It’s Not My Fault!

What is your understanding about being a director of a company?

It is proven time and again that people are unaware of their duties and seem to adopt the idea being a director is merely a title, not much different from that of manager or supervisor.  Nothing could be further from the truth as, unlike those titles, a director has statutory duties to:

  • Act within their powers.
  • Promote the success of the company.
  • Exercise independent judgment.
  • Exercise reasonable care, skill and diligence.
  • Avoid conflicts of interest.
  • Not accept benefits from third parties.
  • Declare any personal interests in proposed or existing transactions or arrangement with the company.

Where a company is insolvent (or likely to become insolvent) the court takes the view that if you fail to meet your duties to protect the interests of the company creditors as a whole then, by default, you accept the consequences of your actions.  Ignorance is no defence. 

These duties can challenge the integrity of a director, particularly when times are tough and you wish to “Look after” certain creditors, for example. 

But, what about when you believe a fellow director is acting in breach of these duties?  Where does that leave you? 

As insolvency practitioners we are seeing an increase in management disputes where one director rolls out a list of failings or perceived breaches undertaken by their fellow director(s).  The key issue with acknowledging the failings of others is just that; you are aware your fellow director may be breaching their duties.  Again, the court has said, “If you are aware a director is in breach of their duties and you are not seen to actively challenge that conduct, then, by default, you assent to it and accordingly, are equally liable for any losses the company suffers.”

While the court’s view may seem harsh, it emphasises the level of responsibility resting on a director’s  shoulders and the fact a director owes a duty to the company and not to any other director or shareholder. 

Should you believe a fellow director is breaching their duties then you must demonstrate you have challenged their conduct.  Keep a written record of your concerns, including any correspondence (such as emails) between you.  If appropriate, convene a meeting of directors as a possible means to discuss the issue and resolve how to remedy the position.  If all fails, seek early independent advice to consider how to protect your position.  Doing  nothing could prove costly.

If you require any advice or assistance on any insolvency-related issue, then please contact PBC Business Recovery & Insolvency  on 01604 212150 (Northampton), 01908 488653 (Milton Keynes) or email to enquiries@pbcbusinessrecovery.co.uk.  Alternatively, visit www.pbcbusinessrecovery.co.uk for further information.

Director duties reinforced (again!)

It would be wrong to imply HMRC simply agree to TTP upon application. PBC Business recovery and insolvency practitioner

What can appear to be straightforward is sometimes never the case as demonstrated by the numerous questions we get from Directors in respect of their statutory duties. This was recently highlighted on a seminar hosted by Gary Pettit where many questions were raised following a short presentation.

All too often directors can find themselves getting embroiled in the emotion of the situation, particularly where there is a dispute within the board of directors with the issues prevailing over their duties.

The court adopt the view you are a director first and foremost, while personal opinions or conflicts of interest are immaterial.  This has recently been demonstrated in the High Court decision of Jacob Beake and Paul David Allen (Acting As the Joint Administrators of London South West SW Limited) and – (1) Jamie Richard Chapman and (2) Bodman House Management Ltd [2023] EWHC 1986 (Ch).

In this case, the director refused to sign a lease to a property, jeopardising the sale.  It is understood the director tried to use his refusal to sign as leverage against a personal dispute with the administrators of a connected company.  The court took the view this refusal was a breach of duty and was interfering with the duties of an administrator.  As a result, the director was ordered to sign the lease and costs were awarded against the director.

This decision should act, as yet another warning to directors who choose to put their personal issues before their statutory duties, particularly if it results in the interference of the duties carried out by an office holder.  It also serves as a warning for those directors who are embroiled in a management dispute whereby, if you fail in meeting your statutory duties then you must be prepared to face the consequences.

If you require any advice or assistance on any insolvency-related issue, then please contact PBC Business Recovery & Insolvency to discuss your situation on 01604 212150 (Northampton), 01908 488653 (Milton Keynes) or email to enquiries@pbcbusinessrecovery.co.uk.  Alternatively, visit www.pbcbusinessrecovery.co.uk for further information.

Claims by directors to the Redundancy Payments Service as employees..

In July we posted about employees’ rights to redundancy in an insolvency process and clarified the four main claims employees can make.

