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Dividends, Directors and the Future in Pandemic Times – the views of 2 Leading QCs

Dividends, Directors and the Future in Pandemic Times – the views of 2 Leading QCs

Advice for Directors. Mark Harper QC and Louis Doyle QC Look at Dividend Payment Considerations in the Pandemic

With the kind permission of Mark Harper QC and Louis Doyle QC, both leaders in their field of Company and Insolvency advice, we reproduce below their current and joint thoughts as to how the impact of the pandemic may come back to haunt directors and shareholders moving forwards and what they should be taking into account, now and in the immediate future, in their decision making processes, regarding dividend payments. Please scroll to their article below, it is excellent advice for directors – Dividend Payment Considerations in the Pandemic.

The Temporary Suspension of Wrongful Trading – Directors Must Still Fulfil Statutory Duties

As a separate point, many of us will have heard  the Government’s so called  temporary relaxation of ‘Wrongful Trading’ laws over the last weekend – that is the Insolvency Act  offence committed  by Directors who trade a company on for too long, when there is no reasonable prospect of it recovering. Such a finding imposes personal liability for company debts on the director. Serious stuff.

Whilst that announcement was a welcome and much needed fillip for Directors who find their businesses facing unprecedented financial challenges right now, our advice for directors is to tread very carefully indeed, as all of the other checks and balances that help to ensure directors fulfil their duties properly remain in force. If any doubt, directors should seek legal advice on the specific circumstances of each case.

Always Obtain Legal Advice

Directors should remember that obtaining legal advice can have many benefits, to include our advice adding benefit to the specific situation, our  ability to put you in touch with trusted  Finance and  Insolvency professionals  and your  ability to rely on our advice (if followed!)  if challenged, moving forwards.

The NDP team are available on their usual mobile telephone numbers. Click here to see full details.

 With very best wishes to everyone in these dangerous and challenging times.

 Neil Davies – neild@ndandp.co.uk 

07825 326857

And all the Team at NDP

Dividend Payment Considerations in the Pandemic

 (by Mark Harper QC & Louis Doyle QC)

Mark Harper QC and Louis Doyle QC look at the litigation risks inherent in a company’s board acting on a dividend policy which fails to take account of the changing pandemic landscape

  1. Owner/directors paid by dividends are not helped by the Self-Employment Income Protection Measures. Individuals working through their own personal service companies (PSC) – a company owned and controlled by them – will not qualify in the vast majority of cases for assistance under the Government’s Statutory Self-Employed Scheme.

On the other hand, there is a respectable argument (at least) that an employed director (that is, one whose remuneration is subject to PAYE etc, as opposed to remuneration being drawn by a self-employed director) may be capable of being furloughed under the newly-announced Coronavirus Job retention Scheme, subject to the mandatory proviso that the furloughed employed director does no work for the furloughing company subject to compliance with statutory duties (on the basis that such compliance arises under statute and is not rooted in any employment contract).

  1. The income and future profitability of some companies will be impacted by the measures imposed because of the pandemic.
  2. The state of the law, as identified by Zacaroli J in Burnden Holdings (UK) Ltd (in liquidation) v Fielding [2019] EWHC 1566 (Ch) is prescient. That case involved a claim against two directors by the company and its liquidator in relation to a grant of security to the directors for a loan made by them and a distribution in specie of the company’s shareholding in a subsidiary.

The distribution was attacked as unlawful and in breach of fiduciary duty because it contravened the requirements of s.263 of the Companies Act 2006 (distributions only from distributable profits) and s.270 (distributions justifiable by reference to accounts). It was also attacked as a breach of fiduciary duty under s.172(3) because the directors knew that the company was, or was likely to become, insolvent, and failed to consider creditor interests.

In dismissing the claim, Zacaroli J held that liability for the unlawful dividend was fault-based, not strict. If the directors were unaware of the facts rendering the dividend unlawful, they could not be personally liable if they had taken reasonable care to secure the preparation of the accounts which showed that a lawful dividend could be paid, even if it emerged ultimately that there were insufficient profits to do so.

The warning, however, is what directors, in present circumstances, must be taken as knowing in taking reasonable care in the preparation of accounts. Specifically, how might a short-term dividend policy be balanced against a company’s longer-term cash needs, especially where institutional lending policy is likely to be increasingly conservative as pandemic conditions persist?

  1. Questions for directors to pose in relation to dividend policies

Is your dividend policy still fit for purpose?

For the purpose of any proposed dividend, how are you assessing the solvency of the company, including taking account of contingent and prospective liabilities?

Even in a clearly solvent company, to what extent would the hypothetical s.172 director retain profits for the future?

How do you protect yourself from any suggestion that decisions to pay dividends were not influenced by the need of the director/shareholder for income, as opposed to the needs of the company, especially where the facts point to such a conclusion?

