Receiving a letter from the IS detailing an intention to investigate the conduct of a Director of a liquidated company is highly stressful. Swift and targeted action needs to be taken by the Director if Director Disqualification is to be avoided, writes Neil Davies*.
(*Neil is a member of the Advisory Board to the leading text on Director Disqualification law and practice, ‘Mithani on Director Disqualification’, the leading publication on Director Disqualification Law and Practice, recognising Neil’s expertise and experience in this field of work).
In 2020, there were 12,557 underlying company insolvencies in the UK, according to Government statistics. Of these, 9,418 were Creditors Voluntary Liquidations and 1,351 were Compulsory Liquidations. That number increased significantly in 2021. Many of them will attract investigation by the IS, on a civil or criminal basis of the Director’s conduct. That can lead to a Director Disqualification Investigation (‘DDI’), the seeking of a Director Disqualification Compensation Order (‘DDCO’) or even a custodial sentence after criminal investigation. Most commonly, such investigations are triggered by a mandatory report from the Liquidator of the failed company to the State.
As Insolvency Lawyers, with particular expertise and experience in Director Disqualification, Insolvency Litigation and Criminal Defence work, we know how much worry and stress such investigations cause. We have a strong track record on behalf of Directors in persuading the IS (and others) to abandon their investigations.
Quite often when we are approached by Directors who have received an IS letter, news of that investigation comes out of the blue for the Director. They have not heard of the IS, do not know what it does and do not know what to do next.
What the IS does
The IS is a Government agency, which amongst other things:
• Looks into the affairs of dissolved companies and companies in liquidation, acting on reports of any Director misconduct.
• Investigates the conduct of Directors of companies that are subject to formal insolvency proceedings, or that have been Dissolved (a recent development since 15 February 2022).
• Works to disqualify Unfit company Directors (‘unfitness’ is a very wide-ranging concept) for a period of between 2 to 15 years, depending on the seriousness of the alleged Unfit Conduct.
• Investigates and prosecutes breaches of company and insolvency legislation and other criminal law offences on behalf of the department for Business, Energy and Industrial Strategy (‘BEIS’).
The IS Company Investigations Team will investigate Directors/officers:
• Following formal insolvency proceedings or where a company has been dissolved without first entering into formal insolvency proceedings, where they receive information about a Director’s conduct (in one or more companies) that would make them unfit to manage a company if it were proven (our emphasis added), and
• Taking into account all circumstances of the case, a Court would be likely to make a Disqualification Order.
These powers are primarily civil and not criminal. If however the IS believes:
“that company or its officers may have committed criminal offences or other regulatory breaches, the case may be referred to their Criminal Investigation Team, the police, a regulator or other investigation agency” (our emphasis added).
The IS powers to gather evidence and investigate are statutory and are part of this country’s legal framework for company law.
Receiving Notification of an IS Investigation is a serious matter
Such letters often arrive on a Friday, ensuring the recipient has the weekend to worry about things. By this point, the IS has already gathered enough evidence to give it a degree of confidence that the investigation is merited and stands a chance of success.
This is the time for the Director to respond and to seek advice. It is imperative that the targeted Director uses this window of opportunity to best advantage.
The IS are complete strangers to what went on in the company. Only the Director (who ‘lived’ the story) will know the full history of what has gone before. It is vitally important that the Director’s story is communicated effectively and to best legal advantage, in response to the IS. The IS investigator needs to know all the circumstances of the case from the Director in a relevant and coherent way.
Directors who have experienced their company going through a formal insolvency procedure/liquidation will already have had a stressful time. So, to receive notification of an IS investigation with Director Disqualification of up to 15 years being the potential outcome, only adds to the stress.
The Director Disqualification regime exists to protect the public and business community from the actions of ‘delinquent Directors’, whose conduct can be demonstrated to be Unfit to manage a company.
So What is Unfit Conduct?
