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Breaking News – Worldwide Asset Freezing Order (WFO) Application Successfully Resisted: THE New Legal Test

Breaking News – Worldwide Asset Freezing Order (WFO) Application Successfully Resisted: THE New Legal Test

Breaking News – Worldwide Asset Freezing Order (WFO) Application Successfully Resisted: THE New Legal Test

Our Insolvency Litigation specialists succeed in resisting a £6.3 million WFO application

The NDP Insolvency Litigation Team have during October 2021 successfully opposed an application for a £6.3 million WFO against our client, brought by a Litigation Funding Company (‘the Funder’).  The Funder had purchased the claims now pursued by it, against our client, from the Liquidator of the company of which our client had been the controlling Director. The Funder was very well resourced.

On the face of it, the Funder held all the cards.  In achieving this great outcome for our client, reliance was placed not only on a forensic and detailed analysis of the facts of the case, but also on the very recent and important changes to the applicable law in this specialist area of work.

Background to this Insolvency Litigation case

NDP’s route to the case was via another Solicitor, who recommended our Solicitors specialising in insolvency law claims from Liquidators and in dealing with WFO claims both for Claimants (such as the Funder) and also (as here) for Respondents to such applications.  The underlying High Court claim issued by the Funder against NDP’s client, sought repayment to the Funder of an eye-watering £6.3m. A life changing claim for our client to deal with.

WFO application against NDP’s Client

Having issued the High Court claim and by doing so, then further raising the stakes, the Funder then made an application to the High Court for a WFO, seeking an Order from the High Court that our client’s assets, worldwide, be frozen to the tune of £6.3m, such Order if made to last until Trial/final hearing in this case – probably 18 months away.

What to do?

That WFO application was whole-heartedly opposed by our client employing NDP and an experienced Insolvency Barrister.  The WFO application was heard and determined by the Court over 2 days in October 2021. We had to move fast as we had only 5 working days from receiving the WFO application, to prepare and respond by detailed written evidence to it.

The outcome – The Court dismissed the WFO application

The application for the WFO, after a day and a half of argument in Court, was dismissed by the Court.  The Funder was also ordered to pay our client’s legal costs incurred in successfully opposing the WFO application. An outstanding result for our client.

The WFO application was, unusually for a WFO application, heard ‘on notice’ to our client as the Respondent to the application.  The first that the Respondent usually hears about a WFO made against him/her, is when the WFO as granted, is served on him/her, together with 12 inches  of supporting paperwork.

On the facts of this case, NDP’s client had the opportunity to be heard on the WFO application, for reasons beyond the scope of this article.  We had pushed for that to happen. It proved crucial.

The effect and consequences of a WFO

Freezing Orders have historically been (accurately) described as the ‘nuclear weapon in the Claimant’s armoury’. If granted, a WFO can and does have a dramatic effect on the targeted person’s life, their ability to trade and may cause enormous reputational damage. Notice of the granting of a Freezing Order is invariably given by the Claimant to the target’s Bankers, for example.

In this case

The well-resourced Funder employed a national firm of Solicitors to pursue its case. They did so aggressively and persistently.  On NDP receiving notice of the WFO application by the Funder, there were only 5 working days for NDP to consider the detailed written evidence relied on by the Funder in support of the Application, to take detailed instructions on the Funder’s written evidence and discuss strategy and tactics with the client and his Counsel.

Written evidence in answer had to be prepared in response to the WFO application.  That proved a significant task.  Attention to detail is everything in such matters.  We and the client had to instruct and meet with Counsel ahead of the hearing and then attend the hearing itself.   It was a frantic week.   There was a huge amount to do.   There were lots of late nights and early mornings, to get the job done.

Four members of the NDP Team, led by Neil Davies and supported by Solicitor Thomas Riley, Solicitor Suky Mann and Paralegal Chloe Collins, represented the client.

Martin Budworth of Counsel was retained. He (as ever) morphed into and became a seamless part of the client’s Defence Legal Team.

