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

A Business Adviser? Come to our free seminar on Personal Liability

To be held at Kettering Park Hotel on May 13th.

Looking at the hot topics that could affect you and your clients including

  • Re-use of prohibitive name
  • HMRC hot potatoes
  • Dividends
  • The Warning Signs

Plus we are looking to cover topics arising from The Budget

RSVP: lisaparker@pbcbusinessrecovery.co.uk

 

DUE TO THE COVID-19 CRISIS THE SEMINAR HAS BEEN POSTPONED AND WILL BE REVISITED IN SEPTEMBER DEPENDING UPON GOVERNMENT GUIDELINES

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

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).

Tax efficient or tax avoidance?

As a director you are probably advised to pay yourself a nominal salary with the balance of your remuneration package being paid by way of dividend.  This is perfectly sensible.  It reduces the tax burden and improves cash flow.  However, what happens if you draw dividends when there are insufficient reserves?

There has been a long-running debate on whether dividends are unlawful when there are insufficient reserves to cover them.  Some commentators (like me) always took the view if a director followed independent and professional advice and the payment of dividends was a tax-efficient way of paying remuneration then it should be fine.  Indeed, in recent years court decisions on various matters (such as wrongful trading or malpractice) have generally looked at the position and adopted the view if a person took independent advice and followed it then they have done what any reasonable diligent person is expected to do, irrespective of whether that advice is flawed.

The above approach was continued in a case that was brought before the court where a sole director had drawn some £23,000 in dividends over a financial year.  The company went into liquidation with a deficiency in excess of £173,000.  It was recognised the director took independent advice and acknowledged if there were insufficient reserves then he would have to adjust his remuneration back to salary and account to HMRC for the PAYE/NIC as appropriate.  The court adopted a practical, common sense opinion and the claim against the director was dismissed.  The Applicant (who had “Purchased” the action from the liquidator) appealed.

In Global Corporate –v- Hale [2017] EWHC(Ch) the appeal over-turned the earlier decision, saying,

“If it looks like a dividend and sounds like a dividend, it is a dividend.”

The court of appeal added further clarification in order to clear the waters muddied by the High Court by reaffirming:

  1. Companies must have sufficient reserves to pay dividends at the time they pay them, whether or not they intend to rectify any deficiency at the end of a tax year;
  2. Quantum meruitwill not act as a defence or set off to claims made by companies against their directors;

 

Personally, this decision does not sit well.  After all, in some cases directors may have been taking dividends when something that could not have been reasonably envisaged extinguishes the reserves, automatically making those dividends unlawful.  That, to me, is using the benefit of hindsight, something the courts have frowned heavily upon in the past, making the Global decision a little contradictory.  I am sure there will be some that disagree with me on this but is that not what freedom of opinion is all about?

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

What has 2018 been like?

 

When I get that call from Business Times informing me it is time to draft your editorial reviewing the past year a mild panic strikes like a bolt out of the blue! Is it really that time already?  What has happened over the past year and what can I write about?

The year started with PBC launching its mediation service.  So far, the PBC mediation service has successfully settled every dispute where acted, either on the day or in the immediate period thereafter.  It has included insolvency-related matters, a shareholder dispute and a professional negligence claim.  All but one were pre-legal action and it is fair to say in two of those the claimant was probably relieved that a settlement was reached!

For those who believe they want their day in court then beware. The courts are penalising those who refuse mediation as an alternative dispute resolution by imposing cost awards.  In one report I read the Claimant won £10,000 but because they refused mediation a cost order of £35,000 was made against them!

While mediation is proving successful our principal area remains insolvency and once again we have found ourselves being asked to act on some challenging assignments, including a deceased estate on the South coast and a corporate group that has two foreign subsidiaries (one in Canada and the other in Australia).  We were also delighted to accept our first nomination from HM Revenue & Customs for the appointment as liquidator, replacing the directors’ choice of insolvency practitioner.

The advisory side has also seen some interesting matters where PBC have assisted creditors of companies either entering into an insolvency process or, in one case, challenging the conduct of the residing liquidator. As we always say at PBC, awareness (of your rights) can often protect your financial interest.

