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

 

 

 

 

 


Setting aside a Notice of Intention to appoint an Administrator by a Director (‘NOI’)

The Court of Appeal has given a recent judgement setting aside an NOI. That was in the following case: JCAM Commercial Real Estate Property XV Limited v. Davis Haulage Limited [2017] EWCA Civ 267 that is reported here: http://cases.iclr.co.uk/Subscr/search.aspx?docID=WLRD2017-265. Lord Justice David Richards gave the lead judgment.

BACKGROUND:

There were 4 NOI’s filed by the director. There was on the evidence no settled intention to appoint administrators.

NEW POINTS TO BE TAKEN:

  1. Notice is to be given and a copy of the notice filed in Court, only (emphasis added) if there is a person (i.e. a Qualifying Floating Charge Holder) with a prior right to appoint an administrator (per paragraph 56)
  2. If there is no person to whom notice must be given under Paragraph 26(1), there can be no interim moratorium (per paragraph 57);
  3. Lord Justice David Richards stated at paragraph 64:

The ground for the order to remove the copy of the notice from the court file is, in my judgment, the straightforward ground that the notice was invalidly given, because the statutory pre-requisite of a settled intention to appoint was not satisfied. The notice was not validly given under paragraph 26 nor was a copy of it validly filed with the court under paragraph 27, with the result that the interim moratorium was not validly invoked. To give a notice and file a copy with the court in these circumstances is no doubt, in a technical sense, an abuse of the court's process…For the future, it will be clear, by reason of this court's decision, that a conditional proposal to appoint an administrator does not entitle or oblige a company or its directors to give a notice under paragraph 26 of schedule B1.’

CAN SUCCESSIVE NOI’S BE FILED?

The 2010 case of RE: Cornercare Limited does not appear to have been overruled. Therefore, it would appear that successive NOI’s can be filed as long as there is a settled intention to appoint and genuine reasons for the successive NOI(s). Those reasons should be carefully recorded as a matter of course in case the Court is involved.

COMMENT:

 A settled intention to appoint administrators is essential.

I am a solicitor. If you have any questions please give me a call on +(0) 1992 558 411 or drop me an email on: Richard.Cole@breezeandwyles.co.uk


Facing Personal Liability for 'Smelting the Assets Transactions'

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

SUMMARY:

In respect of a risk under Section 423 of The Insolvency Act 1986 (the “Act”) a Director must be very mindful where their own interests in respect of a company take precedence over those of the company or perhaps creditors as a risk of personal liability (amongst other risks that may follow).  In this particular case, we focus upon where the company assets are moved with the objective of putting assets beyond the reach of or otherwise prejudicing the interests of persons making or who may make a claim against the company.

BACKGROUND:

This case (Henry George Dickinson and NAL Realisations (Staffordshire) Limited and others [2017] EWHC 28(Ch)) concerned a company Norton Aluminium Limited (“Norton”) which operated an aluminium smelting foundry in Staffordshire. Norton went into Administration following the circulation of a draft judgment that upheld in part claims of nuisance brought by a group of local residence against Norton.  The Managing Director and controlling shareholder of Norton Mr Dickinson brought the claim to recover in the liquidation various sums totalling just over £1M which he alleged were due to him and secured by debenture over Norton’s assets.

Materially for this article the liquidators brought various counterclaims to include setting aside or recovering compensation for transactions entered into in 2010 to include that Norton bought back most of its shares from Mr Dickinson and connected parties for £2.5M, which was left outstanding as a secured loan and again materially Norton sold a subsidiary (North Castings Limited) to Mr Dickinson for £1, which was alleged to be at an undervalue.

Section 423 of the Act is concerned with transactions that defraud creditors that the Court has jurisdiction to review.

NOTABLE COMMENTS BY THE JUDGE:

His Honour Judge David Cook made various findings in respect of Section 423 from paragraph 95 onwards to include as follows:

In respect of the share buyback:

(1) At paragraph 105 the Judge commented that he was satisfied that Mr Dickinson had embarked on the various transactions now challenged in order to ensure that if the worst came to the worst he would be able to retain control of the business and its future profit potential and little would be available in the terms realisable assets from which an adverse judgment could be satisfied. This, the Judge found, was not merely a substantial purpose but the dominant one in Mr Dickinson’s mind.

(2) At paragraphs 109 and 110 the Judge found that net assets in the accounts of circa £2.7M did not disprove the Section 423 purpose as there was nothing in the evidence to disprove that.  In fact, the Judge found that there was evidence to the contrary.