Change in the Law

The Funder had to leap 2 legal hurdles if it was to persuade the High Court Judge to grant the WFO, as follows:

  1. It had to try and demonstrate a good legal case, ‘A stronger case must be shown than would justify relief of a less stringent kind’. On the facts of this case, the Claimant Funder was unable to satisfy the Court of that matter, on significant parts of its claim.
  2. Evidence had to be adduced by the Funder, that our client intended to ‘unjustly dissipate his assets’. Again, the Court decided that the Funder was unable to satisfy the Court that such a risk existed on the facts of this case.   The recent Court of Appeal decision in Les Ambassadeurs Club Ltd v Yu [2021] EWCA Civ 1310 has raised the evidential threshold that a Claimant such as this Funder must meet to satisfy this legal test.

The decision of the Court of Appeal in that case included the following statements, which are a timely reminder of some basic principles:

‘(a)     A freezing injunction “is not intended as a safeguard against insolvency, nor as a means of providing security for a claim, however strong that claim may be and however large a sum of money may be involved”.

(b)       In view of the drastic interference with a person’s right to do as they please with their own property that a freezing injunction entails, (quite apart from the reputational damage that it may cause), the courts must remain vigilant to ensure that such orders will only be granted in cases in which the evidence suffices to establish that there is a real risk of the judgment going unsatisfied by reason of what Gloster LJ in Holyoake v Candy [2017] EWCA Civ92, [2018] Ch.331 (“Holyoake”) elegantly termed “unjustified dissipation,” and where it is just and convenient to make the order.”

(c)      In order to avoid the undesirable situation in which, as Gloster LJ put it in Holyoake at [58] “the nuclear remedy of a freezing order would become a commonplace threat”, there must be cogent evidence from which it can at least be inferred that” the defendant falls into the category of those so determined not to pay that they would take active steps to frustrate the recovery of sums due. (The Funders) ruminations do not put (NDP’s client) in that category at all (and certainly not by cogent evidence).’

Outcome

The Funder failed (in part) to demonstrate point 1 (‘a strong legal case’) on the largest part of its overall claim and failed miserably on the second hurdle (evidence of ‘unjustified dissipation’).

The decision to oppose the WFO application

This decision was not made lightly by the client.  Factors influencing the decision included:

  • The significant legal cost of opposing the WFO application.
  • The adverse costs consequences for the client of failing in that opposition. He was likely to be ordered to pay the Funder’s legal costs, if his opposition to the WFO failed.
  • The evidential strength of the Funder’s application for a WFO and the prospects of successfully opposing it.
  • The wider legal strategy of the case.

The decision (to oppose or not to oppose) had to made quickly.  Time limits were short.

The Legal Team had to come together and we, Counsel and the client had to commit dozens of hours of time, in a short-time period, to prepare for the WFO hearing.  That was done.

NDP’s take on the case

NDP Solicitor, Director and Insolvency Litigation specialist, Neil Davies commented:

“This was a great outcome for the client. Had the WFO been granted with the above consequences, our client would likely have had to swear an Affidavit and disclose to the Court and the Funder all of his assets, their location and their values.  That would have been highly advantageous to the Funder as Claimant. It is long established by the Court, that such a potential benefit should not be used as the reason to bring such a WFO claim.”

Conclusion

Our Insolvency Litigation team is highly experienced and expert in this area of law. Understanding the facts of the case, working out a defence and a strategy and doing so quickly and thoroughly are the key to a successful outcome, as was the case here.

Contact us or call us on 0121 200 7040.

Section 447 Investigations (Companies Act 1985) – Inspectors Knocking on the Door Unannounced!

Section 447 Investigations (Companies Act 1985) – Inspectors Knocking on the Door Unannounced!

Section 447 Investigations (Companies Act 1985) – Inspectors Knocking on the Door Unannounced!

