URGENT: Changes affecting Insolvency Practitioners and Directors from today

As from today Regulations have introduced the key provisions of the Small Business, Enterprise and Employment Act 2015 (“the Act”) as regards its affect on Directors and Insolvency Practitioners.  This introduces very important changes which will have a considerable impact on Directors and the position of Insolvency Practitioners acting as Administrators or Liquidators. The key changes are addressed below.

1.  Insolvency Practitioners – a Claim is now an insolvency asset!

Sections 117 – 119 of the Act commences as from today for any post 1st October 2015 appointments as Administrator/Liquidator.  As from today, with regard to such appointments, Insolvency practitioners can now assign insolvency claims. This will undoubtedly lead to (eventually) a rush of funder interest in IP appointments where the funds or appettite to pursue litigated proceedings is not there.

Directors will also face increased difficulties in defending such claims against an insolvency application where the applicant funder now has very deep pockets.

No doubt this will also lead to Administration/Liquidation appointments in circumstances where there are no assets, as the IP will still have something to sell (subject to sufficient funding interest), and could lead to the interests of creditors being better served.

2.  Compensation Orders

They have commenced. As from today anyone disqualified under the new provisions will then be subject to the risk of a strict liability offence by way of a Compensation Order. Undertakings can be given to pay such compensation but it is undoubtedly a large majority of Disqualification Claims – treating HMRC different to other creditors – which will be the basis for such an application.

Accordingly, as from today, the signing of a Disqualification Undertaking (which may in the past have been solely to avoid legal costs of litigation) will diminish as the cost threat is outweighed by the tax (or other) liability supporting the Compensation Order/Undertaking Directors would have to pay.

3. Director Disqualification Claims – extension of limitation period

As from today, Disqualification Claims under Section 6 of the Company Directors Disqualification Act 1986 (where the company has entered into insolvency proceedings) can be brought within a limitation period of 3 years post insolvency (it was 2 years previously).  This increases greatly the ongoing and continuing risk to Directors, although please see my comments as regards commencement below.

4.  Director Disqualification – new grounds for disqualification and for findings of unfitness

As from today, a Disqualification Claim can be brought against any Director of a Company for a criminal conviction overseas in relation to their involvement in an overseas company (or similar legal entity).  This does not require that the UK company is placed in any form of insolvency proceedings or indeed does not require that the individual is currently a UK Director, although it appears to be intended to prevent a certain category of individual being appointed a Director in the UK with the associated risk to the public interest.

These changes include a change to Disqualification proceedings such that a Director who is acting as a Shadow Director (which the Act also addresses separately at Sections 89-91) of a company where unfitness is made out can now be disqualified. This reflects the corporate transparency requirements of this legislation.  In addition, when engaged in disqualification proceedings, the Court can now additionally consider additional evidence of unfitness including conduct as a director of an overseas company.

5.  Directors’ Appointments and Resignations

As from today, upon the appointment of a Director or Company Secretary (or any change to the Board) the filing requirements at Companies House now require confirmation that that individual has consented to the appointment.

This could have an affect on Non-Executive Directors or other Executive Directors where an unknown (and possibly not consenting) individual is appointed to the Board leading to the risk that they will be liable for such a breach of their statutory duties.

The Registrar of Companies is also required to write to that Director (upon his/her appoiontment) notifying them of their appointment.

 Commencement

The commencement provisions dictate that the above changes relates to conduct and proceedings occurring after today (1st October 2015) including, for Administrator/Liquidator claims, any appointments commencing from today.

For the filing requirements and notifications to Directors/Company Secretaries, the commencement date is 10th October 2015 (and accordingly applies to any notices/appointments from that date).Accordingly, the risk to Directors is not immediate and further to this the commencement provisions also require that the conduct referred to must also be post 1st October 2015.

Accordingly, we do not see this taking effect for a while, but obviously Directors should plan for such risks.As regards Insolvency Practitioners, this provides an almost immediate benefit in freeing them to dispose of good claims which they may not be capable of funding. However, for Directors, this poses an increased risk of a funder with deep pockets making claims against them. This will likely be subject to delay whilst funders put together arrangements to acquire such claims but we see this taking affect more quickly than the other changes.

If you would like to discuss any aspects of these changes (or any other changes introduced by the Act as mentioned in the previous blogs), please do not hesitate to visit our website at FWJ contact me or my colleagues at Francis Wilks & Jones.

Small Business, Enterprise and Employment Act 2015: Director Disqualification

Director disqualification – extension of limitation period – COMMENCEMENT ORDER TO BE ANNOUNCED

This is part of a series of posts on the Small Business, Enterprise & Employment Bill that has now come into force on 26 March 2015 following the grant of Royal Assent and is now the Small Business, Enterprise and Employment Act 2015 (“the Act”).

