Present

The Risks of Gifts

This is the next in my series of blogs for the Directors Friend.

SUMMARY:

In respect of a risk under Section 238 of The Insolvency Act 1986 (the “Act”) a director must be very mindful where they are transferring company monies to themselves without good reason and / or supporting accounting records. In the following case, the directors had to personally repay significant sums that they were found to have gifted to themselves.

BACKGROUND:

In a recent case (Nicholson and Anor v Sukhjit Ghuman and Others [2016] EWHC 3509 (Ch)) HHJ Barker QC heard the Applicant Joint Liquidators only in a case. The Respondents did not attend.

This was a case that sought to make the first and second Respondents liable for their actions as directors of a company. The claims (amongst others) brought included for undocumented payments to one of the Respondents in the sum of £174,000 and undocumented payments to the other Respondent in the sum of £38,000.

The claims were claimed as transactions at an undervalue. The claims were also claimed as preferences, breaches of duty as directors by way of section 212 of the Act as misfeasance and the claim for £174,000 was also pleaded as an unlawful distribution.

THE LAW:

The Judge did not consider it necessary to have regard to the Applicants secondary cases. I can actually do little better than to set out what the Judge succinctly said at paragraphs 12 to 14 (inclusive):

  • Transactions at an undervalue are addressed in section 238 of the Act.
  • It is a precondition that the company should have entered into administration or gone into liquidation, and the claim is made at the suit of the office holder
  • The issue is whether, at a relevant time, the company gave away or disposed of assets (including money) for no consideration or for significantly less valuable consideration.
  • A relevant time is two years before the onset of insolvency.
  • In this case, it is not necessary to ascertain the precise date for the onset of insolvency because a winding up order was made in July 2010, and no transaction at an undervalue is alleged to have occurred before 2009.
  • Section 238(5) of the Act provides that:

The court shall not make an order under this section in respect of a transaction at an undervalue if it is satisfied—

(a) that the company which entered into the transaction did so in good faith and for the purpose of carrying on its business, and

(b) that at the time it did so there were reasonable grounds for believing that the transaction would benefit the company.

  • Section 240(2) adds a further condition, namely that at the time of entering the transaction at an undervalue the company should either be unable to pay its debts as they fall due or should become unable so to do in consequence of the transaction.
  • This insolvency condition is presumed where the recipient, or other transacting party, is connected with the company. So, the evidential burden is on that party, here Mr. and Mrs. Ghuman, to demonstrate that company's solvency.

THE JUDGE’S FINDINGS:

The Judge had no hesitation in finding that the Respondents were directors of the company at all material times.

As to evidence of insolvency the Judge was mindful of the evidenced increasing debt to H M Revenue & Customs (‘HMRC’) owed by the company. The Judge found that HMRC was used as a source of funds or working capital. The Judge found that that pointed to an inability to pay debts as they fell due. That was especially so when there was no evidence that the company had made any provision to pay PAYE or NIC.

The Judge found that on the evidence that there was no documentation at all in the company books and records to explain the payments. Absent clear independent or documentary corroborating evidence the Judge was unable to make a finding that the payments were remuneration as asserted by one of the directors.

The Judge concluded that the payments were gifts and consequently transactions at an undervalue.

COMMENTS:

The well-advised director will note the number of different ways in which a claim against them is likely to be pleaded. This maximises the opportunity of the office holder to succeed on one or other of the heads of claim and for an adverse costs order to follow against the director.

Insolvency is typically (as in this case) evidenced by reference (amongst other indicators) to the (increasing) debt to HMRC.

In addition, the case shows that absent documentation or evidence to the contrary that personal liability for transactions at an undervalue is likely to follow with the additional adverse costs consequences.

WHAT TO DO NOW:

If you are faced with worrying insolvency issues with your company, a claim for transactions at under value and/ or other worrying claims for personal liability please talk to me today.  That is in order to protect your position without delay.  The earlier that you speak with me on +44 (0) 1992 558411 the more that I can help.

I am a Hertfordshire / London based solicitor and a full member of the Insolvency Lawyers Association (‘ILA’). Membership of the ILA is a public mark from insolvency peers that a member has the requisite knowledge, skill and experience to advise you.

Until the next time...

THE DIRECTORS FRIEND


Director's Desk

The Director’s Friend and Director Disqualification – a testimonial received

Director's Desk
The Director's Friend

This blog post features a testimonial from a client who was faced with a substantial director disqualification investigation against him. The client was recommended to the Director’s Friend by their accountant to advise.

 

The investigation was wide ranging and included diverse issues such as:

  • Significant monies owed to particular trade creditors; and
  • Directors loans and benefits.

Outline of the Director Disqualification investigation:

The client was faced with a great number of questions from the investigator at the Insolvency Service that he was struggling with and getting worried about.

The Director’s Friend was able to help:

 This is the testimonial for the advice of the Director’s Friend:

‘I was faced with a wide ranging and detailed director disqualification investigation by the Insolvency Service. They were asking a great number of questions of me in respect of creditors and directors loans and benefits (amongst other issues).

 Richard was introduced to me by my accountant to advise. With Richard’s advice a detailed and lengthy letter of rebuttal, representations and answers was drafted and sent to the Insolvency Service. A further letter of enquiry was quickly answered by Richard. Shortly thereafter the Insolvency Service confirmed that they were not proposing to take director disqualification proceedings against me.

 I cannot tell you how happy I was with that email. This has been a really stressful period for me and I'm delighted with the result.