How our team of Commercial and Insolvency Litigation Solicitors can help when faced with a section 447 investigation

Much of the case work undertaken by the 12 strong Team of insolvency litigation solicitors here at NDP involves dealing with company and insolvency related problems, including acting for Insolvency Practitioners in carrying out their instructions on company insolvency matters. The company is, by definition, dead by this point. As with the Team’s significant Commercial and Insolvency Litigation caseload and its pre-insolvency advice caseload, Section 447 Investigations give the NDP Team members the opportunity to advise Directors and their company, during the life of the company, albeit in often distressed circumstances.

In this article we look at Section 447 Investigations by the Insolvency Service’s Criminal Enforcement Team. These usually happen unannounced, sometimes at dawn, with little or no advance warning for the company involved and can have very serious consequences for companies and directors personally. We detail what they are, what their implications are (and these can include compulsory winding up, director disqualification and even criminal proceedings) and how we can help directors in what can be a highly stressful situation.

The purpose of this article

  1. To explore the nature, powers and extent of a Section 447 Investigation into a company.
  2. The potential implications of that 447 investigation; and
  3. What value NDP can add to the client faced with that investigation.

What is a Section 447 Investigation?

The Secretary of State has far-reaching investigative and interrogative powers under section 447. The main provisions read as follows (with our emphasis added):

‘447 Power to require documents and information:

  • The Secretary of State may give directions to the company requiring it –
  • to produce such documents (or documents of such description) as may be specified in the directions;
  • to provide such information (or information of such description) as may be so specified.

(5)      A requirement under subsection (2) or (3) must be complied with at such time and place as may be specified in the directions or by the investigator (as the case may be).

(7)      The Secretary of State or the investigator (as the case may be) may take copies of or extracts from a document produced in pursuance of this section.’

Comment

The legislation further provides that the Investigator in the case has the same powers, so that the Investigator can deal with the moving feast that is the investigation.

The stated goal of the Secretary of State is:

‘Regarding insolvency related fraud and associated corporate misconduct, working to deter fraud in companies by investigating and prosecuting breaches of insolvency and company law.’

The brief is thus clear. To eradicate fraud and misconduct. Most company investigations are carried out under section 447.  The department for Business, Energy and Industrial Strategy (‘BEIS’) via the Insolvency Service Criminal Enforcement Team, initiate Section 447 Investigations.

What type of matters are investigated?

Investigations (based on NDP’s extensive insolvency litigation experience) might typically take place because there are grounds for one or more of: a suspicion of fraud, misfeasance, misconduct, fraudulent trading, theft or that the company is involved in an illegal pyramid selling scheme.

Who initiates complaints?

The Insolvency Service investigates complaints from several sources to include the Police, Trading Standards and members of the public.  It is unlikely that the Investigator will disclose the source or nature of the complaints that lead to the Section 447 Investigation.

The unannounced knock on the Company Front Door – Little or no advance notice

The Insolvency Service’s powers under section 447 are administrative, in the sense that they are not encumbered by the rules of natural justice in relation to, for example, advance warning.

However, a notice given under section 447 must not be excessively wide or in unreasonable terms and those giving the notice must have acted fairly. As a matter of administrative law, the Secretary of State must have good reason for acting.  Section 447 Investigations are not commenced lightly.

Scrutiny of the terms and extent of the Notice is always needed, by an experienced, critical eye. NDP’s Team of insolvency litigation solicitors are well used to doing that.

How long will the investigation last?

The Secretary of State aims to complete section 447 enquiries within an average of 90 days. That time is often exceeded in our experience.

What can be investigated and sought?

An Investigator may give Directions to the company requiring it to produce such documents as the Investigator may specify or provide such information as the Investigator may specify (section 447(3)).

A requirement to produce documents or information must be complied with at such time and place as may be specified in the Directions or by the Investigator (section 447(5)) or within such further time as may be agreed.  Extended time for compliance by the company can be and is often agreed by negotiation.

However, failing to comply with such a Direction is not an option for the company or its Directors.   There are serious consequences – see below.

If the company refuses to co-operate, the Investigator can obtain a Search Warrant and attend at the premises with the Police to search for and seize documents.

The Secretary of State or the Investigator is entitled to take copies of or extracts from a document produced (section 447(7)) and, for this purpose, a document includes information recorded in any form (section 447(8)).

