Is the corporate veil still worth a candle or has it melted away in the judicial heat?
This article is a must read for Directors and Advisors on developments in company insolvency and the crucial time leading up to it. It is a whistle stop tour and covers the following hot topics and developments in the area of Insolvency Litigation in 2024.
- ‘Trading Misfeasance’ – another brand-new bear trap for the unwary Director.
- Wider Director Misfeasance and breach of Directors duties news.
- Misrepresentation – more personal liability for Directors.
- Directors going to prison and becoming subject to criminal convictions.
- Applications for Permission to act under section 17 of the Company Directors Disqualification Act 1986 (‘CDDA 1986’). A counter – intuitive provision.
- ‘Scooping the Jackpot’ – claims against Directors by Litigation Funders.
- Our predictions for 2025. The message for Directors is that the Courts are ever more willing to find against them, in new and increasing ways.
- Recent Director Disqualification developments – directors going to jail
1. Recent Director Disqualification developments – directors going to jail
STOP PRESS: Director bashing is alive and well, especially in relation to Pandemic related fraud.
2023/2024 Insolvency Service statistics Show that Covid loan abuse produced:
- 831 Director Disqualifications.
- 93 Bankruptcy Restriction Orders.
- 22 Criminal prosecutions.
- Very many Director Disqualification Compensation Orders (‘DDCO’) made against Directors personally.
The starting point is that the Director who engages in Unfit Conduct and where there is a finding by a Court – or agreement between the parties – (i.e. the Insolvency Service (‘IS’) and the Director) of Unfit Conduct having happened, must be disqualified for a period of between 2 to 15 years. We look below at some recent cases decided by the Courts, to include those where the Court has ordered, or the Director has agreed to pay compensation to the Insolvency Service.
The wider Director Disqualification picture – what constitutes unfit conduct? Some examples
- Allegation of Unfit Conduct: What Is ‘Trading to The Detriment of The Crown’ (‘TTTDOC’)?
The recent decided case of Secretary of State v Sekhon [2024] EWHC 674 (Ch) provides some very clear rules and guidance as to what will not constitute this particular offence.
In a nutshell, not paying debt owed to the Crown (e.g. VAT, PAYE, NI and Corporation Tax) will likely attract a Director Disqualification Investigation (‘DDI’) from the IS and ultimately a possible Director ban. As always, each case is judged on its own facts. Interestingly in Sekhon, the Judge commented that TTTDOC was not of itself Unfit Conduct. Instead, the key question was:
‘whether the Director caused the company to apply a discriminatory practice of paying other creditors with the consequence that the company was trading at the expense of the creditor who was discriminated against.’
OUR COMMENT: As ever, each case turns on its own facts.
b. Allegation of Unfit Conduct: failing to keep and/or maintain adequate books and records for the company or alternatively, failing to deliver them up to the Liquidator – possible jail time!
This is a frequently relied upon allegation of Unfit Conduct from the IS. What constitutes ‘adequate’ will depend on very many factors (e.g. size of company, nature of business). It is often a difficult allegation for the IS to successfully pursue against the well-advised Director.
AN EXAMPLE: VN ELECTRICS (‘VNE’) V MR V NDLOVU – 2024. Jail time.
- VNE went into liquidation owing HMRC more than £200,000.
- A Criminal investigation began, after which Mr Ndlovu was disqualified for 7 years, for failing to engage with the Insolvency Service Investigation Team.
- Mr Ndlovu was jailed for 10 months by Manchester Crown Court after breaches of the Insolvency Act 1986 and the Companies Act 2006, primarily in relation to failure to deliver up accounting records to the Liquidator as legally required.
c. Bounce Back Loan (‘BBL’) and wider covid fraud allegations of ‘Unfit Conduct’
Where to start…
This Director misconduct usually takes one of 3 forms, being one or more of:
- The overstatement of turnover by the Director when making the BBL application (to extract the biggest possible loan);
and/or
- The misuse of BBL funds (i.e. not used for the economic benefit of the company) once received by the company;
and/or
- A third category of BBL fraud is emerging, inspired by IS investigations and relates to where multiple applications are made by the Director(s) for BBLs for the same company. A real ‘no no.’ However, every case must be considered on its own facts.