 I just want to say thank you very much Richard, I've been so impressed with you and your service.

 I would not hesitate to recommend Richard Cole (AKA the ‘Director’s Friend’) to you.

 JT, Kent, United Kingdom.’

 

If you or someone you know is the subject of a director disqualification, contact the Director’s Friend for help

 As the Director’s Friend, I was very grateful to receive this testimonial. It demonstrates the approach that the Director’s Friend takes with the experience and knowledge that the Director’s Friend can bring to bear for you in your corner.

 

My name is Richard Cole. I am a Solicitor who formerly worked at the Insolvency Service carrying out director disqualification investigations. I am now the Director’s Friend. Why not contact me to discuss on: +44(0) 1992 558 411. The earlier that you speak with me the more that I can likely help.

Until the next time...

THE DIRECTOR’S FRIEND

 

 

 

 

 


Debt Recovery

Changes to Debt Claims

Debt RecoveryThe Civil Procedure Rule Committee has introduced new rules in relation to debt claims which will be governed by Pre-Action Protocol for Debt Claims and will come into force on 1st October 2017.

The new Protocol will apply to any business, sole traders and public bodies who are claiming payment of money (debt or alleged debt) from an individual including sole trader. Therefore, the Protocol will apply to a sole trader making a claim against another sole trader.  However, this will not apply to business to business debts.

The aim is to encourage both parties to enter into early communication and exchange of information / documents regarding the debts. This will in turn enable the parties to resolve the matter without the need to start court proceedings.  The idea is also to be cost beneficial to all parties to engage in early pre-litigation communication.

A creditor is required to send a Letter of Claim detailing the agreement, issues and how the debt can be paid etc. The Creditor cannot issue court proceedings within 30 days of sending the Letter of Claim.  This is to allow the Debtor to review the Letter of Claim and prepare a detailed response setting out their issues etc.

The Court will take into account whether all parties have complied with the Protocol when giving directions for the management of proceedings. Therefore, failure to comply with the Protocol could result in the proceedings being stayed until the Protocol has been complied with, cost sanctions against the non compliant party or even the claim / defence being dismissed.

If you would like to discuss this further, please contact Sharon Matchwick or Rita Wright in our Debt Recovery Department on 01992 558 411

or email debtrecovery@breezeandwyles.co.uk


I'm very happy with my new home!

"I just wanted to send a mail to say thank you very much for all your work on my sale and purchase. Realise it was a tough one and also that you had a lot of queries to deal with from myself!

I do appreciate everything you did to get this sorted.

Thanks again,"

H. Yates - 04/07/2017


banking new

Food for thought – Director Disqualifications for Business Manager and Bass Player of UB40

This is the next article in a series by the Director’s Friend.

The Insolvency Service (‘IS’) confirmed in a recent press release that David Parker (‘Mr Parker’) (the UB40 business manager) and Earl Acton Falconer (‘Mr Falconer’) (the UB40 bass player) gave director disqualification undertakings to the IS with the periods of disqualification being 11 years and 4 years respectively.

Mr Parker is stated to have accepted that he breached his fiduciary duties as a director of the Reflex Recordings Limited (the ‘Company’) by:

“… deliberately and knowingly causing the dissipation of £252,980 of Company assets between 9 December 2013 and 18 December 2013, without making due provision for subrogated rights and/or claims of at least two creditors.

At the time, the Company was insolvent and Mr Parker knew about the subrogated rights and / or claims of the creditors against the Company.

Mr Falconer and separately a Mr Storrod (also connected with the band) also accepted that they were in breach of their fiduciary duties as directors of the Company by abrogating their duties resulting in or allowing the dissipation of the monies.

The Company’s assets consisted of the music catalogues of UB40 and the trade of the Company included receiving royalties in connection with the catalogues.

Susan MacLeod, Chief Investigator at the IS said:

‘In investigating insolvent companies, the Insolvency Service always looks very closely at individuals who demonstrate a disregard for creditors and appropriate action is taken where wrongdoing is uncovered.’

 THE DIRECTOR’S FRIEND COMMENTS:

 These director disqualifications go to show that you should be aware of your duties as company directors and that especially when a company is insolvent a director should carefully consider the interests of creditors and not dissipate the company’s assets. Appropriate legal should be sought to protect yourself from being disqualified from being a company director.

OTHER CLAIM RISKS FOR DIRECTORS:

If the conduct complained of had been dated from 01 October 2015 onwards then the well-advised director should seek and obtain legal advice upon their risk of the IS bringing Compensation proceedings against them personally for the benefit of creditors of the company in addition to director disqualification.

In addition, the Joint Administrators of the Company may also consider bringing proceedings to recover the dissipated funds from the directors personally. This claim could be brought as Misfeasance. This is where the director is alleged to have

‘… misapplied or retained, or become accountable for, any money or other property of the company, or been guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company.’

THEREFORE:

Food for thought indeed! As your Director’s Friend, it can be seen that when you are first written to by the IS, an Administrator or a Liquidator that you should take immediate legal advice to protect your position to respond to such claims.

WHAT TO DO NOW:

My name is Richard Cole. I am a Solicitor who formerly worked at the IS carrying out director disqualification investigations. I am now the Director’s Friend. Why not contact me to discuss on: +44(0) 1992 558411. The earlier that you speak with me the more that I can help.

Until the next time...

THE DIRECTOR’S FRIEND