Consequences that may flow from a Section 447 Investigation

Consequences may flow not only for the investigated company but also for the Directors of the company, personally.  The Secretary of State could potentially (by way of hypothetical example) act on produced documents and information by deciding to present a Winding-Up Petition against the company on the public interest ground that it is just and equitable to wind-up the company, under section 124A(1) of the Insolvency Act 1986. In an appropriate case, a provisional Liquidator may also be appointed to the company.

Less serious sanctions can be agreed or imposed by negotiation.  Serious stuff indeed.

Director Disqualification

By way of another typical example, information or documents obtained under section 447 could and do form the basis for a decision by the Secretary of State to apply for a Disqualification Order against the company’s Directors in the Public Interest, on the grounds that the Directors have engaged in ‘unfit conduct’.

Such consequential action can be (and often is) opposed by the company and its Directors.  That however can be a legally expensive road to follow, albeit one that must be followed out of practical necessity.  The objective of the client and the appointed legal team must be to prevent matters reaching that stage.

The role of NDP as the Solicitor is to assist the company and its Directors from that point being reached. Achieving that objective is an art not a science.  The response and strategy of the targeted company approach in each case is always tailored to the particular circumstances of the case.

Criminal Proceedings

It is also possible for information disclosed in a Section 447 Investigation to be deployed in criminal proceedings against individuals involved in the company under investigation.

Any statement made by a person who complies with a requirement under section 447 of the Companies Act 1985 may be used in evidence against him (section 447A(1)). However, in criminal proceedings in which that person is charged with a relevant offence, no evidence relating to the statement may generally be adduced by or on behalf of the prosecution and nor may a question relating to it be asked by or on behalf of the prosecution  unless evidence relating to it is adduced or a question relating to it is asked in the proceedings by or on behalf of that person (section 447A(2)).

Comment

Great care therefore must be taken by the Director and the Legal Team advising the Director in such circumstances.

Reputational Damage

Section 447 Investigations are civil (not criminal) in nature. Investigations are confidential and conducted in a way that need not prejudice the business of the company.

The sting in the tail is, however, that the Investigator can (and often does) contact suppliers and customers of the company.  Employees and former employees may also be contacted.   There are steps that can be taken to minimise the need for such contact and to thus protect the company.

Non-compliance by the Director

There are serious penalties for failure to comply with requests for information during a Section 447 Investigation. Where there has been a failure to comply with a section 447 request, an Inspector, the Secretary of State or an Investigator may certify this fact in writing to a Court (section 453C(2)).  If this happens, the Director and the company is in potentially very deep and dangerous water.

The consequences of non-compliance

If (after hearing any witnesses and any statement offered in defence) the Court is satisfied that that the offender failed without reasonable excuse to comply, it may deal with him as if he had been guilty of a Contempt of Court (section 453C(3)).  Potential penalties for the company and/or a defaulting Director thus include a fine or imprisonment.

Consequences for the Director if the investigated company goes into Liquidation

Consequences may include a Director Disqualification investigation for the Director and also consequential financial recovery action from the Liquidator against the Director, to include the setting aside of improper antecedent transactions in the relevant period prior to liquidation or even a prosecution for Fraudulent trading.

If a company were to be wound-up on the just and equitable/public policy ground referred to above, under Insolvency Act 1986 section 124A(1), there would be a high likelihood of a Director disqualification investigation and Director Disqualification proceedings following against one or more of the Directors.

In short, a Section 447 Investigation can have very serious consequences indeed, for both the company and its Directors.

What value can NDP add to Director interviews in the Section 447 investigation?

  • Assistance in preparing for, and during, the interview

The Director(s) will be interviewed (often more than once) by the Investigator as the investigation progresses.  It is vital that the company and its Directors are best represented in such meetings.  It is important to try and establish a rapport with the Investigator to avoid the risk of misunderstanding or of the Director being misled, whether inadvertently or otherwise.

