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More Bad News for Directors

More Bad News for Directors

Increased Personal Financial Risk, Including Personal Liability for Company Tax Debts is on the Horizon

It is perhaps inevitable that in light of recent high-profile company failures (e.g. Carillion, BHS, Mothercare), the UK Government continues to target poor corporate governance, through its Consultation on Insolvency and Corporate Governance (‘The Consultation’).

The response to this Consultation, published in late 2018, is more bad news for the director, as it will, we believe, inevitably result in reforms that will increase the risk for the Director, especially though increased personal financial risk. In this article, our insolvency solicitors look at these reforms and comment on their likely implications.

The Target of the Proposed Changes

In our view, the focus and intention of the changes is to combat the practice of Directors setting up Phoenix companies. This is where the old company is Liquidated, leaving behind debts owed to trade creditors and to Her Majesty’s Revenue & Custom (of which more about in a moment), but where the Directors set up new a company doing more or less the same as the old company, with the same customers and suppliers, but debt free.

Likely Areas to be Targeted

We think key areas to be addressed arising out of the Consultation will include:

  • An enhanced obligation being imposed on Directors to protect shareholders in the sale of a distressed entity.
  • Director Disqualification. An extension of provisions under the current Company Director Disqualification Act 1986, to include investigation of the conduct of Directors of dissolved (rather than liquidated) companies. Little attention or focus is currently placed on such companies, even though many of them die laden with debt. That (it seems) is about to change.

Personal Liability on Directors for Company Tax Debts After 6th April 2010

  • At present, the Finance Bill 2019/2020, envisages a potentially seismic change to the treatment of company Tax liabilities, that often go unpaid at liquidation or dissolution.
  • In future, individuals with a ‘relevant connection’ (including Directors, Shadow Directors and LLP members) may become jointly and severally liable for some company tax liabilities, in respect of periods after 06 April 2020 and/or on default owing after that date.
  • Joint and Several liability for Directors in cases of Tax Evasion and Avoidance, again from 06 April 2020, where HMRC is satisfied that defined criteria are met, provided that HMRC issues a notice of liability within 2 years of becoming aware that Conditions (see below)are fulfilled.

The Conditions

1) Broadly, the conditions are fulfilled in two or more companies where it can be demonstrated that:

  • The individual has a ‘relevant connection’ within the five years prior to a notice of liability being issued;
  • The companies have entered into insolvency within that five year period; and
  • At the time of insolvency they had:
    • unpaid tax liabilities;
    • failed to submit a return/document as required; or
    • a claim, declaration or application for approval which had not yet been determined.

2) A new company is created that is carrying on a trade or activity the same as ‘or similar to’ the two entities (or if more than two, two of the entities) during the five-year period and the individual has a ‘relevant connection’ with the new entity; and

3) At the time notice of liability is issued by HMRC to the individual, one of the original entities has an unpaid tax liability of more than £10,000.00 and that tax liability amounts to more than 50% of the total liabilities of the relevant companies.

What Happens if a Notice of Liability is Issued by HMRC?

If this happens, the individual will be jointly and severally liable together with the new company for any tax liability of the new company that is unpaid on the day on which notice of liability is given, and for any tax liability that the new company incurs during the five-year period following the notice being given while the notice continues to have effect; and:

  • Together with the original entities, for any tax liability of those entities that is unpaid on the day on which notice is given.
  • That individual Director’s liability is unaffected by the relevant corporate entity ceasing to exist.

 Our Insolvency Solicitors Comment

HMRC are quite often the largest unsecured creditors in many liquidations. If these personal liability proposals become law, then we envisage very many Directors and Shadow Directors, who presently walk away from responsibilities to pay HMRC debts on company liquidations will no longer be able to do so, moving forwards.

Directors be Aware of These Changes – We can Help with Professional and Expert Advice

These factors will need to be matters on which Directors are advised, with immediate effect.

The wider emphasis of legislative change continues to be to make directorial conduct more accountable and to maximise the collection of Tax revenue. These proposed changes do not even attempt to hide their emphasis or direction. Directors beware. This is more bad news for you.

