What business owners need to know about insolvency

The Deal Lawyer John Andrews speaks to insolvency lawyer Alejandro Worthington about insolvency events. In particular, Alejandro discusses the duties a directors' duties to the company.

Transcript

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Hello and welcome to the Deal Lawyer podcast.

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I'm John Andres.

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Today I'm joined by one of my partners, Alejandro Worthington,

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who is a partner in our restructuring and insolvency team.

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Welcome to the podcast, Andre. Hi, John.

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Thanks for having me.

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So we're here today to discuss the thorny subjects

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of what happens when businesses potentially get into trouble.

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What the directors of those businesses should be looking out for

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and what the considerations are for them going forwards

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in terms of liability and all those other sorts of nastiness.

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Sure.

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So generally speaking, anyhow, when we're looking at a, you know,

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a trading business that might have some difficulties,

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what duties to the directors generally o towards the company.

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So the duties of a director, they're enshrined in the Companies Act

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2006 Sections 1712177

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and they those sections set out to the general duties

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and without going through the whole list of them.

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The main duties are that a director

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must act within within his or her powers,

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must promote the success of the company

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and must at all times exercise independent judgment

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and must exercise reasonable care and skill and diligence.

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As I say, there are there are others.

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But I think for for today's purposes, probably the most important to

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to to consider that raises the question who and what is a director?

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And so in addition, of course, to a director being that

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a person registered as being director of the company at Companies House,

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we mustn't forget that some people can fall within the definition of director

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by being a what's known as a shadow director, i.e.

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basically someone who pulls the strings in the background.

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Okay, so if I understand it correctly, even if you are not registered,

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the companies house, if you hold yourself out

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as being a director, allow yourself to be held out as a director

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or you exercise control over the company in its direction.

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You will be at law to be considered to be the director.

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So a director filed that companies house

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properly registered as a date to a jury director.

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The shadow director I was talking about a few minutes ago

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and also a de facto director.

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So that is somebody who is not registered as a director, but

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to all intents and purposes is a director

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is is the person or one of the people who makes the decisions, etc..

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Yeah. Okay.

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I guess what we're looking at scenario here is

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a business getting into some financial difficulty.

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Yeah.

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And what we're really concerned about is,

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you know, what potential personal liability

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directors could have if they don't conduct themselves properly in that scenario.

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So I guess one area

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that I've come across in the past are where directors undertake transactions

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and undervalue or possibly prefer certain creditors

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in circumstances where the business is in financial duties.

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So could you tell us a bit about, you know, those two particular areas

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so transactions are undervalued and preferences

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and what the potential consequences are falling foul of

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that area of law?

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Sure.

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So transactions are undervalued and preferences

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there are set out in the in the insolvency Act

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and they're led to the of a spate of what's known as antecedent

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transactions that an administrator or liquidator appointed over

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the company is is likely to to investigate.

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And so a transaction at an undervalue

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is essentially where

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that company transfers an asset i.e.

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as a as a gift or for very little or no consideration

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or simply insufficient consideration.

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And that is that is something that obviously

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if the company was insolvent

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at the time or became insolvent as a consequence of that can lead

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to investigations being opened up by a subsequently appointed officeholder, i.e.

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an administrator or liquidator.

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Ultimately, if if a director decides

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that this particular transaction is done

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in the best interests of the company for that for the general purposes

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of the company's business and is done in good faith,

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and it was done on reasonable grounds for believing

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that the transaction would benefit the company.

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Then that director is likely to have a defense to a claim. Now

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the there there are timeframes.

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This this isn't the sort of thing

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that the look back period is can it doesn't go on forever.

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The lookback period is two years when a transaction at some value

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and that's two years before

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the insolvency event, the liquidation or a

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or an administration

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And and so a section two, three, eight,

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by the way, also does lead into section 43 of the Insolvency Act,

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which is is kind of one step further.

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And that's transactions defrauding creditors,

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which is essentially the prerequisites of which is a transaction to undervalue.