(3) At paragraph 111 the Judge found that the converting of the rights of shareholders into claims for secured debt both prejudiced the interests of the environmental claimants and put assets beyond their reach by ensuring that shareholder debt had prior claim on the assets.  Thereby the pool of liabilities was increased and therefore Mr Dickinson’s dominant intention and therefore the buyback fell within Section 423 and that the Court may order relief.

THE NORTON SHARES

In respect of the Norton shares at paragraph 145 onwards the Judge found that he could also exercise the jurisdiction under Section 423.

Interestingly relief was not available under section 1157 of the Companies Act 2006 and the reason for that (as set out at paragraph 154) was that Mr Dickinson’s ...”liability arises because he was party to the transaction that is to unwound, not because he was a director.  It would be illogical to have a power to grant relief in favour of a beneficiary of a transaction who happens to be an officer of the company where no such power will exist in favour of an equally honest outsider”.

COMMENTS:

Be aware that there is no requirement for the application of Section 423 that the company be insolvent, in liquidation or in administration.

Following this decision it can be seen that a director who is found to have had a dominant intention to put assets beyond reach of persons bringing a claim or prejudicing the interests of persons bringing a claim in these particular circumstances is at risk of being found liable for these transactions and it shows the risks of that director.  However, with the early and right advice the well-advised director could mitigate or perhaps avoid this outcome.

WHAT TO DO NOW:

If you are faced with insolvency issues with your company, a claim for transactions defrauding creditors or a transaction at under value claim 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 the more that I can help.  Why not call me today on 01992 558411 and speak to me without obligation, protect your costs.

If you are happy to instruct me my firm and I are happy to talk to you about fixed fees or staged fees that are agreed with you in advance of any work being carried out or we can liaise with your insurers. Your work will be carried out by me or others under my close supervision. I am happy to come to you to take instructions. My firm is based in London and Hertfordshire, here in the UK.

YOUR ADVISER

Finally, is you advisor a practising solicitor (and thus insured to advise you – check with the SRA) and if so is your solicitor a full member of the Insolvency Lawyers Association (‘ILA’) (ask them). Membership of the ILA is a public mark from insolvency peers that your representative has the requisite knowledge, skill and experience to advise you. I am both. Accept no substitutes.

Until the next time...

THE DIRECTORS FRIEND


The Directors' Friend: – Facing Personal Liability for 'Wrongful Trading' - Call for 'Robin Hood'

This is the next in my series of blogs for the Director’s Friend.

SUMMARY

In order to obtain an order from the court that a director is personally liable for wrongful trading under section 214 of the Insolvency Act 1986 (the ‘Act’) the Liquidator or Administrator have to not only prove the elements of wrongful trading, but they must demonstrate how the wrongful trading caused an increase in the company’s net deficiency. That is its losses.

That is the company should objectively have been placed into Liquidation at X date. It was not. The net deficiency has increased as a consequence – by how much? No evidence = no personal liability.

SECTION 214

In summary, this is claim for personal liability against a director of a company. The claim is made up of the following:

  • The company is insolvent and is in Liquidation or Administration;
  • A person has been a director of that company at any time; and
  • At some time before the commencement of the winding up of the company, that person knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation or entering insolvent administration.

The court, on the application of the Liquidator, may declare that that person is to be liable to make such contribution (if any) to the company’s assets as the court thinks proper.

The court shall not make a declaration if that person took every step with a view to minimising the potential loss to the company’s creditors as they ought to have taken.

That takes into account:

  1. the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company, and
  2. the general knowledge, skill and experience that that director has.

BACKGROUND

A recent appeal case heard by David Foxton QC on appeal from Registrar Jones (Brooks and another (Joint Liquidators of Robin Hood Centre plc (In Liquidation) v Armstrong and another [2016] EWHC 2893 (Ch)) the directors successfully appealed the amount of compensation payable by them.

The Registrar in the earlier decision had held that the directors had been guilty of wrongful trading; that the net deficiency of the company had on the evidence increased and that as a consequence the directors had to contribute £35,000.00 to the company’s assets.

That was in circumstances where the directors were facing a claim in a sum in excess of £700,000.00.

The directors were faced with a number of dates on which it was claimed that they knew or ought to have known that the company was facing insolvent liquidation. The Registrar found that the directors had that knowledge on one date, but were not wrong to continue to trade until a later date. That was because up to that later date the directors were taking steps to minimise further losses to creditors.

