Are we heading for an economic cliff?

How prepared are you for when the COVID-related financial support and other interim measures fall away? 

With the impact of COVID the Government laid down, what was to become the Corporate Insolvency & Governance Act 2020 (“CIGA”) which became law in June 2020 and had retrospective effect to March 2020.  CIGA was seen as a balancing act between the detrimental impact the severe restrictions would have for trading on one hand against shielding business from depleted cash flow on the other.

In January the House of Lords debated over the continued restrictions on creditor enforcement imposed by CIGA.  These restrictions were intended to expire on 30 September but were extended to 31 December and subsequently 31 March 2021.  In general, the restrictions prevented the service of statutory demands/winding up petitions, landlord enforcement and suspended wrongful trading provisions.  As a result of these restrictions, the latest data suggests an unprecedented level of debt has accrued, including over £4.5 billion in rent arrears.

Furthermore, there is an estimated £70 billion of Government-backed lending, together with deferred tax liabilities, which is most likely going to make HM Revenue & Customs (“HMRC”) a major creditor in most insolvencies, resulting in them having significant influence on the destiny of businesses.  This influence is made all the greater following the upgrading of HMRC to secondary preferential status when formal insolvency is required.

So, what is the good news?

Well, the Government have announced an easing of bounce back loan repayments in an effort to ease cash flow demands.  In addition, recognising the resulting position of HMRC and the detrimental effect COVID has caused generally, the House of Lords have stressed HMRC need to be co-operative and engaging with a supportive approach on proposed COVID-affected corporate restructuring.  Clearly, time will tell on this recommendation and I would say this commercial understanding needs to be wider by including landlords and credit controllers who are all seeking recoveries.

I asked in the title whether we are heading towards an economic cliff.  Personally, I would suggest “Normal” (whatever that is) will not occur over night.  So, rather than a cliff as COVID restrictions ease off, maybe the economy will experience a gradual slope.

Whatever the outcome businesses need to be pro-active.  Review your cash flow and look at ways of reducing overheads, particularly while your turnover gradually starts to return to pre-COVID levels.  You should engage with your creditors and for those who are owed money, a commercial understanding is going to be the order of the day.  If all fails, the advice has to be to seek early advice.  It is no coincidence those who do seek early advice find they have more options available then those who leave it until the last minute.  As a Scout will say, “Be prepared.”

Should you have an insolvency-related issue then please contact me 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

Can you claim business interruption?

Have you suffered financial loss due to the COVID-19 pandemic and the resulting restrictions imposed by Government?

On Friday 15 January 2020 the Supreme Court released their judgment in the case of Financial Conduct Authority -v- Arch Insurance UK) Limited and others where they upheld the lower court decision that COVID-19 was a notifiable disease for business interruption purposes.

Businesses need to check their insurance policies to see if their cover is up to date and includes business interruption. Once satisfied on these points they may begin to consider what (if any) losses the business has suffered as a direct result of COVID-19. Unfortunately, this may have come too late for some businesses who may need insolvency intervention, although the court have made it clear insolvency is not grounds in itself for rejecting a claim as you need to consider the business trend following the effects of the pandemic.

The judgment, itself, goes on for 112 pages so this editorial is merely going to provide a broad overview.

The insurers’ arguments

The principal arguments appear to be:
• COVID-19 was excluded because any loss caused by an occurrence of a notifiable disease is excluded for cover where the disease amounts to an epidemic (“The disease clause”).
• Prevention of access to trading premises was not imposed by law (“The prevention of access clause”).
• Insurers’ are not liable to indemnify policyholders for losses which would have arisen regardless of COVID-19 (“The trend clause”).
• The Orient-Express Hotels decision.

The court interpretation

The disease clause.
The court noted policies will list notifiable diseases but may provide for adding to that list where a new disease emerges that is a threat to public health. The court saw no merit in the insurers’ argument as that would make overall policy wording inconsistent.

The prevention of access.
While the court acknowledged it is for the policyholder to prove their loss as a result of COVID-19, prevention of access to trade premises as a result of local authority intervention was sufficient to trigger claims and did not require a law ordering closure. It was also accepted prevention of using trade premises needed to be in compliance with Government instructions and social distancing rules and not purely on grounds of being a hinderance.