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But it then takes things a step further and it's done

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with the intention of putting assets beyond the reach of creditors.

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That is that is something that doesn't actually require an insolvency event

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and the timeframes are different for that.

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But I just thought I'd mention Section 43 as it is, it is tied in

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2 to 2 transactions. Undervalue.

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Okay.

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So are we looking at sort of, you know, circumstances where a director

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may look at his business, think that there is a, you know,

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a risk of the business not surviving.

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And so they take steps to transfer assets out, such as property

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because they can that not that sort of thing is not uncommon at all.

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And sorry

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to address your your earlier other other point of preference transactions as well.

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That is section 239 of the Insolvency Act.

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And it's essentially

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doing anything or suffering anything to be done

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which puts a creditor of that company

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in a better position than other creditors.

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If in the event of going into insolvent liquidation.

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So and that includes and this is something for,

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I think, directors to be wary of, who give personal guarantees, say on

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on, on lending is that if there is a loan out

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to a bank of 100 grand and you're the director, your person guaranteed

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that loan is the company just before an insolvency event.

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So two years, if it's a connected person or six months,

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if it's to an unconnected person or entity

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decides actually

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the company's going to pay that bank off first,

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leaving a load of other creditors to, you know, to sit in line,

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then that actually can be can be

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looked at as a as a preference transaction, because what

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the director's really doing is making sure if the company goes goes bust,

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that the bank doesn't call on the peg and therefore he has actually

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or she preferred him or herself as as the as the

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as the guarantor in that situation.

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I can I guess the other circumstances that I've come across in the past

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have been where directors have repaid that their personal loan accounts

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and also where directors have sought to put some kind of debenture

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or security in place for unsecured lending that they've made to the company.

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So it certainly is evident who was owed money and

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and then and then procures

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that the company repays that director before it goes into insolvency.

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That is, you know, that is something that a liquidator

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is going to be very interested in and will look at instantly.

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Liquidators and administrators, they have bases they have duties to

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to investigate the conduct of directors going back three years.

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So that actually will include a former director.

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If a former director that is falls within that three is

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can in theory, you know, fall under scrutiny as well.

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So that doesn't necessarily get you off the hook.

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Simply resigning when you think things are going well

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and the company's going to likely go insolvent.

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Okay.

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So if we look at the two scenarios, so if there's a transaction to undervalue,

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first of all, what's the potential repercussions

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for a

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director if a liquidator or administrator finds that to have occurred?

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So essentially, when am looking at various things,

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the starting point will be potential

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for personal liability of that director,

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a claim by liquidator.

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In these circumstances, I'll just refer to liquidator could be an administrator,

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but just for the ease of reference going forward, as I keep repeating myself,

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a liquidator will say right, that I'm sorry, but this is

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these transactions ought not to have happened.

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And therefore we believe and this is the application that is made to court.

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So it is for the court to order that the, you know, that compensation ought to be

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given on a contribution to the company's assets or a repayment and or repatriation.

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So it depends.

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It may be that an asset

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has been transferred out, can still be can it be transferred back then?

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Then the court can order that.

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But normally we're talking about,

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you know, financial, financial repercussions for that director.

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And of course, on top of having to

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to repay those monies, they will then be

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legal fees.

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If that if the claim is unsuccessful against the director,

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then the director is likely to be on the hook for the liquidators costs.

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These things can be pretty significant.

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And then of course, there's also interest.

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So with all of these things in mind, it's very important

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for Director to remember those directors duties and to ensure that things

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are always done in the best interests of the over company shareholders.

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But if the company is looking like it's staring down the barrel,

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a director needs to switch the focus away from the members of or shareholders

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of the company, the company itself to the company's creditors.

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Okay.

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And then in relation to the relation of a preference, a similar sort of scenario.

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Similar similar sort of scenario, indeed.

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It's as I

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said, it's two two years of it's 2 to 2 a connected person.

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By connected we mean another director or a family member.

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The director or family member of your own

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or potentially a director of an associated company, for example.

