Experts in
Director
Disqualification

Experts in
Insolvency &
Restructuring

Experts in
Insolvency Claims
& Litigation

Experts in
Commercial
Litigation

Experts in
Regulatory
Disputes

Experts in
Construction
Disputes

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.

Buying an Insolvent Business out of a Formal Insolvency Process

Buying an Insolvent Business out of a Formal Insolvency Process

28 Key Things to Consider When Buying Back an Insolvent Business, by Commercial and Insolvency Solicitor, Iain MacDonald

In this article, one of our Consultant Solicitors, Commercial and Insolvency Solicitor, Iain MacDonald, takes an in depth look into the key things that need to be considered when it comes to buying an insolvent business out of a formal insolvency process. He lists 28 of them and starts off by asking the question: “why would anyone want to buy back an insolvent business?” The reality is that many people do, but as Iain suggests, a good Insolvency Solicitor, with commercial as well as legal skills, is needed for the right help and advice along the way.

Buying Back an Insolvent Business

Hopefully, you have stumbled across this article prior to making any final decision as to a formal insolvency. I say that because if you have, then you may have that most precious of commodities, you remain in control, albeit of a rapidly deteriorating situation. It may not feel like ‘control’ but you are still driving a crashing vehicle. If so, please contact us or call us on 0121 200 7040 us immediately.  We can almost certainly improve your position now.

Why on earth would you buy back an insolvent business? Good question.

  • Typically, any Buyer will be the Director and possibly a Shareholder of the insolvent Company (OldCo), which is being purchased.
  • OldCo is insolvent/distressed and could already be in Administration or Liquidation, or another formal insolvency regime.
  • An Insolvency Practitioner will be required to take control of OldCo and they either already are or will be offering you terms to purchase OldCo (or its assets).

28 Key Things to Consider When Buying Back an Insolvent Company

Firstly, The Easy Part

As any Insolvency Solicitor will tell you, this is not a normal sale and purchase. How does it differ? A non-exhaustive list may assist:-

  1. There are no warranties offered by the Vendor. This is non-negotiable (usually) so do not waste time on this. Negotiate for a better deal where you can – we know where the wriggle room is.
  2. The Insolvency Practitioner as Vendor will provide absolutely no warranties but also will go further and exclude personal liability. Be sure of what precisely you are buying.  Any post purchase claims that you might wish to pursue vests against a bust business. You are likely to have no practical recourse against an insolvent entity let us be very clear on that.
  3. The Buyer must perform its own Due Diligence. Often this is unnecessary because the Buyer is the Director/Shareholder of OldCo. In any event the price payable will often be significantly less than market value, to reflect the absence of warranties and the insolvency.

Getting us involved at the beginning of the process is key. We can likely reduce the price that you pay.

  1. What About the Employees? This is tricky, but the rule of thumb is that a going concern sale (i.e. a sale of a business as a going concern) will mean that the Buyer inherits all of the employees and their potential and actual accrued claims against OldCo as their employer.
  2. A Buyer must consult with the duly elected employees’ representatives or recognised trade unions regarding the purchase. Failure to do so places the Buyer in danger of having a financial award made against it.

Encumbrances?

  1. You will be buying subject to these pesky things. In essence, this refers to the position whereby another party (e.g. a bank or a supplier) has an interest in an asset ahead of you. Such interests include a mortgage/charge or a retention of title (‘RoT’) claim over assets (usually, stock) or a hire purchase agreement.
  2. It is vital that these are examined and suitable releases/transfers obtained prior to or at purchase insofar as this can be achieved. Sometimes the solution lies elsewhere. It is frequently the case that a buyer will purchase assets subject to some encumbrances.
  3. It is often the case that these encumbrances can be reduced in impact. That could, for example, involve RoT stock being purchased from its owner for a very favourable price. Often a deal is struck at a mid-point communication is key here.

Leasehold Property

  1. It is not usually easy to acquire leasehold property prior to a purchase. Therefore, a Licence to Occupy the trading premises is given by either the Administrator and/or the Landlord. Before you do this, engage with the Landlord and flush out their attitude to your proposal. Without the Landlord on board you have no premises.
  2. Administrators now have to pick up the costs of their occupying and/or using the premises. Therefore if a company enters into Administration it is a good idea to plan ahead so that the rent is paid up to date to the point of Administration in order for the Administrators and/or NewCo benefit from a ‘rent free’ period during this time.

