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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.

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.