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And so again,

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you know, preferences Section 239

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are often are often followed up or in the alternative are completed

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as a breach of duty, i.e., you know, it might not technically be a preference

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because it falls just outside

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the timeframes or maybe the requisite level of desire.

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So there has to be a desire to to actually achieve that outcome.

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And sometimes, quite often it's the it's that it's that desire

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and proving that subjective element which which is difficult,

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but that won't necessarily get directors off the hook

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because if they've done something which any other reasonable director

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or director acting reasonably wouldn't have done, then

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there could be a breach of duty claim or a misfeasance action

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as well, which follows instead or as well as okay,

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so relation to preference is

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if a liquidator finds that there has been a preference, say for example,

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the scenario you mentioned where secured borrowing is repaid,

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does the liquidation of any recourse against the third party, the bank

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that received the money, can they, can they go to that third party and say

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that was a preference, you need to repay that money to us?

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Yes, but it will depend on the I suppose the

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the notice that that bank was on potentially or that the lender was on.

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But ultimately,

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yes, the court has has a white discretion there.

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I mean that also will apply under for example section

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127 of the Insolvency Act, which is about void dispositions.

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And this is something else directors often overlook in our experience.

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As soon as a winding up petition is presented

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by is issued in court,

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if the company then gets wound up, goes into liquidation.

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Any transactions between those periods are technically void

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and that includes making payments out to paying prime creditors, etc.

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because you think as a director, I want to keep going here,

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it's simply void unless you

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get an order of the court essentially validating that and they are

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there are applications that would have to be made

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pretty quickly in order to to get these payments across the line.

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So, yes, in summary,

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you can you can look to any any party to to make recoveries.

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But generally they're against they're against the directors.

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Okay.

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The reason I raised that is obviously

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in the context of the practice for a number of years, you know,

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we've actually four companies that have been in financial difficulties.

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And there's always been an issue about who pays our bills

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in those circumstances of, well, source of funds.

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And another interesting area that I've come across,

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which I think is a real minefield and I've had some

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experiences of the client before, is

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that, you know, obviously there's a tendency

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for directors to take remuneration for the companies by way of a mixture of

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salary and dividend.

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And obviously

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in the past in particular, taking dividends

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has been more tax efficient than taking salary.

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However, in the context of a of a company that's in financial difficulties,

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there can be some dangers in taking a dividend,

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can't there, in circumstances where the company is not making a profit?

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Well, if a company is not making

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does not have distributable reserves or distributable profits,

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then any dividend which is paid will be will be unlawful.

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But then technically a dividend can also

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or will also technically be a transaction not undervalued.

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There's been recent, you know, significant case on this

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and the status of the company, the financial status

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of the company at the time is very is very important.

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You know, is it probable that the company

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is going to go insolvent if it is and dividends are made,

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even if there are distributable profits, that might not be sufficient.

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So I think, you know, before making dividends,

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distributions, distributions and declarations,

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dances need to be very sure of their of their financial position.

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And in order to do that, obviously you need to have been conducting,

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you know, proper financial

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management accounts

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as well, certainly on a monthly basis

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and ensuring that your finance director

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is very much up to speed and knows what's going on.

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But that's very important for directors director to keep on top of things,

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especially if it comes to a point where we're actually,

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you know, there might be some difficulties here.

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We still want to make this dividend payment,

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but we really do need to make sure that we're not going to get caught out

00:15:52:08 - 00:15:56:23
and that if there are any creditors there, that they can be they can be paid.

00:15:57:00 - 00:15:59:18
Yeah, I mean, I've had a practical example.

00:15:59:18 - 00:16:02:08
The client would pay dividends out

00:16:02:08 - 00:16:05:23
and the liquidator came after them for repayment of the money.

00:16:05:23 - 00:16:10:18
So it's a fairly black and white claim in many respects as well.

00:16:10:20 - 00:16:15:18
It is likely to be a black and white claim if the company's gone into liquidation.

