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Directors Duties: a review of liquidator claims and director disqualification developments in 2023/2024

Article by: Neil Davies, Solicitor and Managing Director of NDP and Contributory Editor to ‘Mithani: Directors’ Disqualification’ – the leading work on Director Disqualification law and practice. And by: Richard Shepherd, Senior Solicitor at NDP.

Overview of Directors Duties

This territory is inevitably dominated by ever developing caselaw deriving from 2023 and 2024 Court outcomes in relation to the misapplication for and/or misuse of Bounce Back Loans (‘BBL’s’) and Coronavirus Business Interruption Loan Scheme (‘CBILS’) loans by Directors and the many consequences flowing – including immediate or suspended imprisonment for Directors.

Headlines – what do we know?

111 Directors were disqualified in January 2024; and

That number is representative of the number disqualified every month in the last year.

  • Director Disqualification Investigations (‘DDIs’) – Civil Courts are banning Directors on application by the IS for BBL fraud (typically overstating turnover or misusing BBL funds or making multiple BBL applications for the same company) for periods of between 8 years to the maximum period of 15 years following Directors giving Director Disqualification Undertakings (‘DDU’s’) agreeing to be disqualified or by Court Order.
  • Director Disqualification Compensation Orders (‘DDCOs’) – The Courts are imposing DDCOs on Directors, where Director Disqualification is ordered by the Court or agreed to by the Director (by DDU), leaving the Director personally liable to repay (for example) some part or all of the BBL.
  • DDCOs are also being made by the Courts against Directors in respect of non BBL Director Disqualification cases – see below.
  • Criminal Law investigations into BBL fraud are on the rise and are resulting in successful Criminal prosecutions against Directors, resulting in custodial sentences.
  • The sting in the tail – Beware!  Directors giving DDUs in Civil DDI, are then finding themselves subject to subsequent Criminal Law investigations and prosecutions arising out of the same conduct complained of in the concluded Civil DDI.  Great care is needed.
  • Permission for the Director to Act despite disqualificationIn a wider context, even when disqualified for an upper bracket period (i.e. 11 years or more) Directors may still be able to successfully apply to Court for Permission to continue to act as a Director and in the management of an ongoing limited company business – see the Dharas case below.
  • Non-Executive Directors – The extent of the liability for misconduct of non-executive Directors has also been the subject of much debate – a note of such issues will feature in a separate blog in the coming weeks.
  • Dissolved companies – Using the new extended powers available to it, the IS is now pursuing Director Disqualification against Directors of dissolved companies.

Summary

Whatever the challenge faced by the Director, the well-advised Director has a number of routes and opportunities available to him, that may avoid or mitigate the relief sought against the Director – we are well placed to advice.

Who pursues such misconduct claims against directors?

Such directorial misconduct is most commonly pursued by Liquidators (seeking financial recompense) and/or the IS in the context of:

  • Criminal investigations and proceedings.
  • Civil DDI’s.
  • Director Disqualification Court proceedings (‘DDC’).
  • DDCOs

What is a DDCO?

A DDCO can only be made where:

  • Conduct for which the person who is subject to the Disqualification Order or Undertaking has caused loss to one or more creditors of a company of which the person has been a Director.

In other words, a DDCO allows the IS to recover losses caused by the company, from the disqualified Director personally.

Other misconduct pursued by the IS

Inevitably, away from BBL Related misconduct, we have seen some old disqualification favourites pursued against Directors, for example and to include:

  • ‘Trading to the detriment of the Crown’;
  • ‘failure to maintain and/or preserve and/or deliver up adequate company books and records’ (also a Criminal Law offence); and
  • ‘Director Disqualification based on the fraudulent evasion of VAT.
  • Director Disqualification arising out of breach of contractual obligations by the company.

This article now looks at decisions relating to some of the above subject matter.

  1. Decided cases – High Court

a.       DDCO – Secretary of State v Barnsby [2023] EWHC 2284 (Ch)

Background: PZ was a travel operator specialising in safari holidays in Africa. PZ held ATOL authorisation (a financial consumer protection scheme provided by the Civil Aviation Authority). It is a criminal offence to carry out certain activities absent a valid ATOL. However the ATOL was not renewed and the company continued to take bookings illegally. The SOS’s allegations in the disqualification were made out at Trial following a Judgment handed down in 2022 – [2022] EWHC 971 (Ch).

Held: The Director was disqualified and compensation of £81,405 plus (non-contractual) interest at 1.5% was ordered to be paid by the Director to five of PZ’s customers.

b.      DDCO – Secretary of State v Valchev (Unreported – CR-2023)

This case involved a DDCO made in respect of an overstated BBL and evidences that overstating company turnover in a BBL application is as a start point, a recipe for disaster for the Director completing the incorrect/untrue application (and sometimes for the other Directors of the company).