Interventions in such interviews/meetings, on behalf of the Director, are vitally important.  Such interventions ensure (for example) that there is clarity as to whether any criminal proceedings are in contemplation. The presence of a full Legal Team (perhaps including Counsel) on behalf of the company and its Director(s), is likely to act as a restraining influence on the Investigator, discouraging the Investigator from exceeding his/her remit and powers or otherwise acting improperly or unfairly.

It is vital that the Director is fully represented when meeting the Investigator, to ensure both that the Director complies with his statutory obligations under section 447 and so that the Director is protected to the maximum extent properly permissible in law against any possible repercussions.

  • Ensuring compliance with the provision of information and documents

As explained above, the repercussions for non-compliance are potentially very extensive and very serious.  It is important that such legal representation should include both attendance in Director interviews and a supervisory watch over all documents and information disclosed.

That ensures proper and lawful compliance and allows us to guard against any difficulties which might arise from the release of documents.  Experience counts for everything in such cases.

  • Communicating with the Insolvency Service on the Client’s behalf

This is an extremely important function for the specialist insolvency litigation Solicitor. It can shape and guide the direction and outcome of the investigation process.  It puts needed distance between the very focused and targeted Investigator and the company.

  • Ensuring company and Director rights and entitlements are protected

This applies in relation to the investigation process itself, in relation to dawn raids on premises that are occasionally carried out and in relation to any enforcement action that might ensue.

  • Our Insolvency Litigation Solicitors’ experience in Section 447 and related cases

The NDP Team is usually involved in advising on 447 cases, at any point in time. We are presently advising on such an investigation into 11 companies.

We have advised in relation to many such cases in the past.  The Insolvency Service know us and our reputation in this field of work.

We know how to deal with such cases, through experience.  We have within the Team over 120 years of combined experience of dealing with insolvency and company law related work, both in civil law and criminal law. There is not much, if indeed anything, we won’t have seen before.

  • Insurance cover

Individual Directors and ex-Directors should retain records of potentially responsive insurance cover – most likely Directors and Officers (‘D&O’) cover.  If such insurance is in place, then it often responds to section 447 investigations.

If you or one of your clients/contacts, are facing a Section 447 Investigation, then please contact our insolvency litigation specialists: Neil Davies, David Hanman, Sukhbir Mall or Suky Mann of our experienced Team of insolvency for assistance and guidance.

We offer free initial consultations for Section 447 Investigations and all business and insolvency crime cases.

Directors Beware: Bear Traps on the Road to Liquidation!

Directors Beware: Bear Traps on the Road to Liquidation!

Directors Beware: Bear Traps on the Road to Liquidation!

What could possibly go wrong? Liquidators’ Claims, Director Disqualification, Compensation Orders and even Criminal Investigations.

Upon liquidation, Directors of liquidated companies can and do find themselves on the wrong end of several ‘Bear Traps’ all of which can be expensive, time consuming and potentially ruinous. Liquidations happen all the time and for lots of reasons, but, as the Government’s Covid-19 related support for business winds down, and we discover the true extent of Covid’s impact, we expect the number of liquidations to increase.

For this reason, vulnerable companies, and their Directors need to be aware of the pitfalls, know what to look out for and understand how best they can prepare to avoid them on liquidation.

  • In our experience, Directors often place companies into liquidation ‘blind’, without proper or necessary thought having been given by them (or those advising them), pre-liquidation, to the types of issues that we discuss below. That failure often has expensive, time consuming and worrying consequences for the Director.
  • This blog identifies some of the challenges the Director may face in the lead up to and after liquidation. The overarching advice is for the Director to get specialist legal advice as early as possible.

Director Disqualification

The Main Traps for Directors at Liquidation.

  1. Financial recovery action from the Liquidator, alleging Misfeasance (i.e., improper use of company money or assets) and/or breach of the statutory and fiduciary duties owed by the Director under the Companies Act 2006, to their failed company and to creditors of the company. We expand on this below.
  2. A Director Disqualification Investigation (‘DDI’) from the Insolvency Service, arising out of alleged ‘Unfit Conduct’ by the company, during the life of the company.
  3. Financial recovery action from the Insolvency Service (by way of a Director Disqualification Compensation Order claim (‘DDCO’)).
  4. A Criminal law investigation from the Insolvency Service, HMRC or other Agency, arising out of one or more of a myriad of criminal allegations connected to company insolvency.

