The warning was set out in Prospect's written evidence to an inquiry by the House of Commons Business, Innovation and Skills Committee into the roles and functions of the Insolvency Service.

The inquiry was announced on 30 November 2011 and will focus on regulation of the private sector, and the effects of the reductions in staff and budgets caused by government spending cuts.

Prospect's evidence, drawn up in consultation with its Insolvency Service branch, also draws attention to the consequences of a flawed funding model for the network of Official Receivers, who are public servants that are bound by law to investigate all court ordered insolvencies.

Over 470 staff left the Insolvency Service in April 2011 in a voluntary exit scheme, with another 100 posts to be lost imminently.

The BIS Committee is interested in the impact of cuts on the ability to disqualify incompetent, reckless and fraudulent directors. The Insolvency Service has calculated that each disqualification saves £88,000 of future losses to creditors.

Prospect has told the Select Committee that it will give oral evidence if required.