EXAMPLES
SOS V MIRZAIE (‘M’) 2024
• M overstated turnover in a Bounce Back Loan (‘BBL’) application.
• Funds once obtained were then applied other than for the benefit of the company.
• M was disqualified by consent.
• A Director Disqualification Compensation Order was also made against M personally, requiring him to repay £38,971.
SOS V BELAL AHMED (‘BA’) AUGUST 2024
• BA secured for his Midlands restaurant business almost £50,000 more than he was entitled to via the Rishi Sunak inspired ‘Eat out to help’ scheme.
• BA did that after he had previously abused a £50,000 BBL for the same restaurant.
• BA has been banned as a Director for 12 years until August 2036.
SOS V RICHARD OLIVER (‘RO’) AUGUST 2024
• RO falsely applied for and obtained grants from 21 local authorities for his firm.
• £95,000 was received by his firm to which his firm was not entitled.
• RO also provided misleading information to secure a £50,000 BBL.
• RO was disqualified for the maximum period of 15 years at a High Court hearing on 06 August 2024.
2. What is the new ‘trading misfeasance’ law?
This really is big news, coming out of the much-published BHS failure – the decision in Wright v Chappell [2024] EWHC 1417 (Ch). The High Court decided that a new insolvency law trading offence (‘Trading Misfeasance’) should be born, defined as a failure of Directors to consider the interest of creditors when a company is insolvent or bordering on insolvency, but instead carries on trying to trade out of trouble (‘Trading Misfeasance’). The concept of more focused attention being paid to when the duty of creditors kicks in, was established in 2023 in the much-publicised Sequana case.
COMMENT AND CONSEQUENCES
- A Liquidator is now likely to claim the date from which the Director is personally financially liable for creditor losses from an earlier point in time, with a ‘trading misfeasance’ claim, than is possible with a Wrongful Trading claim (section 214 of the Insolvency Act 1986 (‘IA 1986’)) with a potentially significant increase in the financial amount that the Director is liable to pay the Liquidator of his/her failed company.
- The BHS case contains valuable guidance as to what Directors can and cannot do to avoid breach of statutory duty claims and Wrongful Trading claims (section 214 of the IA 1986) in circumstances where the actions and conduct of Directors are increasingly required to take the interests of company creditors into account in the run up to liquidation, if personal financial liability is to be avoided by the Director.
TAKING PROFESSIONAL ADVICE – AN EFFECTIVE STICKING PLASTER? NOT NECESSARILY
c. The BHS case reviews and raises serious issues on the extent to which Directors can protect themselves against such claims by reliance on professional advice. In BHS, Mr Justice Leech was clear that the importance that the Court will attach to the professional advice taken by the Director will depend on:
- The scope of the engagement.
- The instructions and information which the advisor was given.
- The knowledge which the advisors had or the assumptions they were asked to make.
- The advice which they gave (or did not give) and the extent to which the Directors relied on that advice (or not).
In the BHS case, the Judge concluded that the advice given by the professional advisors was not particularly considered or relied on by the Directors. So not helpful here.
INSURANCE
d. Persons advising Directors will want to seriously consider with the Director taking out increased Directors’ insurance cover now, to protect against the sort of liabilities that arose for the Directors in the BHS case.
WHAT DOES THIS MEAN IN PRACTICE?
e. In practice, this means both the trigger for, and content of, the creditors’ interests duty will be matters on which Directors will need to take specialist legal advice when company financial trouble and/or insolvency looms, certainly well ahead of liquidation if the prospect of personal financial liability on the Director is to be avoided/mitigated. The Director and the company always have options.
3. Mediation and wider alternative dispute resolution (‘ADR’)
The rise of Mediation as a settlement tool continues unabated – we are huge fans of Mediation. The recent case of Northamber Plc v Genee World (2024) is perhaps a seminal moment. The Court here imposed cost sanctions on a party who failed to mediate in breach of an Order to do so. Mediation is a great tool. It should be used more often.