The retail sector has taken a pounding this year as we witness the likes of House of Fraser and Toys R Us fall under the regime of the Insolvency Act. Until the retailers look at new ways of improving foot fall then the outlook continues to look bleak.

Gary Pettit was also invited to be party to the Government consultation on corporate governance, being proposals following the experiences of these large-scale corporate failures and the devastating legacy they leave. As the Government say, “When Parliamentary time allows” there could be some stark changes imposed, including the ability to pursue directors of companies that are struck off the register.

For the time being directors should be aware HM Revenue & Customs are continuing their campaign to recover tax from “Disguised remuneration schemes” such as Employment Benefit Trusts and other tax avoidance schemes. At PBC we have seen an increase of these incidences and with the constant pressure to reduce the level of unpaid taxes, it is an area that will continue to grow in recovery procedure terms.

It has to be said the final word must go to Jamie Cochrane who passed his accountancy qualifications. It is a great achievement and the PBC Team all congratulate him on his success.  That hard work and his dedication to PBC has also been rewarded with promotion to associate.

Should you have an insolvency-related issue or a corporate dispute then please contact Gary Pettit and PBC Business Recovery & Insolvency on (01604) 212150 or email to garypettit@pbcbusinessrecovery.co.uk

HMRC to be a preferential creditor once again

 

The 2018 Budget has seen the announcement that HMRC will regain their preferential creditor status, a position which they lost in 2002 under the Enterprise Act. Since then they have ranked alongside unsecured creditors (such as suppliers, landlords etc).

Chancellor Philip Hammond, speaking in Parliament said, “We will make HMRC a preferred creditor in business insolvencies…to ensure that tax which has been collected on behalf of HMRC, is actually paid to HMRC”.

Further detail announced by HM Treasury states, “Taxes paid by employees and customers do not always go to funding public services if the business temporarily holding them goes into insolvency before passing them on to HMRC. Instead, they often go towards paying off the company’s debts to other creditors.  From 6 April 2020, the government will change the rules so that when a business enters insolvency, more of the taxes paid in good faith by its employees and customers but held in trust by the business go to fund public services as intended, rather than being distributed to other creditors such as financial institutions”.

It is understood HMRC will become a “secondary preferential creditor”, ranking after current preferential creditors, which includes the Redundancy Payments Service and employees for certain elements of their employment rights. HMRC will only become preferential for debts collected by the company on behalf of HMRC, such as VAT, PAYE and employee’s NI contributions but will remain unsecured for Corporation Tax and employers’ NI contributions.

The Government believe this measure will result in an extra £185 million in taxes being recovered each year. However the policy will have other consequences such as:

  • Banks and other lenders may be unwilling to support companies, or charge higher interest rates on lending, as their risk will increase.
  • Other unsecured creditors, including small businesses, landlords, pension funds, suppliers and employees will see the amount they receive reduced.

The full release from HM Treasury is available here:

The budget also included confirmation of proposals whereby directors could be held liable for debts due to HMRC where there is a risk that the company may deliberately enter insolvency. Following Royal Assent of the Finance Bill 2019-20, directors and other persons involved in tax avoidance, evasion or phoenixism could be jointly and severally liable for company tax liabilities in certain cases.

Are Members’ Voluntary Liquidations (MVLs) under attack again?

A couple of years ago, the Finance Act 2016 introduced a new anti-avoidance rule which targeted MVLs to counter ‘phoenixism’ – starting a new business soon after winding up the previous one. This was to stop what was seen as an abuse of Entrepreneurs’ Relief.

More recently we have seen HMRC now demand statutory interest on tax liabilities from the date of the solvent liquidation even though, in the case of Corporation Tax, these tax liabilities are not technically due until 9 months later.

The latest attack is that HMRC are running a test case to challenge the approach of distributing overdrawn directors’ loan accounts in specie and reclassify the distribution as income, rather than capital, and therefore claim more tax.

It has been common practice to distribute overdrawn directors’ loan accounts in specie to save the directors having to repay the loans back to the liquidator and then wait for a distribution back to them as shareholders.  In the vast majority of cases the director and shareholder are the same person or husband and wife.

It is also our experience when the Company is brought to an end that directors will dip into Company funds before appointing a liquidator, thereby leading to an overdrawn director’s loan account.