FINDINGS

Essentially, the Liquidators were found on the facts to have failed to make out their case that there had been an increase in the net deficiency (losses) of the company during the period of wrongful trading. This is fundamental irrespective of losses caused to individual creditors.

No increase in the net deficiency = no case.

COMMENT

Following this decision, it shows that a Liquidator or Administrator must show that the wrongful trading alleged actually caused losses to creditors of the company.

From a director’s perspective, it shows that there are risks when you are a director of a company that is or maybe trading insolvently to you personally. However, with the early and right advice this can be mitigated or even perhaps with the assistance of Robin Hood defeated…

I understand, however, that the Liquidators have applied for permission to appeal this decision – watch this space.

WRONGFUL TRADING AND DIRECTOR DISQUALIFICATION

The well-advised director will also be mindful of the risk in section 10 of the Company Directors Disqualification Act 1986 that states:

‘(1)       Where the court makes a declaration under section 213 or 214 of the Insolvency Act 1986 that a person is liable to make a contribution to a company’s assets, then, whether or not an application for such an order is made by any person (emphasis added), the court may, if it thinks fit, also make a disqualification order against the person to whom the declaration relates.

(2)        The maximum period of disqualification under this section is 15 years.’

The directors of the company were perhaps fortunate that the Registrar chose not to also exercise the jurisdiction to disqualify the directors from acting for a period of time.

WHAT TO DO NOW

If you are faced with insolvency issues with your company, a wrongful trading claim for personal liability or director disqualification proceedings please talk to me today. That is in order to protect your position without delay. The earlier that you speak with me the more that I can help. Why not call me today on 01992 558 411 and speak to me without obligation, pressure or cost.

If you are happy to instruct me my firm and I are happy to talk to you about fixed fees or staged fees that are agreed with you in advance of any work being carried out or we can liaise with your insurers. Your work will be carried out by me or others under my close supervision. I am happy to come to you to take instructions. My firm is based in London and Hertfordshire, here in the UK.

YOUR ADVISER

Finally, is you advisor a practising solicitor (and thus insured to advise you – check with the SRA) and if so is your solicitor a full member of the Insolvency Lawyers Association (‘ILA’) (ask them). Membership of the ILA is a public mark from insolvency peers that your representative has the requisite knowledge, skill and experience to advise you. I am both. Accept no substitutes.

Until the next time...

THE DIRECTORS FRIEND


Reuse of a Prohibited Company Name by a Director leaves the Director caught in an expensive web!!

This is the next in my series of blogs for the Director’s Friend.

SUMMARY

Following a prosecution for breach of section 216 of the Insolvency Act 1986 (the ‘Act’) (re-use of a prohibited company name by a director) with confiscation proceedings following the Court of Appeal recently concluded that:

  • a confiscation order can be made against an individual who is convicted for trading under a prohibited name / style; and
  • the court is entitled to hold that the total turnover (not just the net profit) for the entire period of trading under that name is recoverable.

SECTION 216

In summary, this is where a director of a company reuses the same or a similar name to a company that has entered into insolvent liquidation, so as to suggest an association.  This name is known as a “prohibited name”. This can include any name registered at Companies House, a trading or other name.

BACKGROUND

A recent Court of Appeal decision R v Neuberg [2016] EWCA Crim 1927 handed down by Lord Thomas of Cwmgiedd, CJ considered the law of confiscation following a successful prosecution against an individual for breach of section 216.

The appeal was as a result of a reference by the Criminal Cases Review Commission (‘CCRC’).

The Appellant was a director of company Watergate Services Limited trading as ‘Neuberg Metal Spinners’ (the ‘Company’) which went into liquidation on 19 November 2001.

By the time that the Company was placed into liquidation the Appellant was trading in her own name as ‘Neuberg Metal Spinners’.

After 19 November 2001, it was not lawful for the Appellant to use the name of "Neuberg Metal Spinners" but she continued to use that style until 14 June 2002.

The Appellant was charged with trading under a prohibited style, namely "Neuberg Metal Spinners", without the leave of the court, between 19 November 2001 and 14 June 2002 contrary to section 216 of the Act.  She pleaded guilty to that offence on 12 November 2004.

She was given a community sentence and disqualified from being a company director for five years.