00:16:15:20 - 00:16:16:22
And actually they you

00:16:16:22 - 00:16:19:21
know, that dividend payment itself

00:16:19:21 - 00:16:24:07
at the time where the liquidation was probable in the dark to sort of name

00:16:24:07 - 00:16:27:21
their results in other creditors has been left on the shelf.

00:16:27:21 - 00:16:31:21
So yeah, certainly you know up to date financial info

00:16:31:23 - 00:16:33:22
regular board meetings as well.

00:16:33:22 - 00:16:37:21
And this goes for even for and importantly for directors.

00:16:38:02 - 00:16:40:23
So directors you still have to have board meetings.

00:16:40:23 - 00:16:45:04
It might, it might sound a bit odd you had a board meeting with yourself,

00:16:45:06 - 00:16:48:06
but these things ought to be properly and legally documented as well,

00:16:48:09 - 00:16:50:21
and they should be done as frequently as possible.

00:16:50:21 - 00:16:51:10
Okay.

00:16:51:10 - 00:16:54:23
So we've got a scenario possibly where there could be a clawback

00:16:54:23 - 00:16:59:23
by way of transaction undervalue or or a preference.

00:17:00:00 - 00:17:03:00
Can a company answer to contracts whether it's insolvent?

00:17:03:03 - 00:17:07:03
Yes. But with exercising caution,

00:17:07:05 - 00:17:12:24
basically, I think what you're asking me there is essentially,

00:17:13:01 - 00:17:13:15
is there a

00:17:13:15 - 00:17:17:17
difference between trading while insolvent and wrongful trading?

00:17:17:17 - 00:17:18:02
Yeah.

00:17:18:02 - 00:17:22:18
Now wrongful trading is as as the word, but it's wrong.

00:17:22:20 - 00:17:24:12
You can't do it.

00:17:24:12 - 00:17:28:01
And that is essentially when you are trading at a time where

00:17:28:01 - 00:17:33:11
you know that and realistically insolvent liquidation is just is unavoidable.

00:17:33:11 - 00:17:33:22
Yeah.

00:17:33:22 - 00:17:36:19
Yet you continue to trade and you continue

00:17:36:19 - 00:17:39:19
to increase the deficit to creditors,

00:17:39:20 - 00:17:43:12
you continue to increase the creditors knowing there's no other way out.

00:17:43:15 - 00:17:46:21
There's no realistic hope of trading on trade to a point where

00:17:46:21 - 00:17:50:01
you're going to actually be able to repay them, whereas trading while insolvent.

00:17:50:01 - 00:17:52:10
I think that happens more often. More often?

00:17:52:10 - 00:17:55:04
Well, more often than people realize, I guess.

00:17:55:04 - 00:17:57:02
And that's down to cashflow.

00:17:57:02 - 00:17:58:24
Yeah, you can be.

00:17:58:24 - 00:18:03:19
In theory it is insolvent for relatively short

00:18:03:19 - 00:18:06:19
periods of time, sometimes even very long periods of time.

00:18:06:20 - 00:18:11:01
But if you have contracts coming in, you know that money's coming in

00:18:11:01 - 00:18:14:05
from other sources or you've got, for example, a very good

00:18:14:05 - 00:18:18:21
debtor book, but that debt is not owed for 30 days or whatever.

00:18:18:23 - 00:18:20:24
You can still enter into contracts,

00:18:20:24 - 00:18:24:15
but of course you know, you do need to keep tabs on on

00:18:24:17 - 00:18:28:05
what's going on and weigh where you next to weigh in next pounds coming from,

00:18:28:11 - 00:18:32:22
I guess the gate in that scenario, best practice would be to hold regular

00:18:32:22 - 00:18:38:00
sort of monthly board meetings, maybe to minute by minute, minute them.

00:18:38:02 - 00:18:40:02
I would I would

00:18:40:04 - 00:18:40:09
I would

00:18:40:09 - 00:18:44:07
review the key contracts and make sure that the company's

00:18:44:07 - 00:18:50:18
still able to pay its key suppliers without going down that preference route,

00:18:50:20 - 00:18:53:14
but making sure that the business

00:18:53:14 - 00:18:57:04
is essentially sustained and sustainable going forward.