This series of posts is intended to update the readers of the key changes, which should radically transform the transparency of the marketplace as regards the operation, control, ownership and risk associated to limited companies in the UK.

We have not addressed all of the issues described in our previous posts, to avoid duplication, but would welcome any queries from the reader in this respect.

The commencement of these changes is different dependant on which part of the Act is being reviewed (Section 164 of the Act defines commencement) and we have highlighted below the relevant commencement dates. Where we below stated “to be announced” this means it has not yet come into force and will commence upon the making of a Commencement Order.

The changes as set out below will be extremely important to all directors, companies and individuals with business in the future and it cannot be emphasised too strongly how important it is that you are prepared for these proposed changes. At Francis Wilks & Jones we can advise on all matters subject to these posts.

Director disqualification claims previously could only be brought against directors within a period of 2 years from the date of insolvency. 

However, this limitation period is now extended to three years and, as a result of the shortening of the report timetable for liquidators/administrators to provide their reports on the directors’ conduct, there is a much greater period of time during which investigations into conduct of directors of insolvent companies can continue.

As stated above, this widening of the liability of directors includes shadow directors, and will certainly have consequences for non-executive directors who historically considered they were exempt from such risk.

The extension of this investigation period will obviously mean that the Secretary of State will be able to put together a stronger case in future disqualification claims, which are issued to protect the public interest. Conversely, this will leave the potential consequences of having been a director of an insolvent company will go on even longer with the ongoing threat of a disqualification claim hanging above directors (plus compensation orders which will further extend this threat – see the next blog).

It is always recommended that former directors confront any initial enquiries they received early on rather than ignoring them and these changes, once implemented, will make this even more important. Please contact Francis Wilks & Jones should you require any further assistance with regard to these matters.

Small Business, Enterprise and Employment Act 2015: Determining Directors’ Unfitness

Determining directors’ unfitness – COMMENCEMENT ORDER TO BE ANNOUNCED

This is part of a series of posts on the Small Business, Enterprise & Employment Bill that has now come into force on 26 March 2015 following the grant of Royal Assent and is now the Small Business, Enterprise and Employment Act 2015 (“the Act”).

This series of posts is intended to update the readers of the key changes, which should radically transform the transparency of the marketplace as regards the operation, control, ownership and risk associated to limited companies in the UK.

We have not addressed all of the issues described in our previous posts, to avoid duplication, but would welcome any queries from the reader in this respect.

The commencement of these changes is different dependant on which part of the Act is being reviewed (Section 164 of the Act defines commencement) and we have highlighted below the relevant commencement dates. Where we below stated “to be announced” this means it has not yet come into force and will commence upon the making of a Commencement Order.

The changes as set out below will be extremely important to all directors, companies and individuals with business in the future and it cannot be emphasised too strongly how important it is that you are prepared for these proposed changes. At Francis Wilks & Jones we can advise on all matters subject to these posts.

Section 106 of the Act makes further provision for increased transparency in companies by widening the matters which the Court may consider when determining whether a director is unfit, in respect of director disqualification proceedings.

The Courts may now have regard to matters connected to overseas company, where previously such matters were inadmissible in director disqualification proceedings. The Court must of course be persuaded that any involvement in these overseas matters comprised misconduct before it can make a finding that such misconduct merits a finding of unfitness (and therefore disqualification).

We suggest that the limitation of resources available to investigators will undoubtedly make such evidence largely unavailable in all but the largest high profile case, but this will really depend on the availability of evidence from these overseas events.

As stated above, these proceedings now equally apply to shadow directors.

At Francis Wilks & Jones we are specialists in director disqualification matters and should any of the above matters cause concerns please do not hesitate to contact us.

Small Business, Enterprise and Employment Act 2015: Disqualification Following Convictions Abroad

Disqualification following convictions abroad – COMMENCEMENT ORDER TO BE ANNOUNCED

This is part of a series of posts on the Small Business, Enterprise & Employment Bill that has now come into force on 26 March 2015 following the grant of Royal Assent and is now the Small Business, Enterprise and Employment Act 2015 (“the Act”).

This series of posts is intended to update the readers of the key changes, which should radically transform the transparency of the marketplace as regards the operation, control, ownership and risk associated to limited companies in the UK.

We have not addressed all of the issues described in our previous posts, to avoid duplication, but would welcome any queries from the reader in this respect.