STOP PRESS: 1 OCTOBER 2024 – CHANGES TO THE CIVIL PROCEDURE RULES (‘CPR’)
A new addition to CPR1(f) enables the Court to:
‘order or encourage the parties to use and facilitate the use of alternative dispute resolution…’
and
‘order (emphasis added) the parties to engage in alternative dispute resolution…’
COMMENT
Mediation is a much-underused process. Used properly, it saves time, money, angst, limits risk and gives certainty. Why would you not use it? We have achieved a number of great results using Mediation for our clients in 2024.
4. Claim by liquidators against directors – recent misfeasance and breach of duty developments
Byers v the Saudi National Bank 2023 3UKSC 51
This Supreme Court decision is already having significant implications for Directors of failed limited companies. This case relates to rules regarding breaches of Trust; they apply equally to breaches of fiduciary duties owed by company Directors.
So, the decision applies to a case where a Director effects the transfer of company funds or assets away from the company in breach of fiduciary duty owed to the company (‘the Breach’). The law treats the recipient as though they were holding the property or cash asset on trust for the victim company (subject to legal defences).
Such a breach of fiduciary duty could involve fraud and dishonesty by the Director although this is not always necessary to attract personal liability.
CONSEQUENCE
The breach perhaps inevitably results in recovery action against 2 obvious targets, namely the (transferring) Director(s) and secondly all the recipients of the transferred assets (often the same person)
Even if the recipient disposes of the transferred property, there usually remains a personal obligation on the recipient to restore the property (or its value) to the beneficial owner, here the company.
Our prediction is that this case will continue be relied upon a lot in the future, by Liquidators in claims against Directors.
5. Misrepresentation – personal liability for directors
This case represents another erosion of the protection for the Director of the corporate veil. In this insolvency litigation case, a Company Director and his son were made personally financially liable for losses suffered arising out of misrepresentations made on behalf of their business – Njord Partners SMA-Sed LLP v Astir Maritime Ltd [2024] EWHC 1682.
The High Court found both father and son Directors liable for deceit and unlawful means conspiracy arising out of misrepresentations made to secure lending for their family limited company business. That was so despite the Court finding that the son’s role in the family business was ‘to do as he was told.’
COMMENT
This decision demonstrates how a Director (or any other individual) may be liable for not only a company debt but also somebody else’s misrepresentation, on the basis of accessory liability, rather than primary liability.
6. Directors going to prison and made subject to criminal convictions – some recent examples
DARTMOUTH HOMES LTD (IN LIQUIDATION)
BBL MISCONDUCT: James Leslie and his father, William, submitted greatly overstated turnover figures and obtained 2 Covid BBLs worth £50,000 each, for non-trading construction firms.
The applications were made dishonestly. William made the second BBL application 3 days after the first, admitting he knew that he was committing an offence of Fraud by doing so. Having received the funds, they were then used for improper purposes.
OUTCOME
• James was sentenced to 2 years in prison, suspended for 18 months.
• William was sentenced to 16 months in prison, suspended for 12 months.
• Both Directors are now being pursued under the Proceeds of Crime Act 2002 (‘POCA’).
R V ABBASI [2024] WLR (D) 135 – BBL MISCONDUCT
The Director entered into a 12-year DDU by agreement with the IS in this insolvency litigation case. He was it seems then criminally prosecuted and convicted of 3 offences of Fraud and 7 offences of forgery.
OUTCOME
He was criminally convicted and also disqualified for a further 15 years.
IMRAN MUSHTAQ (‘IM’) – IZ BUSINESS CONSULTANT LTD [2024]
BBL MISCONDUCT
• IM exaggerated the turnover of his company to obtain 2 BBL’s for the same company.
• IM did so within a 2-day period in June 2022.
• A criminal investigation and prosecution followed.