The trend clause.
This was designed to assist in quantifying losses. In dismissing the insurers’ argument, the court said the standard turnover and gross profit derived from previous trading is adjusted only to reflect circumstances which are inextricably linked with the insured peril. It was accepted some of the adjustment when comparing past trading trends should include circumstances unrelated to COVID-19 such as a change in management.

Orient-Express Hotels Ltd -v- Assicurazioni Generale SPA

The insurers appear to place reliance on this case, being the only known reported case on business interruption claims. In short, the hotel was insured in the UK but was based and operated in New Orleans. It was severely damaged by hurricanes Katrina and Rita and claims were made for losses suffered as a result of the damage and damage to the surrounding area (of the city) resulting in a decline of income from reduced visitor numbers. At both the arbitration and arbitration appeal the decision went in favour of the insurers whereby losses resulting from the damage to the hotel applied. The losses caused by the surrounding city damage fell outside of the policy.

The Supreme court disagreed and made it clear, had the matter gone to court it would have over-turned the decision of the arbitrators. In reaching this conclusion the court said business interruption arose because both (a) the hotel was damaged and also (b) the surrounding area of the city was damaged by the same hurricanes so were concurrent causes, each of which was, by itself being sufficient to cause the relevant business interruption but neither of which satisfied the ”But for” test because of the existence of the other.

In short, Prevention to access trading premises as a result of COVID-19 guidelines were concurrent causes for business interruption. You would not have been prevented from access to your trade premises had COVID-19 not arisen, causing the “Stay home” and social distancing instructions.

CONCLUSION

Firstly, it must be placed on record, the insurers involved with this vital test case scheme volunteered to be party to the matter under a framework agreement on 1 June 2020. With over 370,000 potential claims worth in excess of £1.2 billion, it was recognised that both the insurers and the policyholders needed clarity. Indeed, two working groups were also allowed to join the case as interveners.

Putting it bluntly, the insurance companies lost and have been ordered to treat COVID-19 as a notifiable disease for business interruption purposes. Indeed, the court said, “It is hoped that this determination will facilitate prompt settlement of many of the claims and achieve very considerable savings in the time and cost of resolving individual claims.”

Should you have an insolvency-related issue then please contact me 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

What superpower would you have if you could?

What superpower would you have if you could?  Invisibility? Being able to fly? Teleportation?  Or how about being able to re-write the law to suit yourself and ensure you are always on the right side?  That’s exactly what the government has done with two measures in the Finance Act 2020.

 

The first is the position where HM Revenue & Customs rank for dividend purposes.  For insolvencies commencing after 1 December 2020, HMRC shall rank as a secondary preferential creditor for the majority of taxes owed by the insolvent party where that party has acted as a collector of taxes.  This includes PAYE, VAT, CIS and employee’s NI contributions (but not any penalties associated with those debts).  “Secondary preferential” means their preferential status ranks after existing preferential claims (generally employee claims for wages and accrued holiday pay) but in priority to the holder of floating charge security.  HMRC will remain an unsecured creditor for other taxes including corporation tax and employer’s NI contributions.  To summarise, HMRC have therefore jumped to pretty much the top of the priority order in one fell swoop.

 

As a direct result of this, The Association of Business Recovery Professionals estimate that future new lending by banks will be £1 billion less, making recovery and turnaround harder.  To make things worse, the ability to use a formal insolvency vehicle (such as a company voluntary arrangement) may no longer be a viable option as.  the unpaid taxes rank ahead of the general body of creditors, reducing the amount available to unsecured creditors.  Furthermore, it is likely there will be a significant HMRC debt as generally HMRC are the first creditor businesses and individuals stop paying – indeed this is one of the Government’s main reasons for introducing the measure.

 

The second new measure contained within the new law is where HMRC can issue personal liability notices against company directors following tax avoidance and evasion penalties and repeated insolvencies.

 

There are various conditions which must be met before HMRC can issue personal liability notices, but all involve scenarios where the company is insolvent (or likely to be).  In the tax avoidance and evasion cases, the directors can be held liable for all of the tax avoided (and any penalties as a result).  However, in the circumstances following repeated insolvencies the directors can be held liable for debts of the failed companies as well as for any future tax debt of a new company.

 

Before you come over all Lance Corporal Jones (Don’t 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.

 

Having said that, 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, or liabilities as a whole, then seek early advice.  Creditors, including 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.  In addition, the earlier advice is sought the more options there are available.