Background: V applied for a BBL on behalf of H&T and H&T  received £50,000 on 08 May 2020. The SOS alleged that the application was deliberately false as the stated turnover was £350,000, notwithstanding the company’s actual turnover being £35,000. H&T was therefore entitled to 25% of that (£8,800). V denied responsibility for the misstatement and the matter went to Trial.

Held: A Disqualification Order of 9 years was handed down alongside a Compensation Order requiring payment of £43,540, including contractual interest to the date of Judgment.

Reasons: The Judge rejected V’s claim that a computer error had caused an extra zero to be added onto the stated turnover figure. Previously V had contended in sworn evidence that it was a typo. The Judge went over the documents V would have reviewed in some detail and concluded that she was happy that V had dishonestly misstated the turnover. The Judge agreed with the SOS that 9 years was appropriate.

c.       Permission to Director to act despite Director Disqualification of 11 Years – Secretary of State v Dharas CR-2021-002445

Background: The Secretary of State accepted an 11 year DDU from the Director who did not dispute there had been a fraudulent evasion of VAT involving his company, dating back to 2006.

Despite his lengthy disqualification, the Director successfully applied for Permission under section 17 of the CDDA to act as a Director of his established and ongoing trading vehicle (‘SL’).

Held: Permission was granted for the Director to act as a Director of SL for 18 months subject to conditions, with the Permission Application adjourned, to be re-listed after 05 June 2025.

Observations: The Judge was clearly influenced in granting Permission, by the absence of any repetition of the conduct complained of and whilst a marginal case, in weighing the Public Interest, the Judge granted Permission subject to Conditions (not set out here).

  • Criminal law

Overstatement of company turnover in a BBL application can be a Criminal Law offence and a Civil Law offence as the cases below demonstrate, with the offending Directors charged and convicted with Criminal offences under one or more of:

Serious and dangerous stuff!  Some recent examples:

  1. R V Dagistan [2023] EWCA Crim 636 – A Court of Appeal Decision

Facts

  • Husband and wife prosecuted by the IS for fraudulently applying for a BBL.  The Crown Court imposed custodial sentences of 2 years and 2 years and 4 months.
  • Husband and wife appealed the sentences.  Their sentences were replaced by the Court of Appeal to 18 months immediate custody, remarking that:

‘…only immediate custody would sufficiently work and punish this serious offending’

  • The Court further remarked that the BBL scheme:

‘was an exceptionally vulnerable target of a time of national emergency’

Comments

  • We can see the Criminal Court of Appeal giving pretty clear guidance to the (lower) Crown Court and Magistrates Court  moving forwards, that misstating BBL turnover may land the Director in the Criminal Courts and in prison.
  • Many such overstatement cases are dealt with as DDI’s in the Civil Courts – that does not however mean that such a case will not become a Criminal case.  Great care is needed.
  • Now compare that with a similar Civil Law case – SOS v Wasilewski – Re: Mat Trans Ltd (‘MAT’)

A Civil Law case where the Director caused MAT to overstate its turnover, resulting in MAT receiving £40,000 more than it was entitled to receive.

Civil Director Disqualification proceedings were commenced by the IS against the Directors, in circumstances where the BBL went unpaid at liquidation with the Director offering no explanation. 

Outcome

The Director was disqualified for 11 years.

ICC Judge Prentis said that the Director’s conduct:

  • Made him Unfit to be a Director.
  • Breached his fiduciary duties in obtaining benefit for MAT to which it had no entitlement.
  • Breached his obligation to complete the BBL application honestly and correctly.

Comment

We are unable to discern what differentiates a case from being pursued in a Civil or Criminal context.  Directors need to be alive to the prospect of both routes being pursued.

Facts: This Director failed to provide explanations or evidence to his Liquidator for the source of receipts of £2.22m and purchases of £2.37m (not to mention £682,000 invoiced out but not banked). The Director had provided a DDU of 7 years.  In this subsequent Criminal prosecution, he was sentenced to 12 months imprisonment, suspended for 24 months.         

 Comment: Failing to maintain and/or preserve and/or deliver up books and records to the Liquidator remains a real and continued problem for Directors, both in a DDI and Criminal Law context.

  • R v Pierini and Razaq [2023] EWCA CRIM 1189

This case was a decision of the Criminal Court of Appeal and thus carries significant weight.  It is an important decision as to the basis on and the extent to which a DDU (given in Civil proceedings) can be admitted as bad character evidence in subsequent Criminal proceedings.