Fixed-Price pre-liquidation review.

  • Here at NDP, we offer a pre-liquidation fixed price meeting with the Director, to address all the issues discussed in this paper and many others besides. The objective is to identify potential problems and identify how they can best be addressed, before the Liquidator takes office, on the particular facts of that case. The issues inevitably differ on a company by company basis.
  • Most responsible Liquidators will discuss such issues in the run up to liquidation with the Director. Not all Liquidators are, however, the same. We can also help the Director in choosing the right Liquidator for his company based on our extensive experience of acting for and against Liquidators over many decades.

The role of the proposed Liquidator.

A Liquidator may have been recommended to the Director by a trusted Accountant or other advisor. But not always. The Liquidator may have been found being found via Yellow Pages (remember that?) or the Internet, without any personal recommendation.

Warning – The Liquidator’s main role is to assist the Company, not the Director.

It is a fundamental misunderstanding for the Director to assume that the consulted Insolvency Practitioner is there to advise the Director(s).  The proposed Liquidator’s role and duties is primarily to assist the company, not the Director.

It is thus essential for the Director to carefully consider his/her position before liquidation, and to have ‘eyes wide open’ when considering liquidation for the company.

When is the right time to get advice? Answer: As soon as possible before Liquidation.

The fall of a company into liquidation may be forced on the company with little notice. A Winding-Up Petition from HMRC (or the threat of it), for example, may signal the beginning of the end.

Compulsory or Voluntary Liquidation?

It is usually open to the Director(s) to avoid the making of a compulsory winding-up by the Court, by taking steps to place the company instead into a voluntary liquidation process.

Taking this step will involve the company in expense.  However, the appointment of a recommended, private practice Liquidator (rather than the company falling into the hand of the Official Receiver) can have many benefits for the Director(s).

There are however a number of weeks between issue of the Petition and the Petition hearing.  The Director should use that time wisely and get legal advice.

The sooner that specialist legal advice is obtained, the greater the opportunity to take advice and to implement that advice to mitigate future problems. That legal advice may even be to defer putting the company into liquidation, to allow remedial steps to be taken for the Director before liquidation.  

Ideally, the Director should be seeking legal advice well before the point when formal action is taken against the company.

We look in this article at common post liquidation issues, the possible consequences of them and what to look out for.

Common Post-Liquidation issues for the Director. All are potential Bear Traps.

  1. Overdrawn Directors Loan Account (‘DLA’)

An overdrawn DLA happens when there is a balance owed from the Director to the company at liquidation. When the music stops and a Liquidator is appointed to the company, the Liquidator will look to recover the amount of that liability, as a debt owed to the company. Careful scrutiny of the composition of that balance is inevitably needed by or on behalf of the Director.

Even when there is a positive DLA balance in favour of the Director, transactions within the DLA will be scrutinised.

This very situation came before the Courts again in the recent case of Manolete Partners Plc v Matta [2020] EWHC 2965 (ch).  The perhaps inevitable outcome in that case was that despite protests from the Director, the Director was unable to explain why that DLA debt was owed by him to the company.  The Court ordered him to repay the liability to the Liquidator. The Director having ‘lost’ at Court will likely have been ordered to pay the Liquidator’s legal costs and his own legal costs. A potentially ruinous experience. Such outcomes can and should be avoided.

Movements on the DLA balance, typically in the 2 years before a Creditors Voluntary Liquidation, will be looked at by the Liquidator and particular transactions within the DLA may also be attacked as Preferences or Transactions at An Undervalue (‘TAAU’) by the Liquidator – see below.

The prevailing rules require that in the time-period leading up to formal insolvency, the interests of creditors not the Directors are paramount.   Declaring Dividends in the lead up to liquidation, to cancel or reduce an overdrawn DLA balance, is rarely going to be the solution. Other remedies are however available to the Director depending on the particular facts of the case.

