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Company Director Disqualification and Accounting Records

Company Director Disqualification and Accounting Records

13 Year Director Disqualification for Failing to Keep Proper Accounting Records

The Company Directors Disqualification Act 1986 details the list of reasons for director disqualification – and there are many. One of the categories is disqualification for ‘unfitness of conduct’, and one of the main determinants of unfitness is not keeping proper accounting records. In this article, our director disqualification solicitors comment on a recent case where a director was disqualified for 13 years (close to the maximum of 15 years) for being unable to explain over £2.4 million of trading activities, VAT assessments and loans.

The Background to this Director Disqualification Case

 Mr Zaid Fares Al-Safee was a registered Director of Exotic Global Limited (‘the Company’) which sold luxury new cars. The Company was incorporated in 2013. in June 2015, following nearly 2 years of trading, Exotic Global was placed into Creditors’ Voluntary Liquidation (‘CVL’) and an Insolvency Practitioner was appointed to the Company.

Mr Safee failed to deliver-up the Company’s accounting records to the appointed Insolvency Practitioner and this led to a report being submitted to the Secretary of State for Business, Energy and Industrial Strategy by the Liquidator, which highlighted his lack of co-operation.

This prompted the Insolvency Service to carry out an in-depth investigation into the financial affairs of Exotic Global. However, the absence of any proper accounting records meant that they were not able to verify who had control of the company’s affairs.

The Missing Information and Unexplained Trading Activities

The information that was missing from the company’s records of its income and expenditure, included Mr Safee’s remuneration, the acquisition (or subsequent disposal) of Company assets and the full nature of the Company’s trading activities. The trading activities that were unexplained included:

  • The purchase and sale of 14 luxury vehicles valued in excess of £1.2 million,
  • VAT assessments totalling £498,106.80,
  • The background of a £318,000 loan,
  • The purchase and sale of 45 vehicles totalling £354,553,
  • Two personalised number plates totalling £40,023.

After a 2-day trial in the High Court, Mr Safee was disqualified as a director for 13 years on 14th March 2018, banning him from directly or indirectly becoming involved in the promotion, formation or management of a company without the permission of the Court.

The Relevant Provision in the Companies Act

Mr Safee had failed to comply with his duty as a director under Section 386 of the Companies Act 2006. This requires:

Every company [to] keep adequate accounting records. Adequate accounting records means records that are sufficient: (a) to show and explain the company’s transactions; (b) to disclose with reasonable accuracy, at any time, the financial position of the company at that time; and (c) to enable the directors to ensure that any accounts required to be prepared comply with the requirements of this Act.”

What the Insolvency Service Said

Ken Beasley, Official Receiver at the Insolvency Service, said:

“Maintaining and keeping adequate accounting records is a legal requirement for all companies. Failure to do so is serious misconduct and the length of Mr Zaid Fares Al-Safee’s disqualification reflects this.”

Comment by our Director Disqualification Solicitors

Had Mr Safee caused or ensured that the Company complied with its duty under Section 386, the Insolvency Service would have been able to complete their investigations and Mr Safee might have been able to adequately deal with the concerns raised by the Insolvency Service. This case is a stark reminder to company Directors of their duties under the Companies Act and the action the Insolvency Service will take for a failure to comply with them.

The length of the Director Disqualification given out in this case, shows the seriousness with which the Insolvency Service views this books and records breach of duty by the Director. 13 years is a very long ban.

A Criminal Investigation Could Follow

The Insolvency Service when accepting a Director Disqualification Undertaking make it quite clear that a Criminal investigation could ensue, based upon the admitted conduct complained of. The Insolvency Service has a specialist team of dedicated Criminal Investigators. The prospect of a Criminal investigation is thus a very real one.

Director Disqualification Compensation Proceedings

The Secretary of State has powers, quite separate from the recovery powers available to the Liquidator, to seek compensatory payments from the Director personally. So the disqualification handed out to Mr Safee might not be the end of the matter.

Director Disqualification Solicitors

For help and advice on defending yourself if threatened with Director Disqualification, talk to our Director Disqualification Solicitors: contact us or call us on 0121 200 7040. The earlier you make contact, the more we can do to help. Click here to see some of our director disqualification testimonials.