Making it Pay

  1. We make no apologies for talking about the folding stuff. This is where you can turn the business from an unsuccessful one into a roaring success.
  2. Assets: Who owns them and what are the encumbrances? Get releases where available. What are they? Am I buying what I need? What am I buying?
  3. Contracts: Ensure that these will be valid and therefore valuable after purchase. Ensure that they can be novated or the benefit transferred to NewCo.
  4. Customers: What is their attitude? Will they exist post purchase?
  5. Deal: is it bad? If so, walk away. Do not get emotionally involved.
  6. Debts: Offer to help to collect the debts of OldCo. This will require time and effort and perhaps rectification of works but should pay insofar as:

a. It preserves trading relationships; and

b. You can negotiate for a percentage of recoveries from the Insolvency Practitioner, to be paid to NewCo.

  1. Employees: Check how many there are and what their liabilities are e.g. pensions and any outstanding employment claims. The Transfer of Undertakings (Protection of Employment) Regulations 2006 (‘TUPE’) are not your friend. Consider leaving these behind if you can (see below). The best way to do this is a purchase from a Liquidator.
  2. Failure: Why did this happen and who was responsible. Why will this not happen again? Think hard on this. Then think more.
  3. Finance: This is a complex area but without it there is usually no business. Some may find it hard to believe that in the world in which we live some of these people offering finance to NewCo are actually not a good fit for you and may eat you rather than feed you. Perhaps we can change the profile of that risk for you? We know the insolvency and ABL market.  We know the good guys who will genuinely try and work with you.
  4. IPR: These are the ‘intellectual property rights’. They could be rights to use IT or a trademark by way of example only. Can they be transferred, and do you own them?
  5. Legal Wrangles: Ensure compliance with:

a. Section 216 Insolvency Act 1986 – you may need to go through one of three processes if you wish to re-use the OldCo name if you are previously connected to OldCo. Failure here is punished severely. It is a Criminal offence to breach section 216 and can have serious financial consequences for the Directors and Managers of OldCo.

b. Substantial Property Transactionssection 190 Companies Act 2006. Most connected Purchasers require approval by ordinary resolution of the Sellers’ Shareholders. Failure can be catastrophic.

  1. Personal Guarantees: Are you giving these? Really? Why? Have you already given them?
  2. Price: The sooner you call us the cheaper the purchase may be for you. Late on in a procedure we can achieve less. If we are involved very early on i.e. before any Insolvency appointment is made then the story may have (we put it no higher than that) a very happy ending.
  3. Procedure: Administration vs Liquidation. Few consider the latter route but it is worth considering on occasion because it can reduce purchase costs and leave behind the TUPE liabilities. There are also VAT implications, which must be considered.
  4. Property: Can you ensure that the Lease will be assigned? Seek agreement from the landlord and negotiate a rent reduction if available.
  5. Speed: The Administrator or Liquidator will be advertising nationally, and you may need to be able to beat competitors to the drop. Points to consider include:

a. Have cash available;

b. Negotiate purchase payment over time – you may need to offer security in respect of deferred payments;

c. Have a SPV (Special Purpose Vehicle) ready and waiting. A SPV has nothing to do with Captain Scarlett. It is a standalone entity designed to purchase OldCo/its assets and if necessary sink alone, without causing collateral damage.

d. If OldCo is you then use a pre-pack procedure if you can. These have a bad name but they are usually clean and straightforward.

  1. Suppliers: You will need to pay some perhaps in order to maintain supply. Others you can fold into the insolvency and lose the debt. Caution – some may be secured or personally guaranteed.
  2. Tax: This area is frequently overlooked for reasons, which do not baffle us, most are too intimidated to approach it. There are tax efficient mechanisms to invoke. These can benefit both the Liquidator/Administrator and the Buyer. Free money is sometimes available but only to those who know how to ask

Contact our Insolvency Solicitors for Expert Help and Advice

In essence, when the bad times roll, there is an opportunity for the brave and the educated. If they are rolling, then contact us or call us on 0121 200 7040 for a FREE initial discussion.  We are specialist insolvency solicitors and the Director’s friend and not many in our business can honestly say that.