 

Anyone with an insolvency related issue can contact PBC on 01604 212150.  Our initial consultations are always free, confidential, impartial and no obligation.

Jamie Cochrane

Is Corporate Recovery Doomed?

There is a saying about giving with your right hand but then take back with your left.  Well, that appears to be the case where the Government are concerned.

Firstly, the Corporate Insolvency & Governance Act 2020 became law and is intended to assist businesses recover post the COVID-19 pandemic.  While I am sceptical about this, any remote positivity was dashed with the Finance Act 2020 receiving Royal Assent on 22 July 2020.  The significance of this is the re-introduction of Crown preferential status on all insolvencies.  This is despite significant objection from various parties and some MPs.

With effect from insolvencies commencing after 1 December 2020, HMRC shall rank as a secondary preferential creditor for the majority of taxes owed by the insolvent party where that party has acted as a collector of taxes.  Therefore, this includes PAYE, VAT, CIS and employee’s NI contributions (but not any penalties associated with those debts).  Secondary preferential means their preferential status ranks after existing preferential claims (generally employee claims for wages and accrued holiday pay) but in priority to the holder of floating charge security.  HMRC will remain an unsecured creditor for other taxes including corporation tax and employer’s NI contributions.

As a direct result of this, The Association of Business Recovery Professionals estimate that £1 billion of potential lending will be removed, making recovery and turnaround harder as the access to new working capital is reduced.  To compound the recovery difficulties, whether a business can secure fresh borrowing or not, using a formal insolvency vehicle (such as a company voluntary arrangement) may no longer be a viable option.  This is due to the unpaid taxes ranking ahead of the general body of creditors and having to be fully paid before those unsecured creditors receive any funds.  Furthermore, it is likely that there will be a significant HMRC debt as our experience is HMRC are the first creditor to go unpaid during any cash-flow crisis – indeed this is one of the Government’s main reasons for introducing the measure.

On first glance, Crown preferential status will only impact those where the insolvency commences on or after 1 December 2020.  However, a cynic would point out there may not be any appetite for HMRC to support the restructuring of a business prior to this date where they remain an unsecured creditor, ranking with creditors as a whole.

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

 

The Preference Trap?

Jamie CochranePBC Logo

My most recent blog on the Chancellor’s support schemes  (available here) included comments on the Bounce Back Loan scheme.  One question I have received following that blog focussed on how using the funds from the loan to pay off debts personally guaranteed by the director would be treated (as the Bounce Back Loan scheme does not involve any personal guarantee) and I thought I would take the opportunity to explain the situation.

 

The Insolvency Act 1986 states “a company gives a preference to a person if that person is one of the company’s creditors or a surety or guarantor for any of the company’s debts or liabilities and the company does anything…..[which puts] that person which, in the event of the company going into insolvent liquidation, will be better than the position he would have been if that thing had not been done”.

 

So let’s unpick that legal jargon for a moment by revisiting the scenario.  The director was a guarantor for a company debt.  The company did something which put the director in a better position – by paying off the debt which had been guaranteed and removing the potential for the creditor to call on the guarantee.

 

However, that is not the whole situation.  The liquidator has to prove three things:

 

  1. The transaction took place at a relevant time. As the director is a connected party, the transaction must have taken place in the two years prior to the liquidation.

 

  1. The company must have had the desire to prefer the individual who received the preferential treatment. As the director is a connected party, this desire is presumed (but can be rebutted by the director).

 

  1. The company was insolvent at the time of the transaction or as a result of the transaction. Clearly, this fact is subjective on the facts of each individual case.

 

Let’s return to our scenario.  Could the company have taken out a bounce back loan to repay other business borrowing (whether or not guaranteed) to take advantage of the low interest rates on the Bounce Back Loan versus their existing borrowing?  Therefore, the director may argue that the desire was not there as they were seeking to improve the cash-flow of the business, but that argument would be stronger if contemporaneous notes (something I strongly advise) were made explaining the thinking behind the transactions, particularly as such transactions may be challenged several years later.

 

As previously stated, each scenario will depend on its own facts.  Should you be worried about your position or you have another insolvency-related issue then please contact me at PBC Business Recovery & Insolvency on (01604) 212150 (Northampton office) or (01234) 834886 (Bedford office). Alternatively, you may send an email to jamiecochrane@pbcbusinessrecovery.co.uk or access our website at www.pbcbusinessrecovery.co.uk

 

Will the government support schemes make things worse?