Further, a formal Order for confiscation was made on 12 April 2006. The benefit was the turnover of the Appellants trading in the sum of £288,948. The realisable assets were £100,000.  The Order was made in the amount of £100,000.  The judge fixed the term of imprisonment in default at two years and ordered the appellant to pay £7,500 towards the cost of the prosecution.

The Appellant paid £100,000 as ordered.

FINDINGS

It was found by the Court of Appeal that:

  • the criminal activity was carrying on the business in the prohibited name;
  • it was clear that the Appellant carried on the business under a prohibited name;
  • it was the carrying on of that business under that name that gave her a significant benefit;
  • For present purposes, it was sufficient to say that, as the court held in 2007, the judge was unquestionably correct in calculating the benefit by reference to the turnover; and
  • On the basis of the information (a lack of financial analysis of the accounts) put before the Court, that there was nothing from which the Court could infer that the amount of the confiscation order in the sum of £100,000 was in any way disproportionate.

The Court observed that attempting to conduct an exercise in ascertaining the financial position of this business more than 14 years previously was one that would have been fraught with difficulty.

The Court therefore rejected the appeal and stated that it was a matter of some regret that the reference was made to the Court (by the CCRC) without a more careful analysis of the basis on which the reference was to proceed.

COMMENT

Following this decision, any director or other convicted of this offence could be ordered to pay a sum equal to the total turnover for the entire period of illegal trading. This would be in addition to any fine or prison sentence handed down as a punitive element.

The director could also be disqualified from acting as a company for a period of time.

In addition, again that director / individual could also find themselves personally liable to repay the creditors of the business under section 217 of the Act, although possibly not in the case under discussion. So, heavy sanctions!

WHAT TO DO NOW

If you are faced with a claim for personal liability or a prosecution under these sections please talk to me today. That is in order to protect your position without delay. The earlier that you speak with me the more that I can help. Why not call me today on 01992 558 411 and speak to me without obligation, pressure or cost.

There are options that are outside the scope of this article to avoid the draconian consequences under this law, but the well-advised director must move swiftly to protect their position.

If you are happy to instruct me my firm and I are happy to talk to you about fixed fees or staged fees that are agreed with you in advance of any work being carried out or we can liaise with your insurers. Your work will be carried out by me or others under my close supervision. I am happy to come to you to take instructions. My firm is based in London and Hertfordshire, here in the UK.

YOUR ADVISER

Finally, is you advisor a practising solicitor (and thus insured to advise you – check with the SRA) and if so is your solicitor a full member of the Insolvency Lawyers Association (‘ILA’) (ask them). Membership of the ILA is a public mark from insolvency peers that your representative has the requisite knowledge, skill and experience to advise you. I am both. Accept no substitutes.

Until the next time...

THE DIRECTORS FRIEND


Employment of Illegal Workers results in Director Disqualification

This is the next in the series of my blog for the Director’s Friend.

BACKGROUND

In a recent press release the Insolvency Service (‘IS’) show that they are targeting insolvent companies that have been employing illegal workers and where the fines levied by the Home Office were not paid. According to the press release 11 directors from separate companies were disqualified for employing a total of 39 illegal workers across various geographic locations in England.

Following visits from Home Office Immigration officers, during which the illegal worker breaches were discovered, the companies were issued with penalty notices ranging from £10,000 to £15,000 per worker, which remain unpaid. Across the companies talked about in the press release these unpaid fines totalled £450,000.

All 11 of the directors were directors of the companies and were in office at the time of the Home Office visit.

THE INSOLVENCY SERVICE COMMENTS

Cheryl Lambert, the Chief Investigator at the IS is quoted to have said:

‘Employing illegal workers is not a victimless crime. These directors sought an unfair advantage over their competitors by employing people under the radar who were not entitled to work legally in the UK.

If a company is found to be employing illegal workers and not carrying out the checks they are required to by law, then the Insolvency Service will take action to remove the directors from the market place, regardless of whether the company is in Liquidation or not.

This action is a warning to other employers to seriously consider their duties and obligations.’

FURTHER WARNING

A further warning is contained in the press release in circumstances where the company is still active and not subject to insolvency proceedings where the Insolvency Service and the Home Office are working very closely together.

THE WIDER PICTURE

An employer can be sent to jail for 5 years and pay an unlimited fine if they’re found guilty of employing someone whom they knew or had ‘reasonable cause to believe’ didn’t have the right to work in the UK. If that is a director of a company, then they could also be disqualified from being a company director in any event by the criminal court.

