Director Disqualification for Moving Funds Out of the Reach of Creditors. How and Why Did it Happen?
Mr Timothy Richard Edmunds (‘Mr Edmunds’) has received a director disqualification period of 5 years, whilst his wife, Mrs Annette Edmunds (‘Mrs Edmunds’), has been disqualified for 4 years, following an Insolvency Service investigation. These Investigations found that the company they were directors of had entered in to a tax avoidance scheme involving the issue of shares totalling £240,000 to the directors, shares which were only ever part paid for. This article looks at why this action lead to their disqualifications.
The Background to this Case
Both Mr and Mrs Edmunds were Directors of ESP Strategies Ltd (‘the Company’) which went into liquidation on 25 November 2015. Mr and Mrs Edmunds agreed to a number of transactions ending with the surrender of the shares, which resulted in £230,400 of uncalled share capital becoming unavailable.
The transactions took place at a time when the Directors knew that the Company had an outstanding debt to HMRC, the sole creditor in the liquidation, with a claim of £133,245.
The above conduct resulted in the Secretary of State for Business Energy and Industrial Strategy accepting Director Disqualification Undertakings on 17 July 2017. The Undertakings took effect on 7 August 2017.
What the Insolvency Service Said
Commenting on the disqualifications, Sue MacLeod, Chief Investigator at the Insolvency Service, said:
‘If your business engages in transactions in the run up to liquidation which are detrimental to any of its creditors, the Insolvency Service may investigate you, leading to your removal from the business environment.’
Mr and Mrs Edmunds, knowing of their outstanding debt to HMRC, owed a duty as directors to ensure that Company funds would be readily available to pay the Crown liability that was due. In making a substantial sum unavailable, director disqualification was perhaps an inevitable outcome.
Is This the End of the Problems for the Directors?
Possibly not. Although we do not have enough information to make any specific comment, in our experience, the Liquidator of the Company may now take steps to recover the unpaid share capital from the Directors personally, most obviously under section 212 of the Insolvency Act 1986 as Misfeasance conduct by the Directors.
Section 212 provides that:
‘Summary remedy against delinquent directors, liquidators, etc.
(1) This section applies if in the course of the winding up of a company it appears that a person who—
- is or has been an officer of the company,
- has acted as liquidator . . . or administrative receiver of the company, or
- not being a person falling within paragraph (a) or (b), is or has been concerned, or has taken part, in the promotion, formation or management of the company,
has misapplied or retained, or become accountable for, any money or other property of the company, or been guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company.’
Key Considerations and Our Take on Matters
Directors can no longer safely dispose of Disqualification proceedings by blindly giving a Director Disqualification Undertaking, without first considering the wider implications of making admissions as to their conduct, as part of the Undertaking process. These implications include:
- The possibility of a Criminal Prosecution and Criminal Asset Confiscation Action against the Director, following a successful prosecution.
- The Liquidator of the Company relying on admissions given in Disqualification proceedings to seek financial recompense from the Director personally, in Misfeasance proceedings.
- Possible Director Disqualification Compensation Proceedings from the Secretary of State, arising out of the Undertaking given.
This case reminds us that Directors must act responsibility and with the interests of creditors of the company in mind, particularly in the lead up to liquidation.
Get Specialist Legal Advice in the Lead up to Liquidation
It seems unlikely to our team of director disqualification specialists that the conduct giving rise to the Disqualification application against Mr and Mrs Edmunds (i.e. entering into a Tax Avoidance Scheme) was done without professional advice from accountants or solicitors. That perhaps makes it even more remarkable that the prospect of disqualification was not (it seems) flagged up to the Directors by one or more of advising Accountants, Solicitors or Insolvency Practitioners. Sadly, this is a common theme in our experience.
What Should the Director Do?
Consult our experienced insolvency team about the negotiation of the wording of the proposed Undertaking. Dilution of the wording of admissions to be given can make a world of difference to what happens subsequently. To not do so risks financial and regulatory calamity for the Director.
If you have any questions regarding your duties as a Director or the conditions of your Director Disqualification Order or Undertaking, please contact us or call us today on 0121 200 7040 for a FREE, no obligation initial chat.