Whilst we all might have our views on how Boris Johnson, Matt Hancock et al have handled the health impacts of the Covid-19 pandemic, one politician who has emerged with his reputation enhanced is the Chancellor of the Exchequer, Rishi Sunak, and that’s not just because he has been nicknamed “Dishy Rishi”.

 

Whilst there is inevitably some people who have fallen through the cracks, the Chancellor’s support schemes have included the Coronavirus Job Retention Scheme (commonly known as the furlough scheme) – with 9.4million employees furloughed as at 5 July 2020, the Self-Employment Income Support scheme – with 3.5million people supported, and CBILS and Bounce Back Loans totalling £45billion as at 5 July 2020.

 

While this is a staggering amount of support that Mr Sunak has offered to UK businesses, there’s the potentially slightly controversial opinion that these schemes make things worse for the directors and their companies.

 

At PBC, we always raise awareness about seeking advice at the earliest possible opportunity as this gives the greatest chance of survival, the largest range of options available and minimises the risk of directors entering the “elephant traps” of antecedent transactions or breaches of their statutory duties.  But we are worried that some directors are believing that the government support schemes, combined with the suspension of wrongful trading provisions from 1 March – 30 September 2020, mean that their business will be fine once the Covid-19 restrictions are fully lifted and trading conditions return to business as normal.

 

However, while the furlough scheme helped towards wages and other schemes were designed to support business survival, liabilities such as utilities, rent, financial commitments etc will have continued to accrue.  In addition, it is unlikely that conditions will return to a “Pre Covid normal” for a significant period of time and businesses should be focussing on how they will adapt to the “new-normal” and ensure that they remain solvent and their cashflow is healthy.

 

Our concerns about the schemes making things worse are highlighted by a well published survey that reports just under half of Bounce Back Loans will not be repaid.  Are these loans being taken out purely to see the business survive for a few more months and enable the director to profit from the business before it fails?  Bounce Back Loans were publicised with no liability on the director or that no recovery action could be taken against a borrower’s main home.  However, while the loans were for business purposes only we have heard of scenarios where the loans have been taken into the company and then used to pay off the director’s personal debt.  This could lead to personal liability for the director and we urge all directors to seek independent advice on the use of the benefits received from the schemes

 

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

 

Jamie Cochrane

Seller beware? – The Corporate Insolvency and Governance Bill

CashflowAs a service provider or supplier, what is your first reaction when you hear your customer is entering into an insolvency process?  Anger, frustration, can I recover items supplied or, how do we make good the financial hole that bad debt will create?

It is an emotional event but, what if you were told your termination clause is no longer enforceable or you must continue to supply the insolvent customer?

On 4 June the Corporate Insolvency and Governance Bill (“The Bill”) received its second reading in Parliament and it is envisaged to become law by the end of June.  It will introduce some temporary provisions (to cover the COVID-19 lockdown) that will have retrospective effect and some permanent law, which is the focus of this editorial.

So, let us explore the four key provisions that are all aimed and restructuring and rescuing a company:

Restructuring scheme

This appears to modernise the current scheme of arrangement available under the Companies Act.  It is most likely a tool used for complex debt restructuring where there are several classes of creditors.  For example, a retail chain where there are suppliers, employees, landlords and financial institutions that are likely to be affected in differing ways.

The big reliance of this scheme is, what has been referred to as “Cross-class clam down”.  Try saying that quickly!  What this means is classes of creditors may out vote a dissenting class of creditor, provided the dissenting class of creditor will not be worse off than if an alternative insolvency procedure was used.  This does represent a shift in the balance of power in creditor voting

Moratorium

This is the largest part of the Bill and sets out a new provision designed to give an “Eligible company” the opportunity of a short holiday from creditors while it looks at ways to restructure its business.

Where a company is not subject to any insolvency proceedings the directors can file an application at court for a moratorium, without any notice to creditors.  The moratorium comes into force immediately upon the application being filed at court.

So, what does this mean?  A moratorium has very similar effects to administration whereby creditors cannot enforce any security held, landlords may not exercise their right of forfeiture or peaceable re-entry and any legal processes may not be commenced or continued.

The initial period will be 20 business days (this maybe increased to 30 business days for “Small companies”).  The directors may extend it for a further 20 business days, or with creditor consent it can be extended for up to 12 months.