The commencement of these changes is different dependant on which part of the Act is being reviewed (Section 164 of the Act defines commencement) and we have highlighted below the relevant commencement dates. Where we below stated “to be announced” this means it has not yet come into force and will commence upon the making of a Commencement Order.

The changes as set out below will be extremely important to all directors, companies and individuals with business in the future and it cannot be emphasised too strongly how important it is that you are prepared for these proposed changes. At Francis Wilks & Jones we can advise on all matters subject to these posts.

Section 104 of the Act has provided that in the criminal Courts, in a similar way as to how the Registrar of Companies may bring disqualification proceedings after a criminal conviction for failures to file accounts and returns, the Secretary of State may now issue disqualification proceedings for a disqualification order to be made if a defendant director has been convicted of offences overseas.

The convictions abroad must either relate to the promotion, formation or management of a company or comprise an indictable criminal offence, i.e. a serious crime (offences in the foreign equivalent of a Magistrates’ court do not count).

Additionally, there is the ability for the individual against who such disqualification is sought to offer a disqualification undertaking, thus avoiding any costs of the legal proceedings. This is particularly important as very recently the Ministry of Justice were considering increasing criminal victim surcharges and seminal costs orders in criminal proceedings (which historically were not high, usually around £120) to approximately £1,000.

This will have incredible consequences for UK directors who may be involved in international companies and who may now be potentially disqualified despite having a clean record in the UK.

Should you require advice on this, or consider that this may impact on you or your clients, please contact Francis Wilks & Jones and we can assist by reference to our long history of dealing with director disqualification matters.

Director Responsibilities and Duties - Part 4

Introduction

This is Part 4 of a series of articles considering the general question of Directors’ duties and responsibilities and in particular, what conduct can ultimately constitute a finding of “unfitness” and possible disqualification as acting as a director.

This article deals with failure to file statutory information, including tax returns and Companies House documentation, and the failure to maintain or preserve company documentation and accounting records.

Unfitness is governed by section 6 of the Company Director Disqualification Act 1986 (“CDDA 1986”).

1. The Court’s approach to the filing of company documentation

The courts take the view that the filing of such documents is absolutely necessary. This is to enable stakeholders in the company (creditors in particular) to understand the financial position of a company to assist them in deciding whether to get involved or not with the company itself.

For example, failure to file accounts when a company is in financial difficulty is viewed seriously by the courts. This is because creditors and other third parties (including shareholders) will not be able to properly review and understand the financial position of the company and as a result may be unaware of financial difficulties faced by the company at a time that they may decide to commit their own resources either by way of trading with the company or investing in it as a shareholder.

2. What are a director’s statutory obligations on the filing of statutory information?

There are numerous statutory obligations of directors pursuant to the Companies Act 2006, including the following:-

a. Section 113 (keeping a register of members);

b. Section 114 (making the register to be kept available for inspection);

c. Section 162 (keeping a register of directors);

d. Section 165 (keeping a register of directors’ residential addresses);

e. Section 167 (the duty to notify registrar of changes of directors);

f. Section 275 (keeping a register of secretaries);

g. Section 276 (the duty to notify registrar of changes of secretaries);

h. Section 386 (the duty to keep accounting records);

i. Section 388 (knowing where and for how long accounting records to be kept);

j. Section 441 (duty to file annual accounts with the Registrar of Companies);

k. Section 854 (the duty to make annual returns);

l. Section 860 (the duty to register charges);

m. Section 878 (the duty to register charges; companies registered in Scotland).

In addition to the above, there are numerous other requirements to be adhered to such as;

The need by a director to ensure that the company is registered at Companies House

That the various director responsibilities to file financial accounts and audited accounts (where necessary) annually at Companies House are undertaken;

That the requirement to keep accounting records for at least 6 years are undertaken;

That the requirement to file an annual Company Tax Return (CT600) with Her Majesty’s Customs & Revenue (“HMRC”) is fulfilled;

That the statutory requirement to register for VAT when turnover reaches a certain threshold (although the company may voluntarily register earlier to gain the ability to reclaim VAT paid); and

The statutory duty to file returns on employee payments monthly and in respect of tax arising on profits annually.

The obligations on directors are onerous.

It is recommended that at all times you seek professional advice to guide you through this minefield of regulations and statutory requirements, the breach of any of which could lead to severe consequences.

However, in disqualification proceedings, these types of allegation are rarely made out in isolation and will usually feature in addition to other allegations .