  1. Significant Crown debt position/HMRC security request

Significant sums owed to HMRC (whether for VAT, PAYE, NIC or Corporation Tax) at liquidation is likely to lead to trouble for the Director, from one or more of the Liquidator, HMRC or the Insolvency Service (‘the Claimants’) and is the most common reason for a director disqualification investigation. However, the existence of such Crown debt at liquidation is not the end of the story.

All the circumstances of the case must be looked at. We regularly persuade such Claimants that on the particular facts of the case, proceeding against the Director because of significant Crown debt at liquidation is unnecessary and wrong.

  1. Books and records of the company

FACT

A failure to keep, maintain or deliver up books and records to the Liquidator is a civil and criminal law offence, punishable in a criminal sense by a fine and/or imprisonment. Directors go to prison for this most basic of offences, often arising out of a failure to deliver up records to the Liquidator.

Criminal law challenges to the Director on this front are most likely to come from the Insolvency Service. Early legal advice and early engagement with the Liquidator and/or the Insolvency Service is vitally important, once the Director has obtained specialist legal advice.

There are a number of answers available to the Director faced with such allegations.  For example, what constitutes ‘adequate’ books and records will differ in relation to each company, depending on what the company did as its trading activity. There are options for the Director faced with such allegations.

  1. Illegal Dividends

It never ceases to amaze us how many Directors continue to declare or take Dividends in the period down to liquidation, during a period when the company is likely to have been insolvent or of doubtful solvency.

The Liquidator can, and often does, seek to reclaim such Dividends from the Directors personally, on the basis that the Dividends were illegal.  Dividends are only payable from profits available for that purpose.

Paying Dividends

The adverse impact of coronavirus on the trading fortunes of a company now means business owners need to tread ever more carefully as they may be personally liable for Dividends paid before liquidation.

Typically sums taken out of the company by owners (school fees and non-business personal expenses) are charged to the Director’s personal DLA with the company and then, to redress their overdrawn position, a Dividend is declared to repay the sums due before the company’s Accounts are finalised.

The music of liquidation changes the rules about declaring and paying Dividends.

Why are Dividends different?

Dividends are different to other earnings because they represent a distribution of post-tax profits to the company’s Shareholders, payable to all Shareholders in proportion to their shareholding.  Shareholders can be legally required to repay unlawful Dividends received, on application by the Liquidator, if there were insufficient funds available to make the distribution/pay the Dividend/declare the Dividend.

  1. Co-operation with the Liquidator

Failure to co-operate with the Liquidator by the Director will almost inevitably lead to trouble, in the form of:

  • An allegation of Unfit Conduct in a Director Disqualification proceeding.
  • Action in the form of an application to Court by the Liquidator to compel co-operation from the Director, pursuant to sections 234 to 237 of the Insolvency Act 1986 (with the prospect of the Director being dragged into Court to answer questions under Oath and a big legal costs bill from the Liquidator).

All of this can be avoided – co-operate but if in doubt about the nature or extent of disclosures to be made by the Director, then do so with the benefit of legal advice.

  1. Antecedent transactions

The Liquidator can and does look back at events in the company, particularly in the 2 years leading up to liquidation.  The Liquidator can assert Preference claims, Transactions at An Undervalue claims, Wrongful Trading claims and section 423 of the Insolvency Act 1986 claims (transaction defrauding creditors).  Many such claims are intimated against the Director as Misfeasance payments, under section 212(1) of the Insolvency Act 1986.

Upon receipt of such a claim from the Liquidator or his Solicitor, the well-advised Director will get legal advice quickly and respond quickly.

  1. Use of prohibited name

This again is a civil and criminal offence.  Section 216 and section 217 of the Insolvency Act 1986 are the starting point.  A name is prohibited in circumstances where a person has been a Director of a company in the 12 months before that company went into liquidation, so that it is an offence for that Director to be involved in another company with the same or similar name for a period of 5 years (unless the Director falls within one of the 3 excepted cases).