While it needs an insolvency practitioner involved (to be called, “The Monitor”) their position is generally to monitor the company during this period, primarily based upon information provided by the directors.  It is envisaged a moratorium will be used as a form of protection while the company considers and/or proposes to enter into a company voluntary arrangement, although it could result in the outcome looking more terminal whereby liquidation may be the outcome.

Any supplier who supplies the company during the moratorium period must be paid (or payment provided for) otherwise the moratorium should be terminated.  Once terminated, any unpaid post moratorium creditors will enjoy a “Super priority” in the subsequent insolvency procedure.  However, that could be small consolation if there are no distributable assets!

Ipso facto clauses

Okay, most of us will ask what that means and does it apply to me?  In English, this is a clause within your terms and conditions of trade that state the contract shall terminate upon the customer entering into any form of insolvency.

A new section 233B is being inserted into the Insolvency Act whereby such termination clauses shall be considered void and no longer be enforceable.

Continuation of supply

The Insolvency (Protection of Essential Supplies) Order 2015 already prohibits suppliers from refusing to supply an insolvent company and/or seeking to vary the terms as a condition of continued supply.

However, the Bill takes this further and makes it clear it is unlawful to hold out for ransom payments (ie demanding pre-insolvency debts are paid as a condition of supply).  This could cause some practical difficulties, including if you have credit insurance, yet pre-insolvency you had reached the credit limit with the insolvent company.  The only protection it appears you have is being told your post insolvency debt shall be paid as an expense of the moratorium period or, failing that, holds “Super priority” in the subsequent insolvency.  Small comfort, I would suggest.

The key message for suppliers is to keep track of your customers (in terms of the warning signs leading to failure) and ensure they stay within credit limits you feel comfortable providing.

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

Recession or is it something else?

Cashflow

What is the outlook for the UK economy post lockdown?  That is a question I have been asked many times, while others tell me how busy my profession will be.

The truth is, nobody can accurately predict what will happen.  Personally, I have heard views from, “It is going to be a tough time, but we will get through it,” to others predicting 800,000 – 1 million businesses will fail over the next 12-18 months.

Before we look forward, let us look back.  I have worked through two major recessions, being 1990 and 2008.  The first of these saw UK officially enter recession at the end of the 4th quarter of 1990.  Corporate insolvencies were up 44% in 1990 (from 1989) with the level of failures increasing with 1991 being 60% higher than 1990.  A further increase was suffered with 1992 being 72% higher than 1991.  While numbers dropped in 1993 corporate failures still totalled 26,316 as compared to 18,720 in 1990.

You then compare that with the 2008 recession which was entered at the end of the 3rd quarter of 2008.  2007 had seen 15,774 corporate insolvencies, rising in 2008 to 21,082 (an increase of 34%). 2009 saw this figure further increase to 23,979.

What the 1990 and 2008 recessions told us is the peak of business failure may well arise a year or two after officially entering recession and levels remain high for a year or two after the peak.   However, this looming crisis is likely to be different to those past recessions.

While we may officially enter recession in the 3rd quarter, it is likely corporate failures will start to rise immediately as opposed to previous trends of corporate failures rising in the wake of a recovering economy.  The principal difficulty will be cash flow as most industries will find themselves back at pre-lockdown operational costs (including salaries as furlough ceases) but also, some will have the additional burden of servicing the bounce back and business interruption loans, as well as any deferred tax payments.  All this cost pressure will be challenging when it is anticipated “Normal” levels of turnover may not return for some time.

In saying the above, it would be remiss of me not to mention corporate insolvency numbers fell by 8.5% in the 1st quarter of 2020 (as compared to the corresponding quarter of 2019).  However, this maybe artificial as according to a well-known high court judge I spoke to recently, the working hours of the courts have been reduced with only 40% employment retained and winding up petitions have fallen by 85% principally as a result of HMRC ceasing enforcement action on standard unpaid tax matters.  Many other petitions have been adjourned under temporary COVID directives so there could be an explosion of activity once UK starts getting back to a semblance of normality.

This may all appear to come across as negative but overall the UK economy has the strength to recover and the services provided will continue to be in demand worldwide.  The key messages readers should take from this are:

  1. Continue to monitor your cash flow without a “Salesman” eye. Be critical and challenge the numbers.
  2. Review your overhead structure to see where reductions and removals are available.
  3. Take early advice from your accountant, solicitor and, where appropriate, an insolvency practitioner. Best anticipate a problem rather than have to deal with problem that has arisen.
  4. 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 pbcbusinessrecovery.co.uk

 

Am I Liable or Not?