3. What happens if a director consistently fails to file company documentationat Companies House?

In these circumstances, the following may happen:

1. Failure to consistently file company documentation can lead to a finding of unfitness, particularly where loose “groups” of companies are formed by a singledirector and which in themselves appear to constitute some form of “phoenix” trading arrangement.
2. A total failure by a director to file any company documentation is likely to lead to disqualification.
3. Under Section 453 of the Companies Act 2006 a late filing penalty can be imposed on the company and this will be doubled if not paid within the required period. This duty exists regardless of whether the company is trading or is dormant.
4. Ultimately, if a company continuously fails to adhere to its statutory duties to prepare and file annual accounts and returns at Companies House, the Registrar of Companies can strike the company off the register. This can have a severe effect on the company and turns its business essentially into a sole trader or partnership operation, with the appropriate personal liability for the owner/partner arising from consequential business dealings.
5. Finally, under Section 212 of the Insolvency Act 1986, a director can be liable for any loss to a company arising by virtue of his breach of any of his duties (including the responsibility to prepare and file annual accounts).

4. What if a director has delegated responsibility for this function to external providers who simply failed to do the task?

This is a commonly asked questions by directors, especially of smaller businesses when things go wrong.

If responsibility for preparation and filing of company documentation has been delegated to third party providers (commonly a firm of accountants), then so long as the director had no reason to suspect the work would not be done, this should suffice to avoid disqualification.

However, the director will have to show that the third party was suitably qualified and was furnished with all relevant documentation enabling the statutory documentation to be produced. Ideally the director should check that the accountant is qualified and registered with the appropriate professional body. The same goes for solicitors and other third party professionals.

The director should also supervise their work (either directly or via senior management or internal accounting personnel appointed for this purpose) and ensure for example that the company’s accountants regularly report to the board on tax returns, payroll matters and accounting matters in accordance with their delegated duties.

The golden rule is that simply delegating tasks and then failing to take any interest or supervision in what is being done is not acceptable.

5. What are the general principles relating to the failure to maintain and preserve accounting records?

The courts view these types of allegation seriously for two reasons:

The on-going production of proper accounting records is important for the general health and well-being of any company. Failure to produce proper financial information such as management accounts means that directors cannot fully understand the true financial position of the company – something vital for its wellbeing.

If a company does later enter into liquidation, it is vital that a liquidator can fully understand how the company traded and what transactions were carried out. A failure to maintain records, (or deliver them up on liquidation) can only hinder the job of an appointed Liquidator (or Administrator where relevant).

In modern life, however busy a director maybe, the courts take the view that there is little excuse for not maintaining proper accounting records.

There are plenty of accounting software packages on the market which can be utilised. Equally, even if hard copy documents do not exist on liquidation, information should still be held on an accounting module on a server somewhere which can then be handed over.

An absence of both hard copies and any electronic records often raises suspicions(even if unfounded). Even when directors have employed a bookkeeper to maintain the accounts, the onus is still on the directors to ensure the bookkeeper undertakes the tasks delegated to that person.

6. What if a director is more focused on sales than finances – how do the courts approach this in terms of misconduct?

This is a regular issue which arises when claims are made against directors for a failure to maintain accounts, file tax returns or Companies House returns.

All financial accounts filed at Companies House must be approved by directors and signed off. This is not something that should be done lightly as the approval of such accounts (the directors’ signature appears on publicly available documents) is indicative of a knowledge of the contents and confirmation that these accounts represent a true and fair view of the company’s financial affairs.

All too common busy directors will sign off financial documents prepared by accountants or a fiancé director without fully understanding what they mean. Over reliance or misplaced trust is no defence to allegations of misconduct.

Accounts may be subject to any audit report filed with the accounts, which may be qualified as to whether the accounts are verifiable and/or accurate. However, in the absence of any such audit report, the assumption is that the directors are holding out this financial information to the public at large, creditors and shareholders and thus may have to personally bear any liability for reliance on such information.

Regardless of a director’s role in a company, whilst it is acknowledged that sales are important it is also true that without due diligence on the accounts the company and its owners may never benefit from any profit generated as a result of proceedings brought in respect of such failings.

7. What should a director do to ensure such problems do not exist?

It is our recommendation that at all times the company should have regular legal and, most importantly, proper accounting advice extending to the internal form of the accounts, the maintenance of these accounts, the directors duties and the tax affairs of the company.

Accountants can often perform bookkeeping services, deal with tax returns, deal with payroll (and the PAYE/NIC aspects) and deal with the annual financial accounts and audit requirements.

Ideally a company should have a dedicated finance person with responsibility for overseeing this area. This should preferably be someone with accounting experience and ideally they should be a finance director, who can devote their entire role to managing the company’s finances. However, the use of a finance director will not alleviate the other directors from the responsibility to ensure that the finances of the company remain healthy.

