HMRC Was Owed £110,000 at Liquidation. A Serious Case, But Director Disqualification Was Not an Inevitable Outcome
The Key Facts: At liquidation, the company owed £110,000 to HMRC. The debt went back at least 4 VAT quarters. HMRC was by far the biggest creditor of the company. There were few other creditors. The debt owed by the company to HMRC at liquidation stuck out like a sore thumb. A investigation into the conduct of the two Directors was, perhaps inevitably, commenced by the Insolvency Service. Our director disqualification specialists were instructed by the directors of the company.
Despite this serious situation, NDP’s Director Disqualification Specialists, led by Neil Davies and Suky Mann, managed to persuade the Insolvency Service, that it was not ‘necessary and expedient in the public interest’ for Director Disqualification proceeding to be pursued on the facts of this case.
Background to this Director Disqualification Case
Our two Director clients found themselves on the wrong end of proposed Director Disqualification proceedings, where the Secretary of State was seeking a 6 year Disqualification Order against both of them, based on the following 4 allegations of Unfit Conduct:
- They caused or allowed payments to themselves and connected entities, which payments were to the detriment of company creditors, namely HMRC, who were owed £110,000 at the point of liquidation.
- They caused or allowed significant reductions in their Directors Loan Accounts, via large expenses claims, submitted shortly before the company failed.
- They failed to comply with filing and payment obligations to HMRC.
- They failed to keep, maintain or deliver-up adequate accounting records to the Liquidator of the company.
The Starting Point – Getting all the Facts in Front of the Insolvency Service
On the face of it, our Director clients had a mountain to climb. What to do? We applied for and obtained from the Insolvency Service the draft written evidence it proposed to rely upon if proceedings were to be issued. That is where our hard work began. We knew that we had to persuade the Insolvency Service to look at all the circumstances of the case, rather than just the headline HMRC debt.
It is easy to forget that the Insolvency Service only sees what it sees. Like the Liquidator of the company, they are a stranger to events in the company. The Directors on the other hand actually ‘lived’ the trading life and the demise of their company. They know the detail of the history of the failure. It was this detail that had to be explained to the Insolvency Service, to give proper context to the company failure and how and why it happened.
This was now their opportunity to tell the Insolvency Service their side of the story.
The Wider Picture
Our clients were under no illusion that they were facing very serious allegations of Unfit Conduct, which, if proved could potentially also result in the Liquidator of the company pursuing them personally for significant sums, alleging Misfeasance (section 212 of the Insolvency Act 1986) against the Directors.
Criminal Law Allegations That Can Result in a 2 Year Prison Sentence
Directors often lose sight of the fact that allegation 4 (above – re: deficient books and records) is also a Criminal Law offence, which if proved before a Criminal Court, carries a 2 year prison sentence. Our clients, could, therefore have faced the possibility of a custodial sentence if the Director Disqualification proceedings had been successfully pursued by the Insolvency Service or if the Directors had admitted such conduct, which admissions could then have been relied upon by a prosecuting authority.
We are seeing – and are representing Directors in – a significant number of such cases, being pursued in a Criminal Law context. Serious stuff.
There are statutory and factual defences available to such Criminal Law allegations. The objective must surely always be to avoid getting into that position, in the first place.
The Meeting With The Insolvency Service
In response to the draft evidence, a detailed letter of representations, was sent by NDP to the Insolvency Service, explaining why the facts relied upon by the Insolvency Service, in their correspondence and in the draft evidence, were incorrect and why the 4 allegations were not made out on the facts.
The Insolvency Service still did not agree to withdraw the threat of proceedings. We recommended that the clients seek a face to face meeting with the Insolvency Service, which then took place.
Our clients put forward explanations and evidence in the meeting. We explained to the Secretary of State during that interview that the 4 allegations could not and should not be maintained against either of the Directors for reasons set out in the meeting. The Secretary of State had the opportunity to, and did, ask questions of our clients.
Preparation For The Meeting was Important
Significant time was spent by us with our Director clients. The full, factual background to the company was obtained. It was clear to us that there was a much bigger story, that the Insolvency Service needed to hear, impacting on the 4 allegations of Unfit Conduct as it did.
Our key skills in interpreting the mass of financial, historical and factual information presented to us, was as ever vital in this task.
Third Party Evidence
We also obtained and put together Witness Statement evidence from third parties, to include those from customers, suppliers and the company Accountants.
A key factor in such cases is always to support explanations with corroborative and explanatory documents where possible. All of the sources of such material were explored, to include the computer service, the company records and papers held by our clients.
The Key to This Successful Defence…..
….was for our director disqualification specialists to put together a coherent, full and convincing response that required us to utilise:
- Our unrivalled Insolvency Law knowledge and combined 110 expertise years across our team of Insolvency Law, Litigation and Director Disqualification Specialists.
- Our knowledge of Insolvency Law and Practice – it’s what we do.
- Our knowledge of what was needed, to persuade the Insolvency Service not to continue with the case.
The Secretary of State responded in the days after the Meeting, confirming the threat of Director Disqualification proceedings was withdrawn, without any proceedings being issued against the two Directors.
There was an irrecoverable financial cost for our Director clients, in instructing NDP and successfully opposing the proposed Director Disqualification proceedings. The outlay was not recoverable from the Insolvency Service, as matters concluded before Court proceedings were issued.
This outcome however achieved at least the following results:
- The prospect of Disqualification was avoided.
- No Court proceedings therefore had to be defended, avoiding the time, distraction, cost uncertainty and risk involved for the Directors in such proceedings.
- The risk of a parallel, Criminal Law investigation was much diminished.
- The risk of legal action from the company’s Liquidator was similarly diminished.
The legal spend in achieving the above outcome, was far less than the cost of dealing with a contested Court case.
Contact our Director Disqualification Specialists
This case demonstrates the type of approach that our Director Disqualification Specialists take when representing Directors. Our mantra remains that no hole is too deep – and this hole was a deep one – for us to be able to make a difference. Click here to see some of our other Director Disqualification Testimonials.