Should directors consider paying owner/directors on PAYE?

  1. Insolvency Practitioners will scrutinise any withdrawals of profits or funds from limited companies during this time and therefore all withdrawals of the same need to be informed by advice (although the mere fact of obtaining advice is not a complete protection; a court will look at the source of the advice, the instructions given, the expertise of the adviser, the substance of the advice and the extent to which the advice was actually relied upon).

Claims by liquidators and administrators for breach of fiduciary duty, breach of trust etc are capable of being conducted under the summary procedure under s.212 of the Insolvency Act 1986 and are easily coupled with non-Insolvency Act claims, most obviously breaches of the Companies Act 2006; neither are such office-holders susceptible to applications for security for costs.

Mark Harper QC – mharper@kingschambers.com

Louis Doyle QC – ldoyle@kingschambers.com

 27th March 2020

Business as usual at Neil Davies and Partners

Business as usual at Neil Davies and Partners

How Can We Help Directors During the Covid-19 Crisis? What are the Duties of Directors?

During these extremely challenging and unparalleled times, we are writing to assure you that it’s business as usual here at Neil Davies & Partners.

Our team of Insolvency Solicitors will continue to provide you with help and support where and when it is required. You can find the direct telephone numbers and email addresses for our team by clicking here.

We are Fully Equipped for Remote Working

As you would expect, all of our team members, from Directors  to legal secretaries are fully equipped to work remotely from the office and are able to fully service your, or your clients’, legal needs, whether it’s a Director Disqualification, Misfeasance, Insolvency, HMRC  or Commercial Litigation problem.

With the current UK-wide lockdown, we are, of course, able to provide meetings over the telephone, including  conference call facilities, or by using Skype, Facetime and other on line services.

Companies and Directors Will be Facing Extremely Difficult and Stressful Decisions

The work that the NHS is doing to protect the nation, along with all the other emergency and support services is truly outstanding and humbling. As a firm of solicitors, we can simply do all that we can, in our areas of expertise, to help companies and directors as much as possible during the crisis.

Many companies have run into serious financial problems almost over-night, and it is to the credit of the Government that several huge new initiatives have been announced in recent days that have been designed to ease the burden. No doubt there will be more to come.

Nevertheless, and distressingly so, there will be many insolvencies, impacting upon directors and employees of those companies.

How Can We Help You and Your Clients? Advice for Directors

Our  insolvency solicitors spend  the majority of their time dealing with problems arising  as a result of companies entering insolvency, for which there may be  many serious consequences for the director – director disqualification investigations and misfeasance claims, for example – which  arise when it is alleged that directors have not fulfilled their Statutory Duties.

The Duties of Directors are set down in the Companies Act of 2006.

The last thing company directors need right now is to worry about further problems, above and beyond insolvency.

We have already had many calls and emails from worried directors about the consequences of insolvency, whether they have been fulfilling their statutory duties, and what they need to do if they haven’t been.

That’s where we come in. Knowing the duties of directors and understanding how to support, advise and defend directors who are threatened with legal action for not carrying out these duties, even during the current crisis, is one way that we can help.

Look out for further emails giving more information on this area.

If You or a Client is Worried About the Consequences of not Fulfilling the Duties of a Director, we can help

All you need to do is contact us, email us on law@ndandp.co.uk, call us on 0121 200 7044 or click here to see our mobile numbers. We recognise there will be many directors feeling concerned and worried about this area and we are here to help. Of course, the initial discussion is free.

Significant Increase in Personal Guarantee Claims

Significant Increase in Personal Guarantee Claims

Negotiating Out Personal Guarantees – How Much Value Are They? – And Responding to Demands for Payment

With the majority of lenders hesitant in these uncertain times to provide funding without adequate repayment safeguards in place, we have seen a significant increase in clients seeking advice as to their exposure to claims under Personal Guarantees and how best they might respond to such claims.

In this article we look at what Personal Guarantees are, what can happen if the terms of the Personal Guarantee are not met and what options a company Director(s) who has given a Personal Guarantee has available to him/her.

It is the last part of this article, looking at practical considerations, that may be of most interest to readers.

What is a Personal Guarantee? How do They Work?

Personal Guarantees are (in theory) simple, and it is no surprise why lenders are so reliant upon them. In practice, the Guarantor (often a company Director) legally agrees to be personally liable for the company’s debts, if its obligations are not met. If the company is then unable to pay and thus fulfil its obligations to the lender, the lender can then sidestep any insolvency process the company may enter into, and look to recover the debt from the Guarantor personally, relying on the Personal Guarantee.

What are the Risks Associated with Personal Guarantees?

The risks associated with personally guaranteeing large company loans can manifest themselves with serious consequences, with potential outcomes for the Guarantor that include significant equity decreases in the family home or, in the most severe case, bankruptcy.