00:18:57:06 - 00:19:00:17
But certainly conduct meetings and, you know, if there's any doubt as to,

00:19:00:18 - 00:19:04:03
you know, should we be doing this, then have a board meeting

00:19:04:05 - 00:19:08:22
and then document that so that at least a recent decision has been reached

00:19:08:22 - 00:19:12:08
and that can be demonstrated to any officeholder that does come in.

00:19:12:10 - 00:19:13:04
Okay.

00:19:13:04 - 00:19:16:02
And then you mentioned wrongful trading.

00:19:16:02 - 00:19:20:20
I'm sure some of our listeners would have also heard of fraudulent trading.

00:19:20:22 - 00:19:23:21
What's distinguish between going for information and trading?

00:19:23:21 - 00:19:26:16
Well, wrongful is not necessarily fraudulent.

00:19:26:16 - 00:19:31:10
Sometimes you think it might be that fraudulent

00:19:31:12 - 00:19:33:02
is is in fact.

00:19:33:02 - 00:19:37:22
Well, it's more serious in that you can actually be imprisoned for up to ten years

00:19:37:24 - 00:19:41:11
and or be fined and and

00:19:41:13 - 00:19:44:13
and as the word suggests,

00:19:44:18 - 00:19:49:09
you know, essentially a director has has or directors have have behaved

00:19:49:11 - 00:19:54:06
and fraudulently with intent to defraud creditors,

00:19:54:08 - 00:19:57:16
whereas wrongful trading, it doesn't necessarily have to be that

00:19:57:18 - 00:20:00:06
that subjective intent to do to to

00:20:00:06 - 00:20:03:06
to just to wrong creditors or defraud creditors.

00:20:03:11 - 00:20:06:09
That just has to have been essentially dereliction of duty.

00:20:06:09 - 00:20:09:22
But fraudulent trading takes it one step further.

00:20:09:24 - 00:20:12:04
That's why they are probably on as many fraudulent

00:20:12:04 - 00:20:15:19
trading cases as a Section two, three, eight or 73 nine.

00:20:15:19 - 00:20:18:12
So just general general breach of duty claims.

00:20:18:12 - 00:20:18:22
Okay.

00:20:18:22 - 00:20:22:19
Can I guess and again, the consequence of wrong for the faulty trading

00:20:22:21 - 00:20:28:00
was it's up to ten years on indictment, I believe, and then also fines.

00:20:28:00 - 00:20:31:13
And I think the fines are are unlimited or you can get both.

00:20:31:13 - 00:20:34:11
So it's just depends on the nature of what you've done.

00:20:34:11 - 00:20:37:17
One thing actually has a bit of a tie in to all of these is that

00:20:37:22 - 00:20:42:16
I mentioned earlier that a liquidator has to has to provide a report,

00:20:42:18 - 00:20:45:06
SA has to report on the conduct of the directors.

00:20:45:06 - 00:20:48:22
That report is for the Secretary of State.

00:20:48:24 - 00:20:52:15
If the Secretary of State investigates and thinks that had actually

00:20:52:15 - 00:20:57:13
a director is is unfit to continue being a director,

00:20:57:15 - 00:21:01:24
that's the point at which the Secretary State can instigate

00:21:02:01 - 00:21:04:16
disqualification proceedings and okay.

00:21:04:16 - 00:21:08:07
And and the ramifications of that are that you can be disqualified

00:21:08:07 - 00:21:11:20
from acting as a director for out for 2 to 15 years.

00:21:11:22 - 00:21:14:01
But also now

00:21:14:01 - 00:21:15:15
you can be hit with a double whammy.

00:21:15:15 - 00:21:20:01
So we've mentioned claims by a liquidator for, you know, return of funds etc..

00:21:20:01 - 00:21:20:18
Yeah.

00:21:20:18 - 00:21:23:21
But also now the secretary state can,

00:21:24:01 - 00:21:28:02
can seek compensation orders against the directors.