Can a director be held personally liable for company debt?

The knee-jerk response to the above is, “No, that is what limited liability means.”  Indeed, the only obvious exceptions would be where a director has given a personal guarantee or, when a director is the named contracting party, which does happen occasionally, especially where leasehold property is concerned.

In a recent press release by the Insolvency Service two directors received custodial sentences and a Proceeds of Crime Receiver appointed to recover monies from the estate of both directors for the benefit of the company creditors.  This should be considered as the worst-case scenario in terms of penalties for errant directors, but it should also be considered a warning to those who feel they are “Above the law”.

There is a worrying upward trend in directors acting in a manner where they believe they can beat the system and fall short of meeting their duties as required by the Companies Act.  Both the Official Receiver and insolvency practitioners are being asked by creditors to investigate the conduct of directors and to seek restoration (compensation) by “Lifting the corporate veil” and demanding directors contribute towards the company losses.  Some of the principal areas of focus include unlawful dividends, debt avoidance and adverse loan accounts, where a director has (what HMRC describe as) taken disguised remuneration.

What is probably more disturbing is the “Blame culture” as an increasing number of directors are seeking to point the finger of culpability toward their professional advisors by suggesting a defence of merely following independent advice.  This is seeing advisors being caught up in litigation or demands to deliver up their client files, or both.  It is a trend that advisors have probably noticed but what can be done to minimise the risk?

On 13 May PBC are holding a free to attend seminar at the Kettering Park Hotel where Gary Pettit and myself will be discussing the issues that are generally leading to personal liability and what professional advisors ought to consider.  Should you be interested then please contact Lisa Parker on lisaparker@pbcbusinessrecovery.co.uk in order to book one of the limited spaces available.

 

DIRECTORS DISQUALIFICATION – COMMON GROUNDS

The meaning of substantial

I am sure most directors are proud the first time you order business cards (with your title as director). Expanding as you employ staff. But do you know the duties and responsibilities of being a director? Do you consider you are a responsible director?

Hopefully, your answers are, “Yes” and “Yes, of course I am.” Unfortunately, there are a minority who see directorship as a means to personal financial gain at the expense of third parties.

The Insolvency Service has recently published their latest report on director disqualifications which cites 1,242 directors were disqualified in 2018/19. A director can be disqualified for a period between 2 and 15 years and during this time they are unable to act as a director (without permission of the court) or be involved in the management, promotion or formation of a company. Since 2014 the average disqualification is 5.7 years and breaching a disqualification can attract severe penalties, including up to 2 years imprisonment.

There are many grounds for a director to face disqualification but, in general, the common grounds include:

• Trading whilst insolvent to the detriment of creditors.
• Failure to maintain proper books and records.
• Transferring company assets to avoid creditors.
• Not properly accounting for tax/VAT.
• Multiple insolvencies.

The 2018/19 figures include 70 directors who were disqualified for 11 to 15 years, a period referred to as the “substantial disqualifications”. Looking at the substantial disqualifications it is notable the bulk of these disqualifications (66%) were directors aged in their 40-50s. However, two directors who received a substantial disqualification were over 70 years of age, proving the offence(s) prevails over the age of the culpable director.

So, what does it take to become subject to a substantial disqualification? Well, examples cited by Insolvency Service include:

• Being involved in a multi-million-pound VAT fraud.
• A husband and wife team duping businesses into sponsoring unnecessary educational materials.
• Transferring £2.5 million-worth of company assets to her father-in-law.

When comparing the number of corporate insolvencies to disqualifications the number facing this sanction is relatively low. However, I would suggest if you were a victim to one of these people then one incident is one too many, irrespective of whether it is in the minority or not!

A director (or the board of directors) should never be shy in taking advice, whether that is from the company accountant or solicitor, if there are concerns on whether they may be at risk of not meeting their statutory duties. An insolvency practitioner can add to that advice, based upon both current issues and experience. In short, I would advise directors never to assume but seek advice early.

Should you have an insolvency-related issue or a corporate dispute then please contact PBC Business Recovery & Insolvency on (01604) 212150 (Northampton office) or (01234) 834886 (Bedford office).