Introduction
Whilst cautious optimism is being expressed in some quarters
about an economic recovery one cannot help reading about a
continuing decline in manufacturing, exports and employment
opportunities. The recent attacks on the bank bonus culture
with resultant proposed guidelines suggest Government
meddling because they do not address the control/reporting
deficiencies which allowed multi-billion pound losses to be
incurred.
Some commentators have mused that a return to economic
conditions in 2007 is a suitable goal whilst others propose
that in an election year, 2010 should witness some more
fundamental changes for longer term benefit e.g.: introduce
core subjects to schools such as respect and aspiration,
business and entrepreneurship, and hand-craft opportunities;
reduce university numbers and promote technical/trade
colleges; offer a financial inducement to pay taxes such as
VAT, PAYE, NIC before the due date; grant a one year tax
holiday for all taxes to any new business that employs more
than three people; remove every Government quango unless it
can be self funding; and increase the annual personal
allowance to £10,000 per person which will be paid in cash
to the recipient if not used against earned income, such sum
being paid to the recipient for a maximum of two years which
replaces unemployment and/or incapacity benefit.
We live in a world of constant change and who knows where we
will be in 5 years.
Never mind the cost, just sue him
Perhaps there are too many TV programmes which show quick
success within a thirty minute broadcast because many
creditors, particularly members of the public, think that a
liquidator should be raising legal proceedings at the drop
of a hat and recovering money for the benefit of the
liquidated estate. A director can be made to restore, repay
or account to the company if found guilty of the following
types of conduct:
- misfeasance/breach of duty, or wrongful trading
- fraudulent trading
- agreeing a transaction at undervalue
- granting a preference
- entering into a transaction that defrauds creditors
- restriction on the re-use of a company name
In reality, delinquent directors do not tend to leave a
trail of documentation and signed memos outlining their
devious actions. Invariably, a considerable amount of
resources are required to vouch a trail that will stand up
to scrutiny if such challenge is to be placed before a
court. Documenting a series of complicated financial
transactions can be difficult, particularly when some, if
not all, of the principal company records are not available.
The resources required include liquidator time, creditor
support and legal advice.
A liquidator might advise creditors that they can receive a
dividend of 50p in the £ now, or risk such money in the hope
of receiving a dividend of 80p in the £ at a later date.
Commercial pressures tend to dictate that creditors prefer
the 50p payment now rather than agree to speculative action
which may reduce the ultimate dividend to zero. Whilst a
liquidator can enter into a fee arrangement with his legal
adviser and obtain insurance for certain types of court
action, it is not always the case that court involvement
will maximise the return to creditors. A liquidator does not
deal in spite and retribution but the facts of a case. He
must rely on appropriate legal advice at all stages. If the
prospects of a successful action against a director are high
there is every reason to devote resources but equally, where
prospects are low, a liquidator will be quite happy to
explain the reasons for not pursuing what may, on the face
of it, appear an obvious challenge.
Never be afraid to ask the liquidator why he did, or did
not, pursue an issue.
Help: the assets are disappearing quickly!
It is often the case that a creditor will pursue a debt due
by a company by appointing an interim liquidator. Sometimes
this occurs when a creditor has good reason to believe that
the assets which remain within the target company are being
dissipated. Whilst many creditors seek to appoint a
provisional liquidator as a debt collection technique
(sometimes proving effective and sometimes a waste of time),
it may be the case that a creditor who is, say, a haulier or
warehouse operator, is aware that a company is moving assets
out of the country so quickly that waiting for the normal
period to appoint an interim liquidator to elapse may result
in significant financial loss to the general body of
creditors.
Section 135 of the Insolvency Act 1986 allows a provisional
liquidator to be appointed after the presentation of a
winding-up petition but before the making of a winding-up
order. In the case of valid concern over assets disappearing
and company records being destroyed, another creditor may
wish to appoint a provisional liquidator immediately in
order to safeguard the position. A provisional liquidator,
when appointed in such circumstances, will require to act
quickly, bravely and decisively and typically means
selecting an appropriate group of agents to provide support.
For example, if unscrupulous directors are removing assets,
threats of violence will have to be taken seriously. The
provisional liquidator will be removed from office when the
interim liquidator takes charge but the interaction allows a
smooth transition from one liquidation process to the other.
Creditors should not always assume that another creditor is
taking steps sufficiently quickly to preserve assets and
have only themselves to blame if they find that assets have
disappeared when they could have done something to protect
the position.
It is never too early to call your insolvency practitioner
for advice.
Bankruptcy Restrictions Orders: are they working?
If a bankrupt’s behaviour has been either dishonest or
blameworthy in some way the accountant in bankruptcy can
submit an application to court asking for a BRO. A BRO will
be for a period between 2 and 15 years with the principal
restrictions being that one must disclose the BRO when
obtaining credit of more than £500 and a person cannot act
as a director of a limited liability company. Prior to
determining whether an application should be submitted to
court, the sort of behaviour that is considered includes:
- not cooperating with your trustee during the period
of bankruptcy
- incurring debts that you knew you had no reasonable
chance of repaying
- giving away assets or selling them at less than
their value
- deliberately paying some creditors in preference to
others
- gambling or making rash speculations, or being
unreasonably extravagant
- failing to keep or produce records that explain a
loss of money or property
- fraud or fraudulent breach of trust
- causing your debts to increase by neglecting your
business affairs
- failing to supply goods or services that have been
paid for by the customer
- carrying on a business when you knew, or ought to
have known, that you could not pay the debts arising
therefrom
Some of these points are subjective and a practical
overview requires to be taken before seeking a BRO.
A BRO was introduced to Scottish bankruptcy legislation on 1
April 2008. For the first year of operation i.e. the year
ended 31 March 2009, there were 14,600 sequestration awards
and 4 BROs. One hopes that more submissions are submitted to
court as familiarity with the legislation develops such that
prospective bankrupts are aware that not everybody will
benefit from a one year discharge.
Conclusion
This update is provided for general information purposes and
does not purport to offer definitive advice. If other
information is required or specific advice sought please
contact either Michael Reid or Michelle Byrne at this
office. Thank you for taking the time to read this update
and please feel free to pass a copy to your colleague or
anyone else who you think might be interested.
Meston Reid & Co October 2009
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