00:21:28:02 - 00:21:31:04
So in a way, this is what's going to fighting the same battle

00:21:31:04 - 00:21:34:24
on two different fronts, increasing costs and so forth.

00:21:35:01 - 00:21:35:10
Okay.

00:21:35:10 - 00:21:38:04
And again, presumably with room for information trading,

00:21:38:04 - 00:21:41:13
liquidator can look for some form of restitution in terms of what's,

00:21:41:13 - 00:21:42:21
what's been lost by the company.

00:21:42:21 - 00:21:49:12
Well, yeah, if it's wrongful trading or any loss really caused to the company

00:21:49:14 - 00:21:54:15
and so an increase in increasing the creditor position

00:21:54:17 - 00:21:59:01
to what it should have been have had the director taken steps to speak

00:21:59:01 - 00:22:03:07
to an insolvency practitioner and place the company into liquidation

00:22:03:09 - 00:22:07:10
or administration earlier than that, not on a wrongful trading basis.

00:22:07:10 - 00:22:07:19
That's right.

00:22:07:19 - 00:22:09:18
That's where the line in the sand is drawn.

00:22:09:18 - 00:22:12:14
And then how much have you racked up afterwards?

00:22:12:14 - 00:22:13:22
Well, that's that's your loss.

00:22:13:22 - 00:22:18:10
Yeah, in very simple terms, Yeah. Okay. So

00:22:18:12 - 00:22:19:03
the obvious question

00:22:19:03 - 00:22:22:03
is, what is the test for insolvency?

00:22:22:05 - 00:22:26:19
So the test for insolvency, it is it is an obvious question.

00:22:26:21 - 00:22:27:21
It's got a simple answer.

00:22:27:21 - 00:22:32:14
But also, as with most things, it's it's how the facts lay out

00:22:32:14 - 00:22:35:18
and how things are are interpreted.

00:22:35:18 - 00:22:38:22
But essentially it is a this is section one, two,

00:22:38:22 - 00:22:43:12
three of the Insolvency Act, and you have the balance sheet test,

00:22:43:14 - 00:22:46:19
which is basically the value of the company's liabilities

00:22:46:21 - 00:22:50:11
versus the the value of their assets

00:22:50:13 - 00:22:52:09
or the cash flow test,

00:22:52:09 - 00:22:56:01
which is is the company

00:22:56:03 - 00:22:58:00
currently or in the future unable

00:22:58:00 - 00:23:01:22
to pay its debts as they fall due for payment.

00:23:01:24 - 00:23:06:16
Now, one thing to bear in mind, if you have a particularly hostile situation

00:23:06:18 - 00:23:10:21
with a supplier, for example, and the supplier is not being paid,

00:23:10:23 - 00:23:11:19
the threshold

00:23:11:19 - 00:23:17:10
for a winding up petition to be presented against the company is a basically

00:23:17:12 - 00:23:20:12
an undisputed debt of only £750.

00:23:20:14 - 00:23:24:22
The threshold for personal bankruptcy is is £5,000,

00:23:24:24 - 00:23:27:23
but we haven't moved on from 750 to

00:23:27:23 - 00:23:30:18
for that figure for a very long service.

00:23:30:18 - 00:23:31:08
Yeah.

00:23:31:08 - 00:23:35:07
So that is, that is, that is something worth bearing in mind

00:23:35:13 - 00:23:38:16
because one of the things if you have you know, if you have your bank

00:23:38:16 - 00:23:42:19
or another lender and you're getting into financial difficulties,

00:23:42:21 - 00:23:45:11
then one of the steps that a director ought to take is,

00:23:45:11 - 00:23:48:22
is to speak to that bank, explain the situation.

00:23:48:24 - 00:23:50:19
The same applies to HMRC.

00:23:50:19 - 00:23:54:21
If you are unable to pay your your annual VAT or corporation tax

00:23:54:21 - 00:24:00:13
or other liability and try to reach a time to pay arrangement or similar.

00:24:00:15 - 00:24:03:18
But the problem with