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

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

How secure is your company?

How secure is your company?

A few years ago I asked an audience, “How many of you are self-employed?”  I followed that by then asking, “How many of you set up in business and planned to fail?”

The fact remains we do not set up a business with a view it will fail sometime in the future.  So, why is it we do not take steps to protect our company from any unfortunate incident that may fall upon its leaders?  Possibly because the UK business person is universally recognised as the poorest when it comes to discussing incapacity, or worse.

Perhaps 99.9% of companies that are incorporated adopt the standard articles of association (“Articles”) which governs the company in terms of directorships, voting and all other specific areas of corporate governance as laid down by the Companies Act.

Recently, I was asked to advise where the company operated with a sole director and shareholder.  Unfortunately, that director was injured in an accident, incurring a serious head injury.  As a result, personal injury claims were being prepared, which included a doctor providing a report stating the director was suffering from mental incapacity.  The problem is the Articles state:

“A person ceases to be a director as soon as—

(d) a registered medical practitioner who is treating that person gives a written opinion to the company stating that that person has become physically or mentally incapable of acting as a director and may remain so for more than three months;”

Taking the above into account that particular company now has nobody with authority to operate the business and without  applying to court for the appointment of a personal representative (which can take several months) it is rapidly descending into a financial chasm, leading to its eventual demise.

The above should be a telling tale, if not a warning, for all those small, single director companies.  You should ensure there is a second director registered at Companies House.  This could be your spouse, although couples do have a tendency of travelling together so, try to consider a different person.  Alternatively (or simultaneously) consider a power of attorney whereby someone has the power to protect the company’s interests by (say) appointing a replacement director or being able to ensure trading can be sustained, thus protecting the share value, being a legacy you may wish to leave for your surviving family members.  It is also worth considering appropriate insurance protection as key personnel invariably need to be replaced if the business is to remain viable.

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

PBC Moves into Bedford

 

Insolvency practice moves into Bedford.

PBC Business Recovery & Insolvency have announced opening their new office in Priory Business Park, Bedford with effect from 1 March 2019.

Highly regarded, PBC provide professional advice and services across both personal and corporate insolvency, whether that is for the client directly or where the client has an insolvent customer that owes them money.

In addition, Gary Pettit is a CEDR-accredited mediator, specialising in facilitating of settlements in corporate or insolvency-related disputes

Managing Director, Gary Pettit, said,

“This is an exciting move for PBC.  Bedford is a vibrant business town and, from my own experience there is an abundance of positive energy shown by its business people.”

Should you have an insolvency-related issue or a corporate dispute then please contact Gary Pettit at PBC Business Recovery & Insolvency on (01234) 834886 or email to garypettit@pbcbusinessrecovery.co.uk

Brexit vs Cash

How many readers like change?  Do you remember the constant barrage of doom and gloom surrounding the Millennium Bug or what about GDPR?  Let us face it, in general we all fear changes that may interfere with our comfort zone.

The “B” word has been with us for 2 years and, personally, I have adopted the position of why write about it?  After all, nobody knows what post EC departure means so anything written pre-Brexit surely must be rhetoric or simple guesswork.  Admittedly, the older generations know what it was like before we joined but times have moved on since then and the economic World is vastly different.

So, let us focus on what we do know.

I bet when asked about your salary you cite your gross earnings.  However, gross earnings cannot be taken into account when it comes to paying the bills; you have to look at your take home pay and hopefully it is sufficient to meet your domestic needs.  Similarly, in business there seems to be a heavy focus on the level of turnover rather than the net profit or, more importantly, cash flow and the ability to meet debts as they fall due.

Through 2018 the average amount owed to a company was £80,141 rising to £82,000 for professional services.  Late payments are the most significant threat to SMEs and the longer they remain unpaid, the higher the risk of an inability to collect.  If your business had to write off £80,000 how much additional business would you need to secure in order to recover that loss?  Going back to the salary scenario if your employer paid you late could you still meet your debts as they fell due?  There is little difference.

At PBC we would say most of our clients have suffered from poor cash flow.  Some are due to poor credit control, some through a slow burn as the business suffers for one of many reasons, while others fall victim to a one-off catastrophic write off.  In one particular case PBC are handling the company suffered a 7-figure debt as their customer went into liquidation, bringing the company to its financial knees.  Thankfully, the director took early advice and we had time to restructure his company via a company voluntary arrangement, safeguarding all of the employees and the company going forward.

So, our message to you is Brexit is currently uncertain whereas cash is king.  Look after your cash controls and let Brexit unwind in whatever format it is destined to take.

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

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

Liquidators’ appointment valid despite breach of deemed consent procedure

The Insolvency (England & Wales) Rules 2016 came into effect in April 2017 and were aimed at enhancing creditor participation in the insolvency process while also consolidating the rules.

One of the new provisions enables an insolvency practitioner (“IP”) to serve creditors with a notice of deemed consent; meaning if the IP does not receive any objections by a given date then, by deemed consent, that IP is appointed liquidator of the company in question. However, what happens if you are a creditor but do not receive a copy of the notice?  You may have burning issues or a preference on the IP who should be appointed.