Maximum Director Disqualification for VAT Fraud

Maximum Director Disqualification for VAT Fraud

15-year Director Disqualification for a £Multi-Million VAT Fraud. This Case also Shows the Shift from Criminal Proceedings to Civil Proceedings Against the Director

This director disqualification case features the maximum ban that can be given to a director – 15 years. It was a £multi -million VAT fraud case, which was part of a Missing Trader Intracommunity (MTIC) fraudulent scheme, that resulted in a tax loss to HMRC of over £7.1 million. We also comment on a change in regulatory direction which means such serious crimes have shifted from Criminal Proceedings to Civil Proceedings.

Background to this Director Disqualification Case

Mr Ulhaque Ahtamad (‘the Director’) was the sole Director of Masstech Ltd (‘the Company’). The company was a carbon emissions and metals trader located in Gerrards Cross, and was wound-up, following a winding-up petition presented by HMRC. This prompted an investigation by the Insolvency Service. Their findings included:

  • Between June and September 2009 the Company achieved sales of over £38 million in the wholesale trade of carbon emission allowances and metals.
  • The Company went on to file quarterly returns with HMRC in an attempt to fraudulently reclaim UK VAT that ‘missing traders’ earlier in supply chains had failed to pay to HMRC. The Insolvency Service’s conclusion was that this was  was part of a Missing Trader Intracommunity (MTIC) fraudulent scheme.

In the Court, the following facts were established:

  • The Director had obstructed HMRC and repeatedly stalled their investigations into the Company’s trading. The Court heard that the Company entered into trading arrangements which were ’too good to be true‘, and against which trades the Company had been expressly and repeatedly warned by HMRC.
  • The Director was also found to have made payments to unconnected third parties totalling at least £7.38 million, despite having been warned on more than one occasion by HMRC officers of the risks of third party payments in the context of MTIC fraud.
  • The VAT fraud, including wrongful VAT reclaims against HMRC, resulted in tax losses of over £7.1 million.

The Court also heard that as the sole Director with responsibility for all aspects of the company’s trading, Mr. Ahtamad was involved in pricing decisions which ran against any commercial logic and could only be explained in terms of this fraudulent scheme.

In addition, it was found that VAT registration and other due diligence checks on trading partners carried out by the Company were superficial and inadequate and the Director failed to act on standard commercial risk negative indicators and continued to trade regardless.

As a result, the Court arrived at the conclusion that the Director must have been a knowing participant in this fraudulent VAT scheme and that a 15 year ban, the maximum period of director disqualification, was the right penalty.

Insolvency Service Comment

 Justin Dionne, Official Receiver for the Insolvency Service, said:

 “Masstech Ltd was involved in trading and making wrongful reclaims in a fraudulent VAT scheme which had been costing the UK Exchequer significant amounts of money at the time the fraud was perpetrated.

This is not a victimless crime, the main impact being on honest tax payers and their families who as a result suffered the effects of funding shortages in healthcare, education and other front-line services.

Regulatory changes, investigative action and legal proceedings have reduced the scale of this fraud from 2007 onwards. The Insolvency Service will not hesitate to use its enforcement powers to investigate and disqualify directors whose companies defraud the public purse.”

Comment by our Director Disqualification Solicitors

The length of the Director Disqualification ban given out in this case, shows the seriousness with which the Insolvency Service view VAT and MTIC Fraud.

There has, however, been a regulatory change of direction:

  • Historically, such serious cases were pursued (going back to 2005 – 2009 in particular) against the delinquent Director in Criminal proceedings, where on conviction, the Director could expect a significant custodial prison sentence.
  • Here at NDP, we have seen a marked and noticeable change in direction, with such cases now being pursued in the arena of Director Disqualification proceedings rather than in the Criminal Court.

Why This Change in Regulatory Direction?

We can only speculate, but the following factors may be relevant:

  • Pursuing Civil proceedings is far cheaper for the State than pursuing the Director in Criminal proceedings. It is also far quicker in most cases and more likely to result in a positive result for the State.
  • The Director cannot, except in the most exceptional circumstances, get Legal Aid to defend or oppose Director Disqualification proceedings.

In contrast, Legal Aid might well be available to the Director to defend his position in Criminal proceedings. The cost to the State of pursuing (and funding the defence of) a Criminal prosecution is formidable and it seems, now prohibitive, in these times of governmental financial austerity.

