to be frustrating to anyone who's been affected by this kind of dodgy dealing, which can be due to anything from poor admin to deliberate fraudulent conduct.

The UK's limited company regime simply does not take strong enough action to punish those who fail in their duties as company director, or to discourage others from following in their footsteps.

Other jail terms are served concurrently - meaning several 12-month terms take a total of only 12 months to serve - which again hardly seems fair to the victims.

Until something fundamentally changes, however, there is little you can do as a supplier to any of these businesses, other than to take the usual proactive steps of checking their creditworthiness and ensuring any amounts owed to you are paid on time and in full.

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