- The Judge at Derby Crown Court sentenced IM to 20 months in prison, suspended for 22 months on 13 August 2024. He was also ordered to complete 120 hours of unpaid work and costs of £1,500.00
7. Applications for permission to act under section 17 of the company directors disqualification act 1986 (‘cdda 1986’). A counter – intuitive provision
Section 17 of the CDDA 1986 envisages a Director (on application by the Director to the Court) being able to apply for Permission to act as a Director and/or act in the management (widely defined) of specific and identified limited company entities (identified in the application to Court), notwithstanding disqualification of that Director
DO PERMISSION APPLICATIONS SUCCEED?
Yes! Here at NDP, our insolvency litigation solicitors have in 2024 successfully applied on behalf of 2 Director clients for Permission, in cases where Directors in those 2 quite separate cases had been disqualified for BBL abuse (7½ years Director Disqualification) and in the other case peripheral involvement in historic VAT Fraud (11 years Director Disqualification). The key to success is in the drafting of the evidence in support of the application to Court. Permission when granted will often be subject to conditions.
8. Directors beware. how much can a liquidation funder claim seek to recover? More than you think!
The decision in MANOLETE PARTNERS PLC V FREED AND ORS [2024] EWHC 2242 (CH) confirmed that on the facts of that case, Manolete (as purchaser from the Liquidator of the claims against the Directors) was not restricted in the amount of its recovery to the deficit in the liquidation estate. Manolete was entitled to Judgment for and to seek to recover the full amount of its claims against the Director(s).
COMMENTS
- This decision surely emphasises the need for Directors to engage with the claiming Liquidator at an early point. Chances are that there is a better and cheaper deal to be done with the Liquidator, rather than with the Assignee of the Claim, here Manolete.
- This ties into the need to settle using Alternative Dispute Resolution to include Mediation. See above.
9. Our predictions in the insolvency litigation area for 2025
- More of the same! The intended protection and benefits of trading with limited liability for Directors continues to be eroded by decisions of the Courts. Directors need to tread ever more carefully and take advice the moment that insolvency problems loom and certainly before liquidation. Doing so may just protect the Director from personal financial liability (or at least limit the damage).
- Liquidators will continue to threaten claims/sue Directors with it becoming more difficult for Directors to successfully oppose such cases on the basis of legal principle and absent funding to do so. Cases such as BHS and Sequana are in reality tightening the noose around the neck of the transgressing Director (whether or not that transgression is deliberate or dishonest).
10. MESSAGE TO DIRECTORS
Get specialist legal advice from Insolvency Litigation solicitors the moment the smell of financial trouble looms – the Director and the company have options:
- Refinancing.
- Insolvency options – Creditors Voluntary Liquidation (‘CVL’).
Here at NDP, we regularly advise on all such matters. Take a look at some of our Insolvency Litigation testimonials.
- We predict we will see ever more BBL and wider Covid fraud cases in 2025, both in terms of Misfeasance claims (section 212 of the IA 1986), Breach of Duty claims, Director Disqualification action and Criminal prosecutions, with the new Labour Government establishing a new role of Covid Fraud Commissioner.
- Mediation – the continued rise. This is actually good news for Directors and Liquidators. Claiming Liquidators (and targeted Directors) cannot avoid Mediation, without very good reason. It can be, and often is, a cost effective and timely way to dispose of claims for all concerned, across a whole range of disputes.
Insolvency Litigation trends. Lessons to learn and takeaways
- When even the whiff of insolvency looms, the well-advised Director should immediately seek experienced insolvency law advice. Remember that the Insolvency Practitioner engaged by the company does not fulfil that role. He/she assists and advises the company, not the Directors. We can help.
- Defences – there are Statutory Defences available to the pursued Director in many circumstances. Act quickly to ensure they can be deployed most effectively.
- The Director under attack should consider taking advice for the company from an appropriate and relevant Licensed Insolvency Practitioner (‘LIP’). We can help. We have great contacts in the LIP community.
- Taking the above steps may avoid the risk of significant personal liability for the Director.
- The well-advised Director will seek and obtain advice early.
In the meantime, we wish everyone the Christmas and 2025 that you would wish for yourselves.
November 2024
