Legal Claims Against Directors following Liquidation – What you need to know. – Guest blog post from Steven Mather Solicitor

This is a guest blog post from Steven Mather Solicitor – The Right Lawyer for You and Your Business™

 

Firstly, thanks to Gary and Jamie and everyone at PBC for inviting me to guest blog on their website. I’ve worked with them a number of times and I’m impressed by how well they know their stuff, but also the commercial and pragmatic approach they take.

I’m a commercial solicitor based in Leicester and over the last 10+ years I’ve acted on both sides of insolvency disputes – acting for insolvency practitioners like PBC as well as acting for Directors personally trying to defend the claims.

When I talk about insolvency claims, the main ones that I see frequently are:

  • Misfeasance
  • Antecedent transactions
  • Directors Loan account recovery

Misfeasance claims are quite rare, but in them an Insolvency Practitioner (IP) will seek to recover funds from directors personally where they have committed some serious misfeasance which has harmed or damaged the business.

One thing I’ve realised in all the cases I’ve dealt with is that in many small businesses, the director is the shareholder and so they think they can do what they please when they please. I mean, that’s a benefit of being self-employed, right?! Anyway, what most directors do not realise is that the Company is its own living breathing (almost) legal entity and that as director they have duties (called ‘fiduciary’ duties) many of which are also set down in statute, which they owe to the Company. When a company goes into liquidation, it is the IP who then make the decisions on behalf of the Company, and so if the Company has suffered loss, the Company doesn’t care that you, the director, was “a good mate and we go back years”. The company is entitled to take action against the director to recover its loss.

Unlawful and Wrongful Trading are two other types of claims that can be brought against Directors and is aimed at pinning liability on directors where they ought to have known the business was insolvent.

Antecedent Transactions are very common.  These claims seek the reversal of payments made/received by the Company prior to the liquidation which were either:

  • At an undervalue – e.g. selling a Lorry for £1000 when it was worth £65,000
  • A Preference – paying a mate or director before making payments to other creditors.

Both types of claims are quite easy to succeed on acting for IP’s. All that needs to be showed is that the payments were made/received and there was a detriment to the Company/Creditors.

If you’re a director, knowing your back is against the wall, your best bet is not to try to bail out but speak to experts like PBC to get solid advice on the best steps for the Company.

 

Directors Loan Account claims

Most businesses operate directors loan accounts. If the director has to put some money in to support the business, their DLA will be in credit and that’s not a problem.

However, they are also used to extract money out of a business in a way which is not payroll/salary or dividends. Sometimes, it might even be unwittingly used, as accountants allocate certain expenditure of the business to the director’s loan account. Most of the time though, having an overdrawn loan account is because the directors kept taking money out of the business when there was not enough profit properly to declare a dividend at the end of the year.

The result is an overdrawn loan account. If you enter liquidation with an overdrawn loan account, you can rest assured that the IP will be asking you to repay it.

So what, as a director, should you do if you are faced with a claim in relation to your directors’ loan account? There’s actually very little you can do to dispute it. As they generally feature in the company’s accounts, which the directors sign, the Courts will say that “ignorance” of how its made up is not a defence. You might be able to argue that some of the debits against the DLA were not personal expenses and were legitimate business expenses or expenses incurred in your carrying out your role as director, but that requires a more forensic analysis of the account entries.

In short, your best option is to speak frankly with the IP and seek to reach an agreement on a repayment figure and potential repayment plan. Most IP’s are savvy enough to realise that many directors are broke by the time their company goes into liquidation, so doing what you can financially will usually make them go away.

Insolvency Claims are complex though and my best advice would be for any director facing any type of claim to speak to an independent and experienced insolvency litigation solicitor.

 

 

About the Author

Steven Mather is a Commercial & Business Solicitor based in Leicester. He has helped thousands of clients with legal issues worth millions of pounds. He is experienced, approachable and recommended. You can check out his website at https://www.stevenmather.co.uk

Close companies: Loans to participators: Members Voluntary Liquidations (MVL)

Close companies: Loans to participators: Members Voluntary Liquidations (MVL)

These are solvent liquidations. From the date of the liquidation the shareholders are entitled to receive the value of the net assets of the company (i.e the company owes them the relevant value). At the same time the shareholders owe the company the amount of their overdrawn loan accounts.

The shareholders could therefore repay the company the full amount that they owe, in which case they will be entitled to receive the full amount of the value of the net assets as a capital distribution.

Otherwise, they can set off the value of the assets due to them against their debt (the balance of the loan account) and only withdraw, in cash, the net amount.