Our director disqualification and insolvency solicitors can offer directors, who find themselves at risk as a result of this bad news, the expert professional advice they need. We won the small law firm of the year award at the Birmingham Law Society Awards in 2016 and were short listed in 2017, 2018 and 2019. Click here to see some of our testimonials Contact us or call us on 0121 200 7040 for a FREE initial discussion.

Commercial Litigation and Early Neutral Evaluation

Commercial Litigation and Early Neutral Evaluation

2020: Commercial Litigation Just Became Much More Affordable with Early Neutral Evaluation

The cost of commercial litigation can be prohibitive for companies as well as individuals. In many cases, justice cannot be obtained simply due to the costs associated with legal proceedings. This situation is made worse where one party to litigation is financially stronger than the other. In this article, our commercial litigation specialists look at how Early Neutral Evaluation, a form of Alternative Dispute Resolution, can be used to make the whole process much more affordable.

Alternative Dispute Resolution is Encouraged by the Courts, but Can Increase Costs if it Fails

The courts actively encourage parties to litigation to engage in Alternative Dispute Resolution (ADR) a method of trying to settle disputes without legal proceedings. However, most forms of ADR (for example mediation) do not impress upon the parties the strengths or weaknesses of their case. Accordingly, ADR rather than resulting in settlement and avoiding the costs of lengthy Litigation, only adds to the overall cost if ADR fails and the matter continues to be litigated.

Early Neutral Evaluation (‘ENE’) is a form of ADR which in which parties are told quite clearly who appears to have the stronger case.

What is ENE?

In an ENE, an independent evaluator is appointed by the parties to give an assessment of the merits of their respective cases. The evaluator provides an authoritative view of the issues at the heart of the case and an evaluation of the strength of the evidence.

In effect, the independent evaluator provides an indication as to who they believe has the stronger case and is likely to succeed at trial.

When is ENE Useful?

ENE is useful where:

  • The parties to litigation are significantly apart in their positions.
  • One of the parties has a wholly unrealistic view of their prospects of success.
  • Confidentiality is essential. Unlike a trial, ENE is not public and does not produce any publicly available Judgment or decision.

What are the Advantages of ENE?

  • ENE is far quicker and less expensive than traditional commercial litigation.
  • At an early stage, ENE demonstrates the limitations of each party’s case.
  • Assists in settlement negotiations by persuading parties to view the litigation and the merits of their case more realistically.

ENE and Other Forms of ADR

ENE does not necessarily have to stand alone. Quite often the parties attend an ENE as part of an ongoing ADR process. For example, an initial ENE decision could be given, followed by a mediation.

Having an indication of the strengths and weaknesses of each party’s case can be a powerful tool in obtaining settlement between the parties.

Commercial Litigation is time consuming and expensive and any step which can reduce the time spent and the expense should be welcomed. Obtaining a neutral evaluation at an early stage of litigation (possibly even be before proceedings are issued) can result in a significant saving to all parties.

Cutting the Cost of Commercial Litigation with ENE. Talk to our Commercial Litigation Specialists

Our Commercial Litigation Specialists have extensive experience of Alternative Dispute Resolution, in general, and Early Neutral Evaluation, in particular, with the team being led by Andrew Wylde. If you are involved in a commercial litigation process and are interested in finding out more About ENE, please contact us or call us on 0121 200 7040 for a FREE initial discussion.

Winding up Petitions by Insolvency and Commercial Litigation Solicitors

Winding up Petitions by Insolvency and Commercial Litigation Solicitors

10 Top Tips for dealing with Winding-Up Petitions by our Insolvency and Commercial Litigation Solicitors

As Insolvency and Commercial Litigation Solicitors, we regularly act for Directors and Companies who are threatened with the presentation of, or who have been served with, a Winding-Up Petition (‘The Petition’) – a document seeking the compulsory liquidation of a Company.

The Petition, which has a date on it for the hearing, is a serious matter, usually served by legitimate Creditors to force the payment of unpaid debts. Very often panic sets in when it arrives, or when it is threatened.