Can Personal Guarantee Claims be Challenged? Yes. In Particular if the Guarantee Does not Fulfil the Necessary Legal Requirement

Receiving a personal guarantee claim can be highly stressful. It is not all doom and gloom, however, as there are indeed ways and means of challenging personally guaranteed obligations.

The law imposes several formal requirements that must be met if a Personal Guarantee is to be enforced against the Guarantor. They include:

  • The form of the personal guarantee: The guarantee must be evidenced in writing. Section 4 of the Statute of Frauds 1677 stipulates that in order to be enforceable, a Personal Guarantee (or some memorandum or note of the guarantee) must be in writing and signed by the Guarantor or a person authorised by the Guarantor. The writing may be a formal contract or agreement, or it can indeed be given by simple means such as an email or memorandum.
  • It must be signed: The Guarantor should sign it themselves, or have their authorised agent sign it. It can however be signed by other modern means such as by way of email signature. The High Court in Golden Ocean Group Ltd v Salgaocar Mining Industries [2011] EWHC 56 decided that ‘signature’ should be given a wide interpretation.

If the name of a Guarantor appears in an email with the intention that it is a signature and there is evidence of an intention to contract, then the name will constitute a signature for this purpose. Therefore, as long as it is intended to operate as a signature, the Guarantor will most likely be bound by it.

  • Secondary Liability: It must be established that the Guarantor has secondary liability to perform the guaranteed obligation and the principal debtor has the primary liability to perform the contract. This will be evidenced within the terms of the Personal Guarantee document.
  • Consideration: The document should satisfy the requirements of any other contract in that there should be adequate consideration. This is however subject to general contractual principles so for example, past consideration will not usually be valid consideration.

In the absence of a clearly drafted and executed document that fails to satisfy the basic formalities of a contract and the legal requirements of a Personal Guarantee, it may not be enforceable.

Additional Ways to Challenge a Personal Guarantee Claim

There are additional ways of challenging Personal Guarantee claims, especially those that fall within one of the below categories:

  • Misrepresentation and/or Undue influence – The Guarantor may have been substantially misled before they entered into the Personal Guarantee. This could result from any undue influence or misrepresentation by a third party.
  • Repudiation – The creditor may have (unwittingly) repudiated the terms of the Personal Guarantee and that repudiation may have been accepted by the Guarantor.
  • Variation of terms – There may have been oral or written variations to the Personal Guarantee which may affect the terms of enforcement, such as extensions of time given and the waiver of one or more terms of the original document, which may raise the possibility of a successful challenge by the Guarantor.
  • Legal advice – There may be an obligation on the creditor to inform any prospective Guarantor to take independent legal advice before entering into the Personal Guarantee.  Failure to so advise, may give the Guarantor legitimate grounds to oppose the Personal Guarantee Claim.

Talk to our Specialists if you are Facing a Personal Guarantee Claim: Practical Considerations

In our experience, all is not lost, and the outcome is not inevitable, when a Personal Guarantee Claim is received.  It is not always an open and shut case for creditors to enforce Personal Guarantees Claims as each case is highly fact specific.

We frequently come across dubious documents that purport to be Personal Guarantees and which are successfully challenged.

Good Old Fashioned Negotiation

The following matters are, in practice, of enormous benefit and are very powerful negotiating tools in negotiating out liabilities claimed under Personal Guarantees and, possibly, wider personal financial obligations.

Inability to Pay

No creditor wants to throw good money after bad, incurring legal expense and wasting time pursuing a Guarantor who:

  • May have indicated a willingness and grounds to oppose the Personal Guarantee Claim.
  • May be able to demonstrate inability to pay the Personal Guarantee Claim (looked at in isolation) or inability to pay, looked at in the context of all the Guarantors debts, owed to all of his/her creditors.

On the ‘inability to pay/other creditor’ position, NDP are well used to deploying the numerous facets of such arguments to maximum effect, resulting in affordable settlement of Personal Guarantee liabilities, often with time to pay settlements over time.

Threat of Personal Bankruptcy or Individual Voluntary Arrangement (‘IVA’) for the Guarantor

Bankruptcy or an IVA (or even the threat of it) may actually be a sensible option for the debtor. Explained properly in a constructive way to a creditor, our experience is that such explanations do result in settlements for Guarantors.

The old adage of preferring to have 20% of something rather than 100% of nothing, holds true. The creditor must however be persuaded that the deal is an agreed one/the best that can be achieved by that creditor.

In the words of the late, great comedian, Frank Carson ‘it’s the way you tell them!’.  At NDP, we are well used ‘to telling them’.

Several factors come into play when deciding whether to challenge a Personal Guarantee claim. If you would like to discuss your position, please contact us or call a member of our team on 0121 200 7040 for a free no obligation chat on what approach is best in your circumstances.

Personal Guarantee Claims