Crown Debt and Director Disqualification – The Insolvency Service’s View of the World.
In the recent Insolvency Service (IS) Stakeholder Newsletter for Autumn 2015 the IS penned a short article entitled “Focus on: Crown Debt scams – a £400m problem”, in which they estimate that HMRC have lost around £400m as a result of cases which ended in the IS seeking director disqualification for non-payment of Crown Debt. In this article, as director disqualification specialists, we give our views on the key points of the article, and some tips on how directors should respond when facing disqualification.
The Key Points
1. The IS refer to the average amount due to HMRC in a Crown Debt director disqualification case in (they say) the sum of £975,740.00.
We do not recognise that number. That is surely an over-estimate. A random sample of IS cases we have looked at shows Crown Debt of nearer £100,000 – £120,000.
2. The IS confirm that in the context of those numbers that they believe that it is clear that there is a significant public interest in pursuing directors involved in such cases.
We monitor carefully the grounds and reasons for director disqualification on a case by case basis. Crown Debt cases figure prominently and are far and away the biggest allegation of Unfit Conduct relied upon by the IS in seeking director disqualifications.
3. The IS refer to the Crown Debt in such cases usually building up over a long period of time.
In our experience, HMRC are ever more vigilant in not allowing Crown Debt to escalate out of control. Directors are often encouraged by their solicitors or accountants to seek time to pay arrangements with HMRC or to seek specialist insolvency advice, to benefit the company and to protect the director from the subsequent risk of a Director Disqualification investigation or Misfeasance proceedings by a liquidator subsequently appointed to the company. The NDP team are specialists in director disqualification and are well placed to advise on such issues and on wider restructuring options for the company.
4. The IS state that in the period 2014 to 2015, over 680 disqualifications obtained under section 6 of the Companies Director Disqualification Act 1986 involved cases where the Crown were treated unfairly (in the view of the IS) by comparison to other creditors.
Of those 680 cases, we expect that many of them will have been disposed of by the director giving a Director Disqualification Undertaking, before Court proceedings are commenced, thus avoiding the scrutiny or involvement of the Court in the case and to avoid what the director fears will be an expensive legal fight (it need not be overly expensive).
That means the Court has had in those cases, no involvement or scrutiny of the case relied upon against the director by the IS. In our experience, that means that many directors are actually agreeing to be disqualified by undertaking, when there may well be no need to do so. The key points to raise here for directors are:
- The mere existence of a debt owed to the Crown at the date of liquidation does not inevitably mean that the director has engaged in Unfit Conduct and thus should be disqualified.
- All of the circumstances of the case need to be looked at, to assess whether non-payment does in fact constitute Unfit Conduct. The director needs to get across to the IS his side of the story in a targeted and determined way. Remember – the liquidator of the company and the IS are strangers to what happened during the life of the company.
- The director should obtain and carefully scrutinise the evidence to be relied upon in the disqualification case against him/her and respond to it in a structured and targeted way. The IS will listen to the director. It has no interest (and there is no public interest) in pursuing cases that do not merit disqualification.
- The IS bring proceedings in the public interest. If it can be persuaded at any stage that it is not in the public interest to continue, it will abandon an investigation/issued case. The NDP team of director disqualification specialists have been involved in many such abandoned investigations and cases.
5. The IS justify their focus on Crown Debt cases on the basis that it impacts on (in their words) “every law-abiding taxpayer”.
It states that this action not only deprives the Government of funds for essential public services, it also introduces unfair competition in the market place.
That is perhaps an unsurprising statement in the circumstances. It ignores however the ‘coalface’ reality faced by directors of struggling companies, who keep the company going in the hope and expectation that the company ship can be turned around, so preserving jobs and livelihoods. It is that type of detail that the director needs to get across to the IS to try and cut disqualification investigations off, at the pass.
The more cynical view is in that pursuing Crown Debt cases (many of which involve only modest amounts of Crown Debt) the IS is simply picking “low hanging fruit” from which the IS can fairly easily meet its director disqualification and budgetary targets.
It has to be remembered however that the Crown regards itself as an “involuntary creditor” and this view permeates their thought processes. Many of their staff have limited experience of what the business community refers to as “commercial reality.” This can make dialogue with them extremely difficult.
However at NDP we have team members with long standing relationships with key HMRC employees and we are thus more able to have a meaningful conversation with HMRC.
Director Disqualification – The Wider View
The IS view, summarised in part above, serves as a warning to company directors who may be incurring increasing, unpaid Crown Debt, and who thus may become exposed to an allegation of trading to the detriment of the Crown or treating the Crown unfairly. Whether you are a director of a company that is in……………..
- In financial trouble, looking for refinancing or close-down/new start options and advice.
- Faced with a Winding-Up Petition (or the threat of one).
- Under pressure from its bank and/or book debt invoice discounters and/or trade creditors.
- Looking for an introduction to a friendly, efficient and helpful Insolvency Practitioner, on a no cost and no obligation basis.
- Looking for alternative funders to support Newco and perhaps for help and guidance to move from Oldco to Newco.
- Seeking to learn about and discuss the options open to the director and to the company.
- Establishing feasibility for the possibility of formal administration followed by a quick buy back by the directors/shareholders of the business but not the insolvent Company. Should this prove possible it has many benefits not least (i) preserving jobs and the business (ii) greater realisations for creditors (iii) retaining income and value for shareholders/directors and (iv) leaving behind debts.
- Faced with a disqualification investigation or disqualification proceedings.
- Dealing with ‘Prohibited Name’ issues.
- Faced with claims from guarantors.
………………Our specialists in director disqualification can help.
Contact Us If You Are Facing Director Disqualification
The team here at NDP is well placed to advise directors about all aspects of Director Disqualification and Misfeasance claims that might be intimated against them as well as advice on all of the above issues.
We have excellent long established relationships with Insolvency Practitioners and Funders that can benefit directors as well as daily contact with the IS and its solicitors, as part of our ongoing caseload.
It is always the case that the earlier you get in touch with us the better. The director and the company have options at every stage, whether your company is threatened with a Winding-Up Petition or has recently been placed into administration or creditors’ voluntary liquidation and whether or not there is a large debt owed to HMRC. Please contact us or call us today for a free no obligation/no pressure initial chat on 0121 200 7040, or why not email a copy of a letter you may have received from the Insolvency Service to firstname.lastname@example.org?