Our Advice? Always Look at all of the Circumstances in the Case
The non-payment of Crown Debt (i.e. PAYE, VAT & NIC) at insolvency is the most common reason for director disqualification. However disqualification is not inevitable in such cases as many believe. The point is demonstrated in this testimonial/case study, in which a company (one of our clients) went into liquidation owing c.£369,000 to HM Revenue & Customs (‘HMRC’), who were by far the largest creditor of the company, which caused the Insolvency Service (‘IS’) 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 specialists was able to convince the IS to drop the case, and so avoid a possible 6 year disqualification.
The Allegation of Unfit Conduct – ‘Trading to the Detriment of the Crown’
The IS allegation was that the Director had caused or allowed the company to ‘trade to the detriment of HMRC’; and more worryingly, that our client had reclassified his Directors Loan Account (‘DLA’) to minimise his personal liabilities, therefore increasing HMRC’s exposure. As a result, the IS was seeking a 6-year director disqualification against our client.
Our Involvement. The Stakes Were High. Disqualification Looked Likely
The client, having had a number of previous company failures, knew that given the seriousness of the allegations, he required urgent specialist advice.
He contacted Suky Mann, a Senior Solicitor, to assist him. The stakes were high for our client. Not only was he facing a significant period of disqualification, but the future of his on-going company also hung in the balance. If our client was to be disqualified, his new company’s ability to trade without him was zero. His income and livelihood would be cut off at the pass. His reputation would be in tatters and his employees out of work.
We Made a Detailed Investigation of All of the IS’s Evidence
Suky was immediately able to identify that whilst the balance of our client’s DLA of c.£112,000 was transferred to wages four months or so before liquidation, that was merely the starting point. Suky carefully interrogated every piece of evidence relied on by the IS and investigated matters with the client to the fullest extent. As a result, Suky was able to demonstrate that the DLA liability was overstated by c.£30,000 and that the reclassification of the DLA was based on the advice of the company’s Finance Director.
Most importantly, Suky was able to evidence to the IS that our client had every belief the company would be able to generate sufficient revenue to meet the increased liability to HMRC notwithstanding the financial difficulties faced by the company. In addition, she was able to show that our client had put in place steps to obtain additional investment and had secured lucrative contracts to justify the company’s ongoing trading.
The Allegation of Unfit Conduct was also Robustly Defended
The IS also attempted to demonstrate that our client’s conduct as a director fell short of the required standards, by his allowing the company to make a series of large bank transfers to a connected company over a matter of days. What the IS failed to recognise was that the transfers were part of a legitimate management recharge that the company Accountant had advised our client to undertake. Ultimately there was no financial loss to the company by reason of those transactions.
Suky’s robust and detailed letter of representations made it clear that the IS’s allegations of Unfit Conduct could not be maintained. Within a matter of days, the IS conceded and confirmed that no further action was to be taken against our client.
Our Client was Delighted with the Result
Our client was overwhelmed and relieved at the result. Having been told of the news, he said:
‘I really wasn’t expecting this to be knocked out in the first letter. I can’t thank you enough, I can trade my business and that’s thanks to you. I am relieved beyond words’.
Summary. ‘It Ain’t What you do, it’s the way that you do it.’
Whilst the non-payment Crown Debt (often called trading to the detriment of HMRC) is the single most common allegation of ’Unfit Conduct’ relied on by the IS, this case demonstrates that director disqualification is not an inevitable consequence of an investigation by the IS. Every case turns on its own unique set of facts and instructing experienced and skilled Solicitors is key to defending and defeating such allegations. Getting the full picture communicated to the IS is a key factor in such cases.