Examples include (but are not limited to):
• Misuse of Covid funding (in relation to one or more of the Bounce Back Loans (‘BBL’s’), CBILS loans, Furlough funding and PPE funding);
• Not keeping and/or maintaining and/or delivering up adequate company books and records to the Liquidator (some of these are also criminal law offences carrying imprisonment as a sanction);
• Not paying Taxes owed by the company to the Crown and/or not making required Returns to the Crown (for example VAT Returns);
• Trading the company to the detriment of the Crown;
• Fraudulent behaviour in the insolvent company;
• Trading whilst insolvent;
• Persistently not delivering company Accounts and Returns to Companies House;
• Mis-using company money or assets (also known as Misfeasance);
• Acting as a Director whilst already prohibited from doing so (also, a criminal law offence) or assisting somebody to do that (‘aiding and abetting’);
• Maintaining an overdraw Directors Loan Account or (for example) repaying it ahead of liquidation, in preference to the position of other creditors of the company.
However – the good news
Just because an unfitness allegation is made against a Director, it does not mean that is game, set and match to the IS. There is usually much for the Director to say, that needs saying.
Window of Opportunity for the Director – draft evidence
The IS letter to the Director may offer to provide to the Director a copy of the written draft evidence to be relied upon against the Director.
If so, ask for sight of it. Interpret it. Respond appropriately to it. That may involve obtaining and supplying to the IS Witness Statements to be obtained from third parties (for example, the company Accountant) and supplying documents (for example, emails) to corroborate the Director’s history of matters. Documents are all important in these circumstances.
Parallel criminal law investigation
The well-advised Director will ensure early in the process, by enquiry of the IS, that there is no such parallel investigation.
If there is such an investigation, it must and will affect the way in which the Director responds to the IS.
The IS letter will almost certainly invite oral or written responses from the Director. This is the window of opportunity and time for the Director, to make detailed, written representations as to why Director Disqualification proceedings are not required.
The Director must respond in a focused and precise way. That is where we can help.
How can we help?
Each year up to 1,500 Directors are disqualified for between 2 to 15 years. However, many more Directors than that receive notification of intent to investigate but where the IS then abandons the investigation, often because of well-crafted written representations made by or on behalf of the Director.
Every case is determined on its own specific facts. We have seen many law-abiding Directors, who through no fault of their own and despite their best efforts, see their company enter liquidation and then attract an IS investigation.
The receipt of an IS letter should not be the beginning of the end. The IS can and does abandon DDIs when presented with compelling responses.
It is our role to most effectively work with the Director and learn the full background to the case and investigate the facts and then present the IS with representations and evidence as to why the investigation should not go ahead.
In our vast experience, all is most certainly not lost when an IS intention to investigate letter is received. Receipt of that letter should be the catalyst for the Director to get moving and develop a response to the IS.
Public Interest Proceedings – IS Abandoning investigations
Director Disqualification proceedings are brought in the Public Interest, by the State against the individual. Unlike in ordinary litigation, if the IS can be persuaded, most commonly by written or oral representations on behalf of the Director, that the investigation should conclude, then the IS will (and does) abandon its investigation, both before and even after the issue of Court proceedings. The IS is subject to a duty to act fairly to Directors and will (and does) review the case whenever new evidence is received and acts accordingly.
There is still all to play for as these two testimonials show.
1. Alleged failure by Director to maintain and/or preserve and deliver up books and records to the company’s Liquidator – allegation defeated
This client’s story showed that Directors should always be prepared to stand their ground with the IS and explain their position coherently and fully when threatened with Director Disqualification. As the client explains:
Sukhbir identified to us the key issues and explained to us that we needed to gather evidence from third parties. Witness Statements were prepared for us and for those third parties and then that evidence was put to the IS with a detailed letter of representations, all compiled by NDP. That is where Sukhbir and NDP came into their own. They presented a compelling and persuasive letter of explanation to the IS, supported by documents where possible.”
Click this link for the full story. The outcome was that the IS decided to discontinue the Director Disqualification investigation, much to the relief of our client.
2. Director Disqualification is not Inevitable in Crown Debt Cases
The non-payment of Crown Debt (i.e. one or more of Corporation Tax, PAYE, VAT and NIC) at the point of liquidation is a common reason for Director Disqualification investigation. However, disqualification is not inevitable in such cases. The point is demonstrated in this testimonial/case study, in which a company (one of our clients) went into liquidation owing circa £369,000 to HM Revenue & Customs, who were by far the largest creditor of the company, which caused the ‘S to commence an investigation into the conduct of our Director client.