This article features our top ten tips on how Company Directors should react when a Petition arrives at their registered office. Dealt with properly and with appropriate professional advice, a Petition does not necessarily mean the beginning of the end for the Company. The Company and its Directors still have many options open and available to them.

1. Act Quickly

When ‘the Petition’ is threatened or actually presented and comes to the Company’s attention – do not ignore it.  Every day counts. The Company and its Directors have a range of options (see below) available to them, but must act quickly.

2. Get Clued-Up Early and Take Professional Advice

Learn about all the options available to the Company and its Directors and which are appropriate to the particular circumstances of the Company.  Those options will include (but are not limited to):

  • Seeking and obtaining specialist insolvency law advice from experienced Insolvency and Commercial Litigation Solicitors, such as the team here at NDP. When needed, we have fantastic contacts with Licensed Insolvency Practitioners, all over the UK and can make any necessary introductions on a no obligation basis.
  • Negotiating (e.g. time to pay agreements and settlements) with the Petitioning Creditor to get the Petition dismissed or withdrawn.
  • Taking steps to oppose and defend the Winding-up Petition and where appropriate, seeking injunctive relief from the Court to restrain presentation and/or advertisement of the Petition, where (for example) the Petition debt relied upon is:
    • Disputed by the Company on substantial grounds; or
    • Where there is a counterclaim or cross claim available to the Company.
  • Creating the conditions for a sale of the business or its assets, whether to the existing management team or to external buyers, whether before or after a formal insolvency procedure for the Company.

3. Nail Your Flag to the Mast

Once you have considered all of the options with your Insolvency Law Solicitors, decide on and implement the strategy that is chosen for the Company, as early as possible. Remember that the strategy and objectives may need to change as the matter progresses.

4. Advertisement of the Petition

It is a procedural requirement that the Petition is advertised in the London Gazette. Once a Petition is advertised (which happens at least 7 business days after its service on the Company and at least 7 business days before the first hearing of the Petition), the Company’s bank account is likely to be frozen by the Company’s bankers.

The advertisement of the Petition has serious consequences for the Company. It might cause other Creditors to formally support the Petition and the making of a Winding-Up Order.

The Company should, in appropriate circumstances, negotiate with the Petitioning Creditor to delay the point of advertisement.

If advertised, the Company still has the option of applying to the Court to free up the Bank account, by application for a Validation Order. That is a potentially expensive route for the Company.

5. Which Advisers Should be Used?

Directors and Shareholders should only ever seek and obtain the specialist legal and insolvency advice the Company and its Directors need from regulated, insured professionals. This includes specialist Insolvency and Commercial Litigation Solicitors. The Company will likely be deluged with offers of ‘help’ from unregulated, uninsured organisations, many promising unachievable or unrealistic solutions.

Resist the temptation to use them. If it sounds too good to be true, it usually is!

6. Duties Imposed on Directors

Remember and adhere to the statutory duties imposed on the Directors and the need to observe them. Those duties are extensive and onerous. Failure to do so (e.g. a failure by Directors to give appropriate weight to the interests of Creditors at the point of insolvency) may (and often does) result in subsequent financial recovery action from a Liquidator against the Directors personally, based on claims of breach of Directors’ duty.

Experience shows that claims by Liquidators against Directors often relate to decisions and the conduct of the Director, in the pressured period before insolvency kicks in.

7. Is the Petition the Beginning of the End?

Do not assume the Petition inevitably means the end of the Company’s trading existence. It doesn’t! Many outcomes where Petitions are presented do not involve a formal insolvency procedure for the Company.

If however a formal insolvency procedure is an option (and it is an option that can be considered alongside rescuing the Company) then choosing the right procedure for each Company, on its particular facts whether it be:

  • Administration;
  • Creditors Voluntary Liquidation (‘CVL’); or
  • Company Voluntary Arrangement (‘CVA’)……

……is vitally important, not only for the Company but also from the perspective of its Directors personally.

8. Which Licensed Insolvency Practitioner to Choose?

If a CVL, CVA or an Administration is appropriate as the way forward, choose your Licensed Insolvency Practitioner carefully as different Insolvency Practitioners have different areas of expertise across different industry areas. The phrase Horses for courses comes to mind.