This post is aimed at directors who look to make a claim as an employee when an insolvency event occurs. This link Check if you can apply for redundancy payments as a company director – GOV.UK (www.gov.uk) provides greater detail on the following:

  • Eligibility
  • How to apply
  • What to do if the claim is rejected

What is not covered off though is, if money is owed by directors to the company when it enters into an insolvency event, the Redundancy Payments Service will not make any payments to directors even if claims pass all the eligibility criteria. Therefore, it appears to be prudent to give some consideration in repaying these sums beforehand if possible, for the following reasons:

  • It may enhance the probability of a successful claim
  • Any appointed liquidator/administrator has a duty to recover the loan account in any event given it will be an asset.

If you have any queries regarding the above, please contact PBC Business Recovery & Insolvency on 01604 212150 (Northampton), 01908 488653 (Milton Keynes) or email to enquiries@pbcbusinessrecovery.co.uk. Alternatively, visit https://lnkd.in/ehKHz4K for further information.

Thomas Cook directors avoid disqualification

Sky News are reporting no further action shall be taken against the directors of Thomas Cook under the Company Directors Disqualification Act.

Andrea Leadsam, the then business secretary at the time of the liquidation, sought an enquiry as a priority given the significance of this case and its implications for thousands of customers and employees.  She added,

“I ask that the investigation by the Official Receiver looks, not only at the conduct of directors immediately prior to and at insolvency, but also at whether any action by directors has caused detriment to creditors or to the pension schemes.”  Labour MP, Rachel Reeves added, “Its directors had exhibited a lack of challenge in the boardroom as the company piled up debt and Thomas Cook management missed opportunities to reduce debt levels and give the business a viable future”.

“Will I be banned?”

A question we, at PBC, get asked constantly by directors.

 

Like most high-profile companies, the Thomas Cook demise was subject to significant media attention.  However, regardless of the media reporting or the size of the company that enters into an insolvency event, it all comes down to what was the conduct of the directors?  In the case of Thomas Cook they engaged with the creditors, they took independent advice throughout and, when they were advised their efforts were going to be to no avail, they followed that advice and took what is an incredibly difficult decision.

At PBC we have an immense level of respect for every person that contacts us for advice.  It is often a period of heightened emotion and, at times, can feel intimidating.  However, taking that advice generally dismisses the “Pub talk” stories and can open up options to address those issues that are keeping you awake at night.

Taking early advice helps to control the situation, provides more options being available and helps avoid directors doing things that could see them getting embroiled in issues where disqualification and possible personal liability are a real threat.

Should you have an insolvency-related issue then please contact a member of the team at PBC Business Recovery & Insolvency on (01604) 212150 (Northampton office) or (01234) 834886 (Bedford office). Alternatively, you may send an email to info@pbcbusinessrecovery.co.uk.

Formal crackdown on directors who dissolve companies to evade debts

The Insolvency Service has been granted new powers to take to task directors who dissolve companies to avoid paying company debts. This is as a direct result of directors dissolving companies to avoid repaying Government backed loans put in place to support businesses during the Coronavirus pandemic.

The new legislation now extends the Insolvency Service’s powers to investigate and disqualify company directors who have been deemed to have abused company dissolution processes.

Previously the Insolvency Service had these powers to investigate directors of companies that entered formal insolvency such as liquidation and administration. It is also understood that the Insolvency Service may also be instructed to investigate live companies where evidence has been brought to their attention of wrongdoing.

In addition, the new legislation also allows for the Insolvency Service to apply to court for an order to require a former director of a dissolved company, who has been disqualified, to pay compensation to creditors who have lost out due to their fraudulent behaviour.

Should you be a director and are concerned re the new legislation then please do make contact with Gary Pettit, Ian Cooke or Jamie Cochrane (01604 212150) to understand your obligations and responsibilities

garypettit@pbcbusinessrecovery.co.uk

iancooke@pbcbusinessrecovery.co.uk

jamiecochrane@pbcbusinessrecovery.co.uk

What is in a (Company) name?

 

 

Can a director be held personally liable for the debts of their company?  The immediate reaction will probably be, “No” although that is not entirely accurate.

 

Generally, a director can be found personally liable for:

  • Debts where they have given a personal guarantee.
  • They have borrowed company money for personal use, creating an adverse loan account.
  • They are found guilty of malpractice (which causes a loss to the company) including any actions that place company assets out of the reach of creditors.

 

However, a question that often arises is when directors are looking to re-start trading with a new company and whether they use the current company name for their new enterprise.  As we all appreciate, the company name can be your brand, it is what your customers are attracted by and so therefore may carry a value.