In addition, a civil penalty could be levied in the sum of £20,000 for each illegal worker employed.

So, employing someone who does not have the legal right to work in the UK could be very expensive, result in a prosecution and a director disqualification. In addition, a confiscation order could follow!

COMMENT

These kind of civil director disqualifications seem in my experience to be on the increase where the theme is that the company employs illegal workers, is caught by the Home Office and fined. The fine is not paid and the company is placed into formal insolvency. It would appear that it is as a consequence of the Home Office and the Insolvency Service working together to target these cases.

WHAT TO DO NOW?

If you are faced with a claim for director disqualification by the IS please talk to me today. That is in order to protect your position without delay. The earlier that you speak with me as a specialist director disqualification defence solicitor the more that I can help. Why not call me today on 01992 558 411 and speak to me without obligation, pressure or cost. I am a game keeper turned poacher.

If you are happy to instruct me my firm and I are happy to talk to you about fixed fees or staged fees that are agreed with you in advance of any work being carried out or we can liaise with your insurers. Your work will be carried out by me or others under my close supervision. I am happy to come to you to take instructions. My firm is based in London and Hertfordshire, here in the UK.

YOUR ADVISER

Finally, is you advisor a practising solicitor (and thus insured to advise you – check with the SRA) and if so is your solicitor a full member of the Insolvency Lawyers Association (‘ILA’) (ask them). Membership of the ILA is a public mark from insolvency peers that your representative has the requisite knowledge, skill and experience to advise you. I am both. Accept no substitutes.

Until the next time...

THE DIRECTORS FRIEND


10 Things that you should consider when faced with a Director Disqualification Investigation

This is the next in the series of my blog for the Director’s Friend.

When the Insolvency Service (the ‘IS’) write to you with perhaps a questionnaire or a ‘section 16’ letter there are a number of issues that you should consider:

  • You should never deal with the claim yourself as it is not as straightforward as it may seem. What you say could be used in evidence against you and undermine your objective. Always seek and obtain expert legal assistance – use their expertise to assist you and let them deal with any stress for you;
  • Never just ignore the letters – the investigation and any claim is not going to go away if you just ignore it. It may end up costing you a lot of money with no input from you;
  • Do not be rushed into a response to the IS within the usually short timescale that they give for a response. Always consider your response carefully with the assistance of experienced solicitors. The solicitors can usually seek and obtain an extension of time to respond on your behalf and take away the stress for you;
  • You should never respond to the questionnaire without taking experienced legal advice first. That is because you need to be able to fully identify what the IS are investigating and to respond in the right way;
  • You should never respond to the section 16 threat letter without requesting a copy of the evidence that has been prepared against you. You then need to carefully review the same with an experienced solicitor to formulate the right response;
  • You should always ask your solicitor to identify whether there is a risk of other claims being made against you or other investigations being carried out. The IS investigation is not always the only one in contemplation. You need to avoid accidentally prejudicing yourself;
  • Running another company in the background whilst disqualified as a company director (perhaps as a majority shareholder) – you may believe that you can do this. My advice is that you should never do this as the IS do check and you could be at risk of someone complaining to the IS that you are breaching the disqualification. Remember that the fact of your disqualification is made public. The criminal sanctions are draconian; you could be held personally liable for the company debts and you could be disqualified for a longer period of time;
  • Acting in the management of a company whilst disqualified – you may consider that you can take up another more senior role in the company without being an appointed director. This is not sensible without the right director disqualification legal advice to avoid the draconian consequences outlined above. I have been involved in a case before where the judge found that the disqualified director was acting in the management of a company by arranging that company’s mobile telephone contract;
  • Is a disqualification inevitable? No not always with the right advice; and
  • If you are disqualified from being a company director is that it – do you have to wait out your ban period before you can act as a director again. No – please talk to me about obtaining permission to act as a director even whilst disqualified.

WHAT TO DO NOW?

If you are faced with a claim for director disqualification by the IS please talk to me today. That is in order to protect your position without delay. The earlier that you speak with me the more that I can help. Why not call me today on 01992 558 411 and speak to me without obligation, pressure or cost. I am a game keeper turned poacher.

If you are happy to instruct me my firm and I are happy to talk to you about fixed fees or staged fees that are agreed with you in advance of any work being carried out or we can liaise with your insurers. Your work will be carried out by me or others under my close supervision. I am happy to come to you to take instructions. My firm is based in London and Hertfordshire, here in the UK.