Your choice of Licensed Insolvency Practitioner can make or break the Company and its Directors.  Not all Licensed Insolvency Practitioners behave the same. The NDP team regularly make such referrals, to trusted insolvency professionals based on our many years of experience in the insolvency and commercial litigation arena.

9. The Role of HMRC

HMRC present more Petitions than any other Creditor, for the non-payment of Crown Debt. It is important, therefore, to choose an insolvency solicitor who is well used to dealing with HMRC. That will save time and cost and hopefully instil HMRC with some confidence that the Company knows what it is doing, when the Company is trying (for example) to negotiate time to pay agreements with HMRC.

10. Don’t Forget the Director

Remember that whatever course the Directors choose for the Company, it may have consequences for the Director, including:

  • Exposure to Personal Guarantee obligations (e.g. from Landlords, Banks or Trade Suppliers). Take steps to address such obligations pre-insolvency or at least be aware of the consequences of not doing so.
  • Financial recovery action against the Director from a subsequently appointed Liquidator. The correct pre-insolvency legal advice can reduce or eliminate such exposure.
  • A possible Director Disqualification Simple steps taken before formal insolvency can reduce or eliminate the risk.

Why Choose NDP to Advise You When a Petition is Received?

As Insolvency and Commercial Litigation Solicitors, advising on how to deal with Winding up Petitions is a core area of our work. Here are some of the main areas in which we can help:

The Director’s Position

Our Director friendly team never forgets that the interests of the Directors rank equally with those of the Company, at this most difficult time for the Company. What is it that the Directors are looking to achieve for themselves and the Company? Are those competing or compatible objectives? Explore all the options. Go into matters with eyes wide open.

Experience

The members of the NDP team have decades of hands-on experience in prosecuting and defending Petitions, both for HMRC and other Creditors. We regularly advise the Company and Directors in such circumstances. We know what Creditors want and how to achieve the desired and best results for the Company and its Directors. The solution to the threat of a winding-up by a Creditor is not always simply a legal question. Practical concerns can and do (and should!) play a big part in the decision making process.

Adjourning Petitions

We have established working relationships with the key HMRC teams who present Petitions.  We regularly succeed in getting Petitions adjourned (often by consent) and withdrawn. An adjournment is often required to allow (for example) time to negotiate a settlement of the Petition debt or to allow an alternate insolvency procedure to be put in place, with the Company’s choice of Licensed Insolvency Practitioner in place.

Licensed Insolvency Practitioner Relationships

  • Our long standing relationships and friendships with key Insolvency Practitioners can, and often do, make the difference. We can arrange, free of charge, meetings with Insolvency Practitioners on little or no notice, at a venue of your choice.

Barrister Relationships

  • If the Company does end up in a Court battle, we have excellent relationships with specialist, experienced Barristers who will fight the Company’s corner, with us. We can and do arrange attendance at winding-up hearings at little or no notice.

Flexibility

We offer:

  • Nationwide coverage.
  • Free advice in the first instance.
  • Confidentiality

Refinancing

  • If the Company’s problems stem from a problem with its Factoring/Invoice discounting arrangements, we have long standing relationships with many financiers, who can and do step in at little notice to refinance businesses in trouble, often where a Petition is live.
  • We work with those lenders and the Petitioning Creditor to gain the time to put that new or additional finance in place.

Accountants

Sadly, it is a common theme that a Company often finds itself in trouble (at least in part) because the Company has failed to file its Tax returns and/or make payments due to HMRC. We have great relationships with Accountants who can step into the breach to help. We can and do work with the existing Company Accountants to allow such positions to be remedied before a Winding-Up Order is made.

For Help and Advice With Petitions, Contact us

Our experienced Insolvency and Commercial Litigation Solicitors are well used to advising directors whose companies have received Petitions. Click here and here to see two testimonials for our work in this area.

Contact us or call us on 0121 200 7040 for a FREE initial conversation. Above all, if you have been served with a winding up petition, speed is of the essence.

Insolvency and Commercial Litigation Solicitors