Section 216 Insolvency Act 1986 (“The Act”) states that the name of a company in insolvent liquidation becomes a prohibited name.  That also goes for a trading name or a name that is so similar that it may cause confusion to the public.  This restriction only applies to those people who were directors (or “shadow” directors) of the liquidated company in the 12 months leading to liquidation AND who become directors of a company with a prohibited name within 5 years AFTER the liquidation date.

Section 217 of the Act then gives rise to personal liability following contravention of re-use of a prohibited name, as well as criminal sanctions including potential imprisonment.

 

In the recently reported case of PSV 1982 Ltd v Langdon [2021] EWHC 2475 (Ch) it was held:

  1. the effect of section 217 of the Act is that establishing the company’s liability (through proceedings or otherwise) makes a defaulting director automatically responsible. It is not necessary to bring separate proceedings against a defaulting director; and
  2. ‘liability’ as defined in section 217 means an obligation to pay a sum of money. The relevant liability was incurred when the contract was breached, at which time [the director] was in breach of section 216 and therefore personally liable.

 

The Claimant in the above case (PSV) were seeking recovery of some £1.4 million inclusive of costs and interest and, while the decision is likely to be appealed on a couple of technicalities, it serves as a stark warning to directors.

So, if a director was planning to start afresh what should they do when it comes down to the name?  Well, they can always steer clear from the prohibited name completely.  While this may cause some communication issues with customers, it certainly avoids any threat of breaching section 216 of the Act.

However, if the name (or something very similar) is needed then there are exceptions where permission can be obtained (prior to using the name) and readers are advised to take independent advice from an insolvency practitioner and/or solicitor who practices in the insolvency field to ensure you (a) meet the requirements for an application to use the name and (b) what the defined steps required consist of to ensure you do not become another Mr Langdon.

The number of “Phoenix” insolvencies is increasing and, it therefore follows, so does the exposure to breaching section 216 of the Act.  That company name could be seen as a precious commodity.  However, it is clear it can also become an expensive and personal liability.

 

Should you have an insolvency-related issue 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

Beware the Elephant Traps

Something I have been asked several times recently is when should directors seek advice from an insolvency practitioner.  My answer is always “as soon as possible” as there are more options available the earlier advice is sought, with the likelihood of rescue and recovery markedly higher.

The other advantage is that a director is less likely to step on what I call the elephant traps.  These antecedent transactions, explained below, can lead to personal liability for the director to restore the position to what it would have been prior to the transaction taking place.

  1. Preference

The Insolvency Act 1986 defines a preference as where a payment is made to a person and “that person is one of the creditors or guarantor for any of the debts and [the insolvent] does anything which has the effect of putting that person into a position which will be better than if that thing had not been done”. 

It needs to be proved that the company was insolvent at the time (or as a result) of the transaction and that there was a desire to prefer the creditor or guarantor.  However, where the recipient of the preference is a party connected with the company (e.g. a director or relative of a director or a company of such a person) then the desire is presumed.  Finally, the payment needs to take place within a relevant time which is 6 months prior to the company entering liquidation or administration, although this is extended to two years when the recipient is connected.

Typically, preference payments involve payments being made to directors to clear loan accounts, to creditors personally guaranteed by the director or to suppliers which the director intends to utilise should they start a new business.

  1. Transactions at an Undervalue

A transaction at undervalue occurs when a company “makes a gift or otherwise enters into a transaction that provide for no consideration” or “enters into a transaction for a consideration the value of which is significantly less than the value provided” in the two years prior to the company entering liquidation or administration.  Additionally, it needs to be proved that the company was insolvent at the time (or as a result) of the transaction.

The most common examples are the gifting of assets to directors or the transfer of an asset the director believes is theirs (e.g. a company car) for a value far less than it was worth.

  1. Transactions Defrauding Creditors

A transaction defrauding creditors arises when a company “makes a gift or otherwise enters into a transaction that provide for no consideration” or “enters into a transaction for a consideration the value of which is significantly less than the value provided”.

On the face of it, that sounds exactly like a transaction at undervalue but in this case it needs to be proved there was an intent to put assets beyond the reach of anyone likely to make a claim (typically a creditor).  There is no need to prove insolvency and the transaction does not need to occur in a relevant time period.

Often these cases involve scenarios where financial arrangements are changed to ensure one party holds the assets while another takes all the risk.