8. What happens if a company falls behind on my tax liabilities? Can this affect a director personally?

If a director find him / herself in arrears with HMRC, the Revenue are unlikely to wait very long before notifying the director of this. HMRC will seek enforcement of any tax liabilities against a company and is the largest creditor responsible for presenting winding-up petitions.

However, if a director realises that there are tax arrears, then he/she need to act immediately.

The longer the issue is left and the worse the arrears become due to HMRC, the higher the probability that the company will be subject to winding-up proceedings and the directors could easily find themselves liable for other offences such as trading whilst insolvent or trading to the detriment of HMRC (both of which can lead to a director being disqualified).

Despite adverse publicity, HMRC can be reasonable if approached at an early enough stage. After all, they are interested in recovering tax, even if it might take longer than normal.

It is important that all tax arrears are verifiable and reflected in the company’s records. Simply leaving HMRC to raise assessments, which may fall well below the true liability, is a breach of a director’s fiduciary duties and may undermine any future negotiations.

HMRC may agree to enter into a Time To Pay arrangement (“TTP”) to allow the company to repay arrears during the course of trading. However, the directors will have to reach a decision as to whether the company can afford to maintain any such commitments under an agreed TTP – it is a breach of their duties just to negotiate such an arrangement without any belief it can be honoured in the future (as current tax liabilities will have to be simultaneously remitted) and may be seen as just a delaying tactic (which could in the future lead to disqualification claims and other claims for compensation against directors personally).

9. What can HMRC do against directors personally for a failure by the company to adhere to its statutory duties in respect of tax returns?

HMRC have a great amount of powers under the various Tax and Finance Acts. We would recommend that advice from a tax expert is sought in respect of tax liabilities at an early stage.

For example, where a company has unpaid National Insurance contributions, these sums can be sought from directors or managers of a business personally by way of Personal Liability Notices (“PLNs”) issued against them.

HMRC can also require directors of companies which have previously failed to pay security deposits in respect of any registration for VAT sought or required. This is particularly common where the previously failed company had a large indebtedness to HMRC for VAT or PAYE/NIC. These can be quite a substantial sums (especially for a new start-up business) and a failure to pay any such security sought can result in criminal proceedings against a director personally, resulting in a fine of up to £5,000 per invoice issued in breach of the requirement for a security deposit. Where lots of invoices have been raised this can lead to severe financial problems for directors or event bankruptcy.

As of October 2013 HMRC have an increased mandate not to offer excessively reasonable terms under TTP’s and to enforce against non-tax paying companies and their directors more quickly. The Secretary of State in dealing with disqualification claims also issues a majority of these against directors for mistreatment of HMRC as an unsecured creditor.

If a director does find him /herself in difficulties with regard to paying tax, the key is to take early advice. Simply buying ones head in the sand can lead to the company being wound up and may also lead to personal liability for repayment as well as disqualification.

10. What if records are lost or destroyed? Can directors suffer personally as a result of this?

A director will only be liable for matters arising in a company which arise as a result of negligence or misconduct (whether intentional or unintentional). There will always be a defence that events were beyond his/her control, although the Court will generally look on this with a critical eye.

If, for example, a fire breaks out and accounting records are lost, it is essential that records are maintained as regards the fire report, any police report and any other documented reasons for the fire. The same considerations apply to flooding or any other natural event which may destroy company records. If records are stolen (for example on a laptop) it is essential that a police report is filed and the crime reference number taken.

However, company records should normally be preserved by a back-up located elsewhere and a failure to maintain any such back up may be a consideration in any future proceedings against a director.

The existence of cloud based technology makes it increasingly difficult for directors to argue that it simply wasn’t possible to properly back up accounting records.

The same applies to accountants who do not provide the services they were supposed to be providing, either in respect of filing/paying tax returns or preparing/filing returns at Companies House.

If they are properly supervised and reports sought on a sufficiently regular basis, this may be sufficient for the Court to accept that a director performed his/her function of diligence sufficiently well in this respect. However, if a director just “leaves them to it” and blames the accountants when the house of cards topples, his/her failure to communicate and oversee the accountants’ role will be criticised and may lead to a finding of unfitness and/or personal liability.

Should you require assistance with any concerns which relate to your Director Disqualification proceedings or your personal risk generally as a director, then please contact Francis Wilks and Jones LLP and we will be more than happy to discuss your concerns on an initial free no obligation basis.

Each case we deal with is unique to the individual concerned. Our team of experts can provide you with the tailored expert advice you need.

Call us now on 0207 841 0390 for your free consultation.