The Downside to this Regulatory Direction

Without commenting on the specific facts of this case, where such Criminal conduct is committed we, as a society, must surely ask whether it is right that the wrongdoer in such an enormous case retains his liberty and (it seems) escapes any Criminal punishment.  We have a view…

The team at NDP are experienced in dealing with such claims. For help and advice on defending yourself if threatened with disqualification, talk to our Director Disqualification Solicitors by calling us on 0121 200 7040, or contact us. The earlier you make contact, the more we can do to help. Click here to see some testimonials.

Director Disqualification for Transferring £50,000 at Insolvency

Director Disqualification for Transferring £50,000 at Insolvency

Not Acting in the Best Interests of a Company Lands a Director with a 7 Year Director Disqualification Ban

The Duties of Directors are many and not fulfilling these duties can lead to a lengthy period of director disqualification, especially when insolvency strikes. Here our director disqualification solicitors detail and comment on a case in which a director was banned for 7 years for transferring over £50,000 out of the company’s bank account, in full knowledge that the company was insolvent and preparing to cease trading. The director in question may well now face Misfeasance proceedings.or even a criminal investigation.

The Details of this Director Disqualification Case

Ayaan Khan (‘Mr Khan’) was the sole Director of Salford Auto Spares Ltd (‘the Company’), which was incorporated in 2011 and traded in motor vehicle scrap parts. The Company went into liquidation on 4th May 2016, owing more than £122,000 to creditors.

Following the insolvency of the Company, the Liquidator received claims from over 98 individual customers, who stated that they had made full payments in advance to the Company prior to the liquidation but goods had never been delivered to them. This left them as unsecured creditors at liquidation.

Mr Khan signed a Director Disqualification Undertaking in which he did not dispute that between 12th April and 18th April 2016, when the Company was insolvent and was preparing to cease trading, he caused the Company to make transfers out of its bank account totalling £50,180.00.

Mr Khan, also, did not dispute that the transfers were not in the best interests of the Company and were to the detriment of its creditors generally. Due to the lack of information provided by Mr Khan, these transfers remain unexplained.

The Secretary of State accepted Mr Khan’s Director Disqualification Undertaking on 16th April 2018 and it came into force on 7th May 2018.

What the Insolvency Service Said

Robert Clarke, Head of Insolvent Investigations North at the Insolvency Service, said:

“In full knowledge that the company was failing, this director has chosen to seek to defeat the claims of creditors, and his improper actions caused losses to others which were wholly avoidable.

Directors who show such blatant disregard for their fiduciary duties can expect to be investigated by the Insolvency Service and removed from the corporate arena for a lengthy period.”

Comment by our Director Disqualification Solicitors

Had Mr Khan made clear what the transactions related to, he may have been able to adequately deal with the concerns raised by the Insolvency Service as to the destination of the funds, and the purpose of the same. Such an explanation, if available and credible, may have resulted in the end of the Insolvency Service investigation.

Misfeasance Proceedings Might now Begin

There is now the prospect of the Liquidator of the Company pursuing civil recovery of funds from Mr Khan personally, as part of Misfeasance proceedings, in light of Company funds having, it seems, been misapplied by Mr Khan.  The Liquidator would likely seek to rely upon the admissions made by Mr Khan in his Director Disqualification Undertaking.

Such Misfeasance proceedings may/could, if successful, result in a Judgement for the unexplained sums (here £50,000+) plus a legal bill for the Liquidator’s costs in pursuing recovery from Mr Khan.  That could greatly increase the amount payable, putting any personal assets that Mr Khan owns in jeopardy. Such assets might include his house.

A Criminal Investigation is also a Possibility

The Insolvency Service when accepting a Director Disqualification Undertaking make it quite clear that a Criminal investigation could ensue, based upon the admitted conduct complained of. The Insolvency Service has a specialist team of dedicated Criminal Investigators.  The prospect of a Criminal investigation is thus a very real one in cases such as this.

Director Disqualification Compensation Proceedings

  • The Secretary of State has powers, quite separate from the recovery powers available to the Liquidator, to seek compensatory payments from the Director personally.
  • This case is a stark reminder to company Directors of their statutory duties under the Companies Act and the strong action the Insolvency Service will take for a failure to comply with them.

For help and advice on defending yourself if threatened with Director Disqualification or Misfeasance proceedings, talk to our Director Disqualification Solicitors by calling us on 0121 200 7040, or contact us. The earlier you make contact, the more we can do to help.

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