Another no-no offence, that can lead to personal liability for the Director for debts of the next company and the prospect of criminal prosecution against the Director for using a prohibited name, with the prospect of a fine and/or imprisonment on conviction. We have a number of such cases where we are defending Directors, right now.

Prevention (pre liquidation) is better than cure but if this allegation is made post liquidation, there are steps the well-advised Director can take to get rid of the problem. Pre-liquidation there are also steps the well-advised Director can take to avoid the problem even arising.

  1. Action against non-involved spouse Director

Often, the wife/husband is made a Director of the company as a recognition of family ownership. She/he may however have had no active role in the day to day running or the management of the company.  She/he, however, owes the same duties to the creditors and to the company as her husband/ his wife, who is trading and running the business.   This can lead to all the types of action against her/him as are detailed at the beginning of this blog.

  1. Personal Guarantee obligations

How can this possibly be ignored?   Directors often give personal guarantees to:

  • Funders – Funding Circle appear as a guarantee creditor in a disproportionate number of liquidations.
  • Building material and other product suppliers to the company.
  • Lenders to include the bankers to the company and invoice discounters for very many different reasons.  We have significant experience of dealing with such claims.

On liquidation, those guarantees will crystallise and the obligation to pay arises on the Director personally.   Whether or not a guarantee is enforceable against the Director depends on the particular circumstances of each case.  Many guarantees are unenforceable for very many different reasons. We have significant experience of dealing with such claims.

 10. Dissolved companies – the Insolvency Service is given new powers to tackle unfit Directors of dissolved companies

Dissolving a company (rather than liquidating it) has historically been a route used to bury company liabilities, whilst avoiding the scrutiny of a Liquidator.

No more! The Insolvency Service is to be given powers to investigate Directors of companies that have been dissolved, closing the legal loophole.

Government backed loans and Covid.

This route for Directors to fraudulently avoid repayment of Government backed loans, given to businesses during the pandemic, will no longer be available.

The new measures are far reaching and are set out in the Ratings (Coronavirus) and Director Disqualification (Dissolved Companies) Bill. The measures are retrospective and the Insolvency Service will be investigating the conduct of Directors who have inappropriately wound-up companies that have benefitted from Coronavirus loans.

We are right now instructed by many Directors, faced with claims from the Insolvency Service and/or the Liquidator of the company, challenging the use to which Covid loans have been put.

Despite what the Liquidator or the Insolvency Service may say, the position is often not that straightforward.  We are well used to dealing with, opposing and (where necessary) settling such claims on the most advantageous terms.

What can be done by the director?

  • PRE-LIQUIDATION

The Director can and should address all the above issues insofar as applicable to the particular case, with the Accountants to the company and with Insolvency Solicitors experienced in dealing with the above issues.  The Director should engage with the liquidation process, knowing the issues to be faced and the financial and other consequences of them.

  • POST- LIQUIDATION

When the problems for the Director have actually materialised, all is not necessarily lost for the Director.   Our Insolvency Solicitors have 80 years of combined experience in negotiating solutions with Liquidators, with the Insolvency Service, with Criminal Law Investigators and other Agencies.

To avoid or mitigate the Bear Traps associated with Liquidation, including Director Disqualification, Talk to our Insolvency Litigation Solicitors.

Liquidation is an intensely stressful and difficult experience and can be made much worse if Misfeasance claims by Liquidators, Director Disqualification or even criminal action follow.

In this article we have identified the Bear Traps that await Directors and what to look out for. However, our best advice to Directors if insolvency looms is to take professional advice as soon as possible. That way, steps to reduce the risk of falling into a Bear Trap and paying the price can be taken.

Practical considerations

Solutions to financial claims against Directors do not rely solely on legal solutions.  Many practical considerations come into play, to include settlements based on part payments, with payments being made over time.  Achieving such settlements is an art not a science. We are very experienced and used to achieving such settlements.

Contact our Director Disqualification or Misfeasance Claims specialist for an initial FREE discussion or call us on 0121 200 7040. The sooner you contact us the more we can do to help.