This case decided that the content of a Civil Law DDU given by a Director, could be used against him as ‘Bad Character’ evidence (defined by section 98 of the Criminal Justice Act 2003) in subsequent, unrelated Criminal proceedings.

 Comment: Directors giving Civil DDU’s must be alive to the fact that DDU’s are not standalone documents.  They can come back to haunt the Director in later Criminal Law proceedings.   Great care and experienced advice needs to be taken by the Director to deal with this situation.

An IS press release on 04 February 2024 reports that:

  • Mr Ozhot applied for a £50,000 BBL but misused the money, for his personal gain.
  • IS investigators successfully pursued Mr Ozhot in a Criminal prosecution.  He was sentenced at Wood Green Crown Court on 02 February 2024 to:-
  • 2 years in prison, suspended for 2 years, having pleaded guilty to one count of fraud by false representation.
  • A Compensation Order, meaning Mr Ozhot will have to repay the £50,000 he fraudulently obtained, at £500 per month.

Misfeasance and breach of duty cases by liquidators against directors

Below are some key points that the well-advised Director must have in mind when dealing with a financial claim from a Liquidators or Administrator (or from the IS!).

  • Engage early and positively with the IS/Liquidator/his Solicitor (even if you consider the claim to be misconceived or a try on).
  • Obtain early legal advice from specialist Insolvency Solicitors.  There is much to say and do at the outset.  Know all of the options – we guarantee there will be some options the Director has not thought of.
  • Use all the procedural and practical tools that are available to the Director.  Consider issues to include:-
  • Make detailed written submission to the IS or the Liquidator (setting out the Director’s side of the story).
  • Obtain third party evidence (to support and corroborate the Director’s position).
  • Security for Costs applications.
  • Assimilate all evidence to support the Director’s position at the outset (whether from the Director, his Accountant or the company’s own papers, probably now held by the Liquidator – access them).
  • Mediation.  This route can offer a cost effective and quick solution to such disputes, when used properly.  We regularly engage in the Mediation process on behalf of our clients.

Remember- The Liquidator and the IS are complete strangers to what went on in the company.  The Director is at clear advantage in dealing with factual issues.  Use that advantage in conjunction with experienced and savvy legal advice.

  • Challenge what is said against the Director.  Think outside the box.  A recent example:

We took over a case against a Director from another firm of Solicitors (we take over many such cases). The claim against the Director was for £500,000 plus costs and interest for alleged breach of duty and misfeasance (i.e. misapplication of company property or assets).  The previous Solicitors had written solid and good responses to the Liquidator. 

They had however overlooked a fundamental point.   The total value of the creditors in the case amounted to £45,000.  The Liquidator thus, on those particular facts, was as a starting point, limited to claiming that much lower sum, even if the Liquidator had the best case in the world to seek recovery of the much greater sum.  The previous Solicitors had completely overlooked the point (query also the conduct of the Liquidator’s Solicitors in claiming overstated amounts).

  • Meet the claims head on.  Address and deal with them quickly to keep legal costs and angst to a minimum.  Decide objectives and aim for them.
  • Know your options.  We would not presume to know or understand your business. Take experienced advice and know all of your options.
  • Parallel claims by Liquidators and the IS.  The same subject matter (for example – an allegation of inadequate books and records in the company) can result in financial claims by the Liquidator and a DDI from the IS.  Be aware that they talk to each other.Liquidator
  • Prepare to fail!  Most if not all of the subject matter of this article relates to post liquidation action against the Director.
  • The well-advised Director should take legal advice before liquidation.  The choice of the proposed Liquidator is vitally important.
  • Take advice pre-liquidation on likely issues of contention (for example: unpaid BBL, Crown debt, overdrawn Directors Loan Account, illegal dividends etc).  Choose a Liquidator who talks to you about such matters before liquidation, to avoid nasty surprises post liquidation.
  • The giving of a DDU (or a Court ordered Director Disqualification) is not necessarily the end of matters for the Director.  Great care is need.  ‘Eyes wide open’ is the message.
  • Admissions made by the Director in DDU’s need to be considered very carefully, given the ramifications that can follow – see above.
  • Applying for and obtaining Permission to continue in the management of a limited company or as a Director of specified companies is possible, even in the most serious Director Disqualification cases (to include cases involving a BBL) on application by the Director to the Court – see Dharas above.
  • Director Disqualification is not inevitable.   Setting out in writing the full circumstances of the case in targeted and focused representations to the Insolvency Service (as to why a DDI should not be continued) is absolutely vital.  Ditto in respect of a Liquidator claim.
  • The targeted Director always has options available to him in Director Disqualification and Misfeasance cases.

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