Where the two debts (company debt to shareholder and shareholder debt to company) are set off in this way, this will constitute a repayment of the loan account for the purposes of relief under CTA10/S458. This is because where a creditor accepts something of equal value, the debt is discharged by satisfaction not by release. There is therefore no question of ITTOIA05/S415 applying.

It is well-established that where a sum is owed by one party to a second party and another sum is owed by the second party to the first, both debts may be cleared by means of a set-off and that is exactly the same as if both sums had actually been paid/repaid.

Example

A participator owed the company £1,425,000 by 30 May 2017. The company went into Members Voluntary Liquidation on 1 June 2017. The net assets, including the overdrawn loan account totalled £5,300,000.

On 1 June 2017 the liquidators declared an interim distribution in the liquidation of £1,425,000 per £1 ordinary share, giving a total distribution at that date of £1,425,000. This was not paid out in cash to the shareholder but was credited to his loan account. It would be a capital distribution within TCGA92/S122. This is not a release of the loan, it is a repayment of the loan. There can be no charge under ITTOIA05/S415.

Likewise any further distributions in the liquidation up to the total balance of the net assets will also be capital distributions.

Mediation – Listen to their story

People Sitting around a table discussing

 

I want to tell you my story

Hands up if you have been in an argument.  What usually happens?  They raise their voice so you raise yours and so on until it becomes a shouting match and the cause of the debate gets pushed aside while other issues come to the fore.  Sound familiar?

Common claims parties say to me in the run up for a mediation include:

  • The matter is complicated; or
  • Although willing, I am not sure how this can be settled; or
  • The other side have been doing something untoward/fraudulent etc.

One of the problems is the longer a dispute is allowed to run the more the core reason for that dispute pales into the background and claims and counterclaims are thrown back and forth.  In shareholder disputes it can get worse as disputing shareholders make allegations of misconduct, then act on those beliefs, forgetting their own statutory duties owed to the company.

So, with the above in mind, how is it that more often than not disputes reach a settlement in mediation?  I read something recently that said,

“The question is not how to avoid conflict but how to do it well.”

As I was once told, we have two ears and one mouth; we have been designed like that for a reason.  All too often in a dispute scenario we forget the core basics of listening and talking by resorting to raising our voices, hoping the one that shouts loudest will win the day.  Unfortunately, all it generally achieves is a steadily increasing legal bill, court intervention and an unwanted distraction to your business.

A mediator re-introduces the core communication attributes back into the forum and it is surprising how getting each party to listen to the story of their opponent extracts the facts, which ultimately leads to reaching a common position.  This usually leads to settlement as the parties get to understand the facts behind the cause of the dispute from their opponents’ point of view.

Refusal to mediate or, simply agree to mediation so you can “Tick the alternative dispute resolution box” can be dangerous territory.  If a court take the view you could have avoided court intervention by settling through mediation you may be at serious risk to an adverse costs order as many have already discovered to their cost.  Therefore, if there appears to be a chance of settling a dispute you should consider mediation at the earliest practicable date.

Should you have an insolvency-related issue or a corporate dispute then please contact Gary Pettit at PBC Business Recovery & Insolvency on (01604) 212150 (Northampton office) or (01234) 834886 (Bedford office). Alternatively, you may send an email to garypettit@pbcbusinessrecovery.co.uk or access our website at www.pbcbusinessrecovery.co.uk

A squeeze on tax avoidance

gary-pettit

Someone once told me, “I enjoy paying tax because, if I am paying tax then I must be earning money”.

In fairness, most people would agree with the above.  Unfortunately, there has been a long-running battle for HM Revenue & Customs in catching up with those who see it differently.

The Government are planning to introduce policies within the Finance Act 2019-20 that proposes to make directors personally liable for company tax liabilities where the following five conditions are met:

  1. Where a company that is subject to an insolvency procedure or there is a serious risk that it will be;
  2. The company has engaged in tax avoidance or evasion;
  3. The person responsible for the company’s conduct enabled or facilitated it, or benefitted from it;
  4. There is likely to be a tax liability arising from the avoidance or evasion;
  5. There is a serious possibility some or all of that liability will not be paid.

The objective of these policies is aimed at those:

  • Who try to exploit the insolvency procedure to avoid or evade taxes and/or payment of taxes and duties;
  • Repeatedly accumulate tax debts without payment by running them through a succession of corporate vehicles which are made insolvent;
  • Try to sidestep penalties for facilitating avoidance and evasion by going insolvent.

Based upon the five conditions, you can see the policies are aimed at those who act in a deliberate manner of tax avoidance/evasion.  It is not aimed at those who have (say) missed the payment deadline for last month’s PAYE prior to entering into an insolvency procedure or, your overall circumstances demonstrate, as a director, you have acted honestly and fairly to creditors as a whole.