We have spoken to both tax advisors and compliance firms within the insolvency world and currently what is certain is that there is uncertainty. However what is certain is that Schedule 11 of the Finance (No 2) Act 2017 seems to put an end to the approach going forward where the loan is not repaid before 5 April 2019.

As always as with any MVL it is now more important than ever to meet with your accountant and an insolvency practitioner before you bring the Company to a close to avoid any of the common pitfalls.

As always, PBC offers free initial meetings which are confidential and impartial.

Time to pay thanks to Carillion?

Following the demise of Carillion, HM Revenue & Customs have announced their Business Payments Support Services are open to approach by any company or business that has suffered a short-term cash flow problem as a result of the large scale failure.

The Support Service will consider:

  • Instalment arrangements of tax due that cannot be paid on time;
  • Suspension of recovery action/proceedings;
  • Review penalties for missing statutory deadlines;
  • Reduce any payments on account;
  • Agree to defer payments due to short term cash flow difficulties.

 

Should you find yourself facing difficulties to meet your tax liability as a direct result of the Carillion failure then you may apply to the Support Service on 0300 200 3835 or go on the website at www.gov.uk and search “Dealing with HMRC-payment problems.”

The obvious question this raises is, “Why is this offer being made for Carillion creditors?” At PBC we believe this could set a precedent for others who are caught under an insolvency process.  After all, what is different between a supplier losing (say) £5,000 in the Carillion liquidation to that under “Standard” UK liquidation?

At PBC we are often approached to assist companies with addressing tax issues whether in respect of trying to secure a time to pay agreement or by other formal means where appropriate. Should you require advice in this respect then contact PBC and speak to one of our insolvency practitioners on (01604) 212150 or email info@pbcbusinessrecovery.co.uk.

Statutory Interest on Corporation Tax in Solvent Liquidations

This blog is for accountants, tax advisors and directors who are considering a solvent liquidation, commonly referred to as a Members’ Voluntary Liquidation or MVL.

During the course of 2017 we have been informed of what appears to be a change of policy by HMRC in respect of statutory interest on Corporation Tax. HMRC now require the payment of statutory interest at 8% from the commencement of the liquidation on any CT that falls due for payment after that date, even if the normal due date for payment of the tax is not until after the commencement of the liquidation, and payment is made before the normal due date.

HMRC are relying on a decision in one of the Lehman’s cases for this change in policy. That case indicated that statutory interest was due on both future debts and contingent debts, and since CT payable on a normal due date after the commencement of a liquidation is a future debt then statutory interest falls due. Whilst that judgement related to an administration, HMRC are arguing that in view of the similarity in wording in the legislation it applies equally to liquidations.  The standard letter that they are sending to liquidators with demand for statutory interest says:

“Our understanding of the correct treatment of statutory interest derives from the decision of David Richards J in Re Lehman Brothers International (Europe) : Lomas v Burlington Loan Management Limited. In a supplemental decision he restates his conclusion that “interest under Rule 2.88 (statutory interest) is payable on future debts and on the amount admitted to proof in respect of contingent debts from the date on which the administration commenced”.

Rule 2.88 mirrors Rules 14.23 which applies to a winding up. We are also assuming that will also apply to others taxes, VAT, PAYE and NIC etc.

To make matter worse it is clear that HMRC themselves don’t understand or haven’t been made aware of the change of policy and so we are aware of cases where we have paid the statutory interest and it has been paid back to us. The current advice is to pay the CT to the normal office but send the statutory interest to HMRC’s MVL team!

Therefore if you are considering a solvent liquidation further planning will be required to calculate and more importantly pay any tax debts at the commencement of the liquidation or as soon as possible thereafter in order to minimise statutory interest.

Gavin Bates specialises in solvent liquidations, commenting on the change Gavin said:

“This is effectively a hidden tax on entrepreneurs since HMRC are receiving interest that would not be due other than for the decision to cease trading to permit the members to extract their capital from the company. I also find it very unfair that we have no notice of this change of policy.  I often sit with directors many months before my appointment as liquidator in order to plan the process so we will now need to calculate and pay the tax debts as well as many other factors which we work through”

If you wish to discuss this further please feel free to contact us for an initial free meeting which are confidential and impartial.