These were some of the issues arising in the case of Cash Generator Ltd v Fortune and others [2018] EWHC 674 (Ch) which is understood to be the first case to challenge the new insolvency rules.

Background

The companies operated, as franchisees, in pawn-broking and ‘payday’ loans.

The first and second respondents were nominated by the companies as their joint liquidators and, when fewer than 10% of the creditors objected, they were duly appointed under the deemed consent procedure.

Before the liquidations began, the companies assigned their leasehold interests in their business premises to a third party.  Once appointed, the first and second respondents sold the stock and other assets.

The Companies Court decision was that non-compliance with the statutory provisions for the appointment of liquidators did not invalidate the first and second respondents’ appointments as joint liquidators of the three companies. There was also no cause for their removal to enable an independent investigation into the assignment of the companies’ leasehold interests in the business premises and the sale of the stock and assets.

The application

The applicant was a franchisor and claimed to be a creditor. They sought declarations from the court that:

  • the appointment of the first and second respondents as liquidators was invalid as the correct procedure had not been followed.
  • the first and second respondents should be removed from office.
  • the first and second respondents should be replaced by the Applicant’s own nominees or those appointed by the court.

What did the court decide?

The court determined there were two distinct issues to consider, namely the invalidity (or otherwise) of the appointment and whether the respondents ought to be removed from office.

Invalidity

The applicant argued that as they (and other creditors they were aware of) had not been given notice of the respondents’ nomination, the statutory requirements for nomination under the deemed consent procedure had not been complied with.  Consequently, the appointment was fatally flawed.

It was conceded by the Applicant that a company could nominate a person to be liquidator at a company meeting at which the liquidation commenced.  However, the insolvency rules require directors to seek nomination from the creditors whose choice of liquidator shall prevail. In those circumstances, the court had to intervene and either order removal or the appointment of new liquidators.

The judge considered these arguments in the light of section 100(1B) Insolvency Act 1986, which provides,

“The directors of the company must in accordance with the rules seek nomination of a person to be a liquidator from the company’s creditors”.

The court also reviewed the deemed consent provisions in the insolvency legislation and highlighted notice can be taken of the fact information made available to those assisting the directors frequently contained errors, such as a mistake, oversight, or a failure to keep proper books and records. It did not escape the court’s view that omissions may even be down to a deliberate decision not to provide correct information.

Notwithstanding the possibility for error or omissions the court felt the Government had intended for the new rules to achieve a speedy appointment of an insolvency practitioner nominated by creditors and not to cause uncertainty, delay or additional costs. It was also noted the deemed consent procedure was intended to encourage creditor involvement rather than to assure maximum number participation. The court further argued the Government would have anticipated there was a prospect of one or more creditors not being given notice from time to time. Accordingly, it was reasonable to conclude that, in the absence of an express provision, the Government did not intend invalidity in these circumstances, otherwise it opened every appointment up for challenge where creditors failed to receive notice, hence the loss of opportunity to vote.

It was also pointed out by the court the applicant had other remedies open to it. For instance, to requisition a meeting of creditors or even an application for directions under section 112. of the Insolvency Act 1986.

Removal

It was argued there was a need for an investigation into the conduct of the respondents, particularly the issues surrounding the pre-liquidation lease assignments and the post-liquidation sale of stock. As those investigations concerned the liquidators conduct, new office holders should be appointed in their place.

The court followed the approach set out by Warren J in Sisu Capital Fund Ltd v Tucker [2005] EWHC 2321 (Ch), [2006] 1 All ER 167, being:

  • removal should be ordered where an independent review cannot be carried out because of conflict
  • the court should consider the views and wishes of the majority of creditors
  • removal should not be ordered merely because conduct has fallen short of the ideal
  • the court should remember that removal can impact upon professional standing and reputation

The court found no evidence had been put forward to suggest the respondents would not carry out investigations that they considered appropriate. Indeed, it was observed the early sale of stock had been based upon expert valuation advice and, as there was no business to sell, a ‘fire sale’ had been justified. Furthermore, the respondents had been advised on both the validity of the assignments and value of the leases.

In noting the above, the court also mentioned HMRC had not supported the application and, presumably was content for the respondents to remain in office. Based upon the facts before the court, there was no cause to remove the respondents as liquidators.

What are the practical implications?

Gary Pettit said, “It was interesting to note the presiding judge issued a plea for the Rules Committee to consider whether the rules needed to be consolidated as those rules the judge had been referred to in this case were in a variety of places and featured numerous requirements. This echoes the common view of insolvency practitioners.”

Gary continued, “Ultimately, though, what this judgment means is company nominated liquidators need not worry about the validity of their appointment under the deemed consent procedure if a creditor is not sent notice of their nomination and a statement of affairs, in accordance with the rules.”

Comment

Creditors are often omitted from the initial notice of an insolvency, primarily due to the pace of information gathering causing an oversight in identifying all potential creditors. The Court appear to have acknowledged this practical difficulty when reaching their decision.

Unfortunately, while the new insolvency rules require for virtual meetings to be advertised in the London Gazette this is not a requirement for the deemed consent procedure. It remains to be seen whether this advertising requirement will be amended for proposed deemed consent appointments following this latest court decision.