On the face of it, Director Disqualification looked a certainty, but Suky Mann, one of our Director Disqualification Solicitor Specialists was able to convince the IS to drop the case, and so avoid a possible 6-year disqualification for our client.
What should the well-advised Director do when threatened with a Director Disqualification investigation?
1. The first thing to do is act quickly and contact us. We assure you of a user-friendly welcome.
2. Documentary evidence to build and support a Director’s case is vitally important. This may involve (depending on what is alleged) obtaining evidence (e.g. company records and emails) and Witness Statements from persons such as key company employees, suppliers and the company Accountant and scrutinising and interpreting company Accounts and emails exchanged between the Directors and relevant parties. All of the circumstances of the case must be identified and communicated to the IS.
3. The Director should always be prepared to stand his/her ground with the ‘IS’ and explain his/her position coherently and fully. Such perseverance does often pay off, with an investigation abandoned. We are well used to supporting the Director’s position and the Director in this very stressful period.
Meeting with the IS
4. Often, even where the IS declines to abandon a Director Disqualification investigation (after written exchanges with NDP), the Director requesting and attending a meeting with the IS (with legal representation), to better/further explain his case, can often result in the abandonment of an investigation or proceedings. Personalising the case in this way is an important tool in the armoury of the Director. The meeting serves many purposes. For example, it brings a case to life and it allows the ‘IS’ to see the credibility of the Director.
What can NDP Uniquely add to the Director’s position?
1. Our 2 Directors (Neil and Sukhbir) have historically either advised or worked for the IS. We know what the IS want. Our 6 experienced Solicitors, who work alongside our Directors, are passionate and committed to best represent our Director clients and achieve their objectives. Identifying and agreeing those objectives early on with the Director is vitally important.
2. Our CEO, Neil Davies, has unrivalled experience in this field of advising Directors as to their duties. He advised the IS as a Panel Solicitor in a former life. Neil is and has for a number of years been an Advisory Editor to the leading textbook on this subject, ‘Mithani: Directors’ Disqualification’.
3. We have a proven track record of successfully representing Directors faced with:
• Director Disqualification investigations;
• Director Disqualification financial compensation claims;
• Financial claims from Liquidators; and
• Criminal law investigations arising out of company failures.
We understand and know what the opponents want and how to best manage those expectations for the benefit of the Director under attack.
4. Our Team has over 120 years of combined Insolvency Law and Director Disqualification experience. Insolvency law and practice is what the NDP Team do, day in day out. It is that detailed knowledge of Insolvency Law and practice that can and does make the difference between winning and losing a case for the Director. We have extensive contacts within the Licensed Insolvency Practitioner community that can often help in dealing with these matters.
Contact us if you are threatened with Director Disqualification
Our experienced and award-winning team of Director Disqualification specialists has defended many hundreds of Directors who have been threatened with disqualification. We have regularly succeeded in:
• Reducing the length of the disqualification;
• Removing the threat of it entirely in many cases;
Of course, there is a cost to responding to the IS. Our experience in this field of work allows us to be very competitive in our fee structures.
We work with clients on, for example:
• Fixed fees for particular stages of work.
• Fees payable in agreed instalments, where necessary.
Where the client has legal expenses insurance, that responds to the claims.
Legal costs of the IS
The IS, during the investigative steps of matters, does not (currently) seek to recover legal costs from the Director. The downside of that is that where the Director successfully opposes an IS investigation, pre the issue of Court proceedings, the Director cannot (usually) recover his own legal spend from the IS.
Nevertheless, in context it is perhaps money well spent, when compared to the cost of opposing/dealing with the IS in Court proceedings (if commenced), not to mention the risks and cost involved in Director Disqualification proceedings, to include reputational damage and the prospect of paying the IS legal costs if the Director is unsuccessful in opposing claims.
Contact us if threatened with Director Disqualification
Neil Davies, Solicitor and NDP Director.
(Neil is an Advisory Editor to the leading text on Director Disqualification law and practice, ‘Mithani: Directors’ Disqualification.’)