  1. Wrongful Trading

Wrongful trading occurs where “at some time before the commencement of the winding up, [a director] knew or ought to have concluded that there was no prospect of avoiding insolvent liquidation”.  

Case law has held that a director can be held personally liable for the increase in liabilities from the point where they ought to have reached the conclusion to the time when the company ultimately enters liquidation or administration.  A statutory defence is available to directors where “they took every step with a view to minimising the loss to the company’s creditors”. 

An example would be directors acknowledge their company had suffered losses and there was insufficient capital to keep the company trading.  Over the next two years (say) debts increased by £200,000 and the company went into liquidation owing £350,000.  The wrongful trading (and personal liability) is the £200,000 increase.

  1. Fraudulent Trading

Fraudulent trading carries criminal sanctions as well as personal liability for any party “knowingly … carrying on business with intent to defraud creditors or for any fraudulent purpose”.  The company does not need to be insolvent at the time of the fraudulent trading, which could be as simple as a single act.

A single act could be the taking of a loan, using the funds for personal benefit and having no intention of repaying the loan.  This would include the government backed Covid support schemes.

  1. Misfeasance

Misfeasance occurs where a director breaches their duty (fiduciary or otherwise) in relation to the company.  Common examples of this include adopting a systematic policy of avoiding paying taxes to HM Revenue & Customs, failing to maintain adequate books and records and paying dividends where there were not the available reserves to do so.

It is a common policy for director/shareholders to pay themselves a mixture of salary and dividends to reduce the tax liability but recent court judgements have held that dividends cannot subsequently be converted to salary if challenged.

Except with the statutory defence outlined above for wrongful trading, the antecedent transactions outlined have no defence so if a director steps on the elephant trap there is mitigation.  As a result, I must return to what I said at the outset that if advice is not taken as soon as possible, then this position could result in significant sums becoming payable by the director.

A Government scorned?

How many of you have taken out a bounce back loan, a CBIL, claimed furlough or even claimed under the Eat out to Help out scheme?  I guess many readers will be nodding their head at this point because most businesses have claimed some of this Government support during the pandemic lockdown.

For many businesses these schemes will act as the saviour and the loans will be repaid in accordance with the terms.  However, there has also been plenty of media surrounding those who have misused or misapplied funds originating from these schemes.  At the end of the day, it is taxpayers’ money (and will have to be repaid in due course) so those more unscrupulous applicants need be aware of the potential consequences.

While bounce back loans and CBILs under £250,000 are not personally guaranteed, directors need to understand that does not mean you escape personal liability.  For example, if a director draws down some of the loan to pay personal liabilities, that in turn creates a directors’ loan account, being a debt repayable to the company.  It can get worse as HMRC could determine that the personal use was income and accordingly, gives rise to PAYE where the director can be held personally liable.

It has been reported that as of 30 June 2021 HMRC had conducted more than 12,000 investigations into coronavirus fraud.  Indeed, there have been several arrests with the number of prosecutions inevitably going to rise over time.  Further, a director in Bolton was disqualified from acting as a director for 11 years after he claimed a bounce back loan when not eligible and subsequently used the funds for personal gain.

In the disqualification case (above) the director, clearly, thought ensuring there were insufficient accounting records would aid his defence as there was no evidence of accountability.  Apart from a failure to maintain accounting records can be a criminal offence, banking records will always offer some form of transaction tracing.

So, what should I do?

I am bound to say, take early advice.

If you have used the corporate schemes for personal benefit, then look at how you are going to repay the amount taken.  When liquidators pursue a director for malpractice, they are looking for restoration and this can become a drawn-out and costly affair for the director.

A common practice appears to be to extinguish personal loans by way of dividends.  However, if the company has insufficient reserves, then drawing dividends is unlawful.  Even if there are sufficient reserves, a loan-extinguishing dividend is exposed to challenge as a breach of duty.

In terms of any breach in the job retention scheme, while it seems concerning, you should confess to HMRC and seek ways of restoring the position.  It is better to approach HMRC and include a proposal for making good than to be found out!

The Government have made it clear HMRC are to adopt a commercial understanding when it comes to recovery of tax liabilities and coming forward early should facilitate a structured restoration agreement.  Stick your head in the sand then be prepared as hell hath no fury like [the Government] scorned!

Should you have an insolvency-related issue 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

 

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