While many have criticised the proposed policies, HMRC have already been increasing investigation activity and a freedom of information request revealed in the 2018/19 accounts an additional £34.1 billion was generated from tackling tax avoidance, evasion or, simple non-compliance.  The first 3 months of 2019, alone, has seen these investigations recover more than £20 million.

The key message that should be derived from the proposed policies is if you feel there is an increasing difficulty in managing the company tax affairs then seek early advice.  HMRC are generally understanding where they learn of a possible issue at an early stage and it is better to engage with them early rather than wait until enforcement procedures commence.

Should you have an insolvency-related issue or a corporate dispute then please contact Gary Pettit at PBC Business Recovery & Insolvency on (01604) 212150 (Northampton office) or (01234) 834886 (Bedford office). Alternatively, you may send an email to garypettit@pbcbusinessrecovery.co.uk or access our website at www.pbcbusinessrecovery.co.uk

 

Golf Day Raises £2051 for Charity

At PBC we are delighted that our Golf Day held in September raised a fantastic £2051 for the Ronald McDonald House Charities. Together with other events we have been able to donate £3761 to such a great charity this year.

PBC Golf Day – in aid of Ronald McDonald Charity Houses

What a glorious day to hold a Golf Day. The sun was shining, Overstone Golf Club was in excellent condition and the event was supported by a great bunch of local Businesses and Professionals.

PBC with the support of Overstone Golf Club hosted 12 teams of mixed ability golfers. Scoring was good with a number of players under handicap. Pink was the colour of the day when it came to the Team Ball competition. It has to be said that this received mixed comments. Pressure of the Pink Ball took its toll on 10 out of the 12 teams as only 2 Pink balls made it home.

The day was all in aid of Ronald McDonald Charity Houses and we would like to thank all those who attended and contributed to the success of the day. We will be announcing the total amount raised for Charity soon.

A round of golf always brings out the competitive nature and on the day we had 5 prizes to play for…….

Congratulations to:

Guy Zarins: Nearest the Pin on Hole 4
Phil Hardcastle: Nearest the Pin in 2 on hole 15
Duncan Nicholson: Winner of the Charity Hole draw
Team Ball: Paul Currie, Tom Low, Jonathan Dolby & Danny Roberts

And the Individual Winner ***** PAUL CURRIE ***** with an impressive score of 43

We are looking forward to Next Year and hope to see everyone again for the 2020 Golf day – details to be announced

TAX AVOIDANCE

HMRC Logo

A squeeze on tax avoidance

Someone once told me, “I enjoy paying tax because, if I am paying tax then I must be earning money”.
In fairness, most people would agree with the above. Unfortunately, there has been a long-running battle for HM Revenue & Customs in catching up with those who see it differently.
Following consultation, legislation received Royal Assent within the Finance Bill 2019. Entitled, “Tax abuse using company insolvencies” it provides for a person to be jointly and severally liable for amounts payable to HMRC where at least one of the following five conditions are met:
1. Where a company that is subject to an insolvency procedure or there is a serious risk that it will be;
2. The company has engaged in tax avoidance or evasion;
3. The person responsible for the company’s conduct enabled or facilitated it, or benefitted from it;
4. There is likely to be a tax liability arising from the avoidance or evasion;
5. There is a serious possibility some or all of that liability will not be paid.
The legislation also provides for where there has been repeated insolvencies and non-payment.
The objective of this legislation is aimed at those:
• Who try to exploit the insolvency procedure to avoid or evade taxes and/or payment of taxes and duties;
• Repeatedly accumulate tax debts without payment by running them through a succession of corporate vehicles which are made insolvent;
• Try to sidestep penalties for facilitating avoidance and evasion by going insolvent.
One example I have seen included directors who had adopted a policy of VAT evasion where they have both been the recipients of 6-figure personal liability notices.
Before you panic this legislation is aimed at those who act in a deliberate manner of tax avoidance/evasion. It is not aimed at those who have missed the payment deadline for this month’s PAYE (provided you do still pay that is) or your overall circumstances demonstrate, as a director, you have acted honestly and fairly to creditors as a whole.
The key message that should be derived from this legislation is if you feel there is an increasing difficulty in managing the company tax affairs then seek early advice. HMRC are generally understanding where they learn of a possible issue at an early stage rather than wait until the need for enforcement procedures commences.
Should you have an insolvency-related issue or a corporate dispute then please contact Gary Pettit at PBC Business Recovery & Insolvency on (01604) 212150 (Northampton office) or (01234) 834886 (Bedford office). Alternatively, you may send an email to garypettit@pbcbusinessrecovery.co.uk or access our website at www.pbcbusinessrecovery.co.uk