Many Lawyers do not have the commercial skills to do anything other than the legal mechanics of a rescue. Plucking you out of the creek and placing you alone on dry land is not the ideal way forward.

About the Author of This Blog

Iain MacDonald is a Commercial and Insolvency Solicitor who has spent most of his working life in London and the South East trying to help business men and women to increase their net worth.  He has worked in both regional and top ten national practices. He is a Consultant Solicitor to NDP.

(Please Note: This blog is not formal legal advice and should not be relied upon in isolation, it is merely a puff piece intended to drum up business in case I have a spare moment and is issued for general information purposes only and does not constitute legal or professional advice. It should not be used under any circumstances as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the publication date of this article.)

 

Personal Insolvency Case – Lock v Aylesbury Vale District Council

Personal Insolvency Case – Lock v Aylesbury Vale District Council

A New Defence to a Bankruptcy Petition? Our Insolvency Litigation Solicitors Comment

In this personal insolvency case – of Lock Versus Aylesbury Vale District Council – the High Court, on appeal, exercised its discretion to set aside a Bankruptcy Order on the basis that it would serve no useful purpose, or be of any benefit, to the creditor (Aylesbury Vale DC) as the debtor (Ms. Lock) did not have assets to satisfy the liability in bankruptcy. In this article, our insolvency litigation solicitors review and comment on the case, which appears to show a new defence to a bankruptcy petition. Click this link for full details of the case: Lock Vs Aylesbury Vale DC – Case Analysis.

Background to this Personal Insolvency Case

  • The local authority, Aylesbury Vale District Council, served a bankruptcy petition on the debtor, based on a statutory demand for unpaid council tax of £8,067.00. Evidence was served, addressing the council tax liability. The evidence of the debtor did not address her financial situation in detail, but made clear she was living in social housing and was dependent on her daughter for financial support.
  • The debtor prepared a skeleton argument having been ordered by the Court to do so. The skeleton contained an argument, among many, that a bankruptcy order would serve no purpose and be of no benefit to the local authority creditor as she had no assets to satisfy the liability. The County Court made a bankruptcy order. The debtor appealed that order to the High Court.
  • During the appeal hearing, the debtor referred to a bankruptcy checklist used by the respondent local authority. This had not been put in evidence before the district judge. It made clear that, prior to the presentation of the petition, the local authority had been aware that the debtor was unemployed, did not own a home or receive any benefits.
  • The report also stated that there were no obvious assets, but the debtor might have received funds from an inheritance. There were no documents to support this assertion and so the debtor argued that this possible inheritance would only be small, and in any case she had not received any funds (or was unlikely to receive any at all).

The Debtor’s Appeal was Upheld by the High Court

On appeal, it was found that there was no proper evidence establishing any present or prospective assets that could be realised, and nothing to indicate that an investigation of the bankrupt’s affairs would bring any further information to light. As a result the bankruptcy order was set aside pursuant to CPR, Rule 52.21(3) which states:

The appeal court will allow an appeal where the decision of the lower court was: (a) wrong; or (b) unjust because of a serious procedural or other irregularity in the proceedings in the lower court.”

Final Comment by our Insolvency Litigation Solicitors – A New Route to Defend a Bankruptcy Petition?

The approach of His Honour Judge Hodge QC demonstrates there is a new (or at least, an underused) route to defend a bankruptcy petition.

Whilst this case turned on its own particular facts, creditors looking to bankrupt debtors need to recognise that the existence of an undisputed liability will not always be enough to get them home. The Bankruptcy Court will, in an appropriate case, as here, bare its teeth and refuse to make a Bankruptcy Order.

Here at Neil Davies & Partners, our insolvency litigation solicitors are well used to prosecuting and defending bankruptcy petitions. For a FREE, no obligation chat, please contact us or call the team on 0121 200 7040.

This website uses cookies to give you the best user experience. For information on cookies please read our cookie policy. Click on the Accept button to continue using Cookies on this website.  By declining cookies you might lose some functionality.