Finally, is you advisor a practising solicitor (and thus insured to advise you – check with the SRA) and if so is your solicitor a full member of the Insolvency Lawyers Association (‘ILA’) (ask them). Membership of the ILA is a public mark from insolvency peers that your representative has the requisite knowledge, skill and experience to advise you. I am both. Accept no substitutes.

Until the next time...

THE DIRECTORS FRIEND


Directors Duties when the Company may be or is insolvent - Be aware of personal liability stalking you!

This is the next in my series of blogs for the Director’s Friend.

In a recent decision of Terence Mowschenson QC sitting as a deputy High Court Judge in the case of Oakdene Homes PLC (In Liquidation) (the ‘Company’) and Carl Stephen Turpin dated 03 November 2016 the director of the Company in Liquidation was ordered to pay the total sum of circa £825,000.00.

That is a significant sum of money for a director of a company to find post that company’s liquidation. So, what happened?

BACKGROUND

The Company’ business was residential house building. In 2007 there was a sharp slowdown in the market for residential homes as a consequence of the financial crisis.

The judge found that the Company was insolvent from the end of 2007 to 23 January 2009 when it was placed into administration.

THE CLAIMS

The lead claim advanced against the director was for £750,000.00 for a call in respect of subscription monies due on a subscription of shares in the Company.

The judge found that the Company was short of cash in 2008. In about May 2008 the director agreed to subscribe for further shares for a consideration of £750,000.00. The judge referred to contemporaneous evidence where it was found that the shares had been allotted and the liability due from the director. The judge found that the director was liable to pay that sum.

A further claim was advanced by the director in the sum of £75,000.00 for monies that the judge found were simply a misappropriation of company monies to meet the directors’ personal liability to a bank. The judge found that the director had a fiduciary duty to safeguard company assets. He did not do so, therefore he was required to make good the assets as if he was a trustee and repay the monies.

A further claim in the sum of just over £5,000.00 was found to be owed by the director as a debt.

On the facts and the law the director’s counterclaims for set off and other claims were rejected.

A small crumb of comfort was allowed by way of the director’s counterclaim for a month’s unpaid salary, 12 week’s salary by way of wrongful dismissal and a redundancy payment.

ANALYSIS

Oddly the judgment does not set out the pleaded legal basis of the Liquidators claims. However, it is likely that they were for Misfeasance pursuant to section 212 of the Insolvency Act 1986. This is a fairly typical claim that directors of a company can face it that company has been placed into Administration or Liquidation to make them personally liable.

The Court may explore the conduct of a director and may via a Misfeasance claim compel the director to repay, restore or account to the company for any property or money (plus interest), or contribute such sum to the company’s assets by way of compensation in respect of the breach of duty as the Court thinks fit.

If the company is insolvent or financially distressed, an additional duty is imposed on the director to consider or act in the interests of creditors of the company (section 172(3) of the Companies Act 2006). However, that duty is owed to the company.

This is in circumstances where, as in this case, the judge found that the Company had been insolvent over a long period of time and that means that the director(s) of the company then have a duty to consider the best interests of creditors as a whole. These interests are paramount.

COMMENT

Particularly when the company is or may be trading insolvently the paramount consideration for the well-advised director is to consider the best interests of creditors. That protective advice should be sought from an accountant, a Licensed Insolvency Practitioner or an insolvency Solicitor to forestall an application by a subsequently appointed Administrator or Liquidator for Misfeasance to make you personally liable.

WHAT TO DO NOW?

If you are faced with a claim for Misfeasance please talk to me today. That is in order to protect your position without delay. The earlier that you speak with me the more that I can help. Why not call me today on 01992 558 411 and speak to me without obligation, pressure or cost.

If you are happy to instruct me my firm and I are happy to talk to you about fixed fees or staged fees that are agreed with you in advance of any work being carried out or we can liaise with your insurers. Your work will be carried out by me or others under my close supervision. I am happy to come to you to take instructions. My firm is based in London and Hertfordshire, here in the UK.

Finally, is you advisor a practising solicitor (and thus insured to advise you – check with the SRA) and if so is your solicitor a full member of the Insolvency Lawyers Association (‘ILA’) (ask them). Membership of the ILA is a public mark from insolvency peers that your representative has the requisite knowledge, skill and experience to advise you. I am both. Accept no substitutes.

Until the next time...

THE DIRECTORS FRIEND