Do failing sports clubs and their directors enjoy different rules to other failed/failing limited company businesses?
This article by Neil Davies, Head of the Insolvency and Business Recovery team at NDP Solicitors, Birmingham, looks at the financial aspects of the question posed in the headline.
Neil is an expert on the law relating to Directors’ duties and is an advisory editor to ‘Mithani: Directors’ Disqualification’, the leading work on Directors duties and responsibilities.
This time around, it is elite professional rugby that is in crisis: Worcester Warriors and Wasps RFC have both gone into Administration in recent days. Will there be a sting in the tail for the Directors of those entities?
Worcester Warriors – 2 Ex-Owners Disqualified as Directors
As a pre-cursor of what may be to come, Jason Whittingham and Colin Goldring, as former owners of the Warriors, were on 14 October 2022 both disqualified by Cardiff Magistrates Court for 1 year, for failing to file Accounts at Companies House for the financial year to 28 February 2021.
The Common Denominator
It is reported that both rugby clubs have run up massive, accrued debts to HMRC and others, running into many millions of pounds.
This article looks at the potential consequences for the Directors of failed limited companies, to include Wasps and Worcester and other clubs that may follow a similar road, in, most obviously, Rugby Union, Rugby League and Football where the latter has had a number of casualties in recent years.
Wasps and Worcester – the tip of the Rugby Union iceberg?
That may be so, with rugby union premier chief Simon Massie-Taylor quoted as saying in the press that he cannot be certain more professional clubs will not follow Wasps and Worcester into financial oblivion. English Rugby Union is undergoing an overhaul at all levels. Objectively, this might be said to be happening after the financial horse has bolted. That clearly must however happen. Such clubs are often the heartbeat of a community. Their supporters, volunteers and employees, to include their playing staff, deserve to know that they are working in a secure and safe financial environment, where their work and commitment will not be undermined by the failure of the club.
This article does not address how those problems might be avoided moving forwards, save to say that the French Rugby model requires teams/clubs to be subject to intense accounting and financial scrutiny before the start of each new season. That might be a good start for English rugby and other sporting disciplines. Equally, stewardship by experienced individuals of those clubs, supported by external legal, accountancy and non-executive advice, on their board, might be another way forward, by way of improvement.
Possible consequences for the Directors of Wasps and Worcester (and for the Director of any failed Limited Company Business)
We stress that nothing is known of the way in which the 2 clubs were run or of the conduct of the directors of them; The following statements are generalisations of what might however happen in such an insolvency situation:
- A Director Disqualification Investigation (‘DDI’) by the Insolvency Service, who have a mandatory obligation to review the conduct of every person who has been a Director of a failed limited company business. Such reported high levels of debt owed to HMRC in each of the Wasps and Worcester scenarios, will inevitably be a red flag to the Insolvency Service and will attract a DDI with all the angst, risk and legal costs involved for the director in dealing with that investigation.
- Possible disqualification as a Director under section 6 of the Company Director Disqualification Act 1986 (‘CDDA’) for a period of between 2 and 15 years, with all the reputational, employment and other damage that may flow from that. That can happen, even where a ban has already been imposed by a Magistrates Court, if the Insolvency Service determine that the Public Interest demands a longer Director Disqualification ban.
- The possibility, if disqualified as a Director (whether voluntarily or otherwise) of the Director being pursued by the Insolvency Service for a Director Disqualification Compensation Order (‘DDCO’), which seeks to make the Director personally liable and responsible to pay certain of the debts owed by the failed company, to include potentially liability for crown debt.
- The impact on other, ongoing directorships of that Director so that an application to Court, for Permission to continue acting in the management of an ongoing company or as Director of a new company, may need to be made by the Director. Again, significant legal expense and angst are involved in such an application. Such applications can and do succeed. NDP is well used to successfully making such Permission applications.
- Financial recovery action against the Director, by the Administrator of the company or any subsequently appointed Liquidator of the company, seeking financial redress against the Director personally, alleging one or more of:
- Wrongful Trading under section 214 of the Insolvency Act 1986, involving an allegation that the Director allowed the trade of the company to continue beyond that point when it should have ceased trading, when there was no realistic prospect of avoiding insolvent liquidation.
- A Misfeasance claim from the Liquidator of the company against the Director under section 212 of the Insolvency Act 1986, involving allegations of misuse and/or misapplication of company assets or property.
The reader should not be tempted to conclude that such financial recovery claims are pie in the sky possibilities. My firm is currently involved in, for example:
- Million pound claims, on behalf of the Liquidator of that company, pursuing the former Director of a failed professional Rugby League club, alleging Wrongful Trading of that company by its Director in the period prior to its fall into liquidation.
- Many more actions, acting for and against Liquidators, in respect of the above type of allegations.
- Possible wider regulatory scrutiny of the conduct of the Director of the failed company, in both a Civil and Criminal law context, by any one of a number of regulatory Agencies.
So much can be done by and on behalf of the Director, pre-insolvency, to avoid the situation arising in the first place, by for example the taking of professional advice from experienced Insolvency professionals in the legal and Insolvency Practitioner community, at the earliest moment.
That could avoid the prospect of the problem arising in the first place.
Equally, there is much that can be done for the Director, post insolvency, to protect his/her position, given the lines of attack that are talked about in outline above.
THE ‘SEQUANA’ CASE
If ever Directors were unsure about the extent of their legal obligations to the creditors of their company, they need look no further than the recent Supreme Court decision in the case of BTI 2014 LLC v Sequana SA, that has set out in words of one syllable that such a duty is owed to creditors by Directors and that alarm bells should ring and Directors should act positively and decisively to act in the best interest of creditors, when the prospect of insolvency looms.
A failure to do so by the Director is likely to have serious financial consequences for the Director personally, when the Liquidator of the company comes knocking on his or her door.
We are well used as a firm to advising Directors in both pre-and post-insolvency situations and to giving advice Directors as to the extent of their duties, on a much higher and wider level, before individuals take office as a Director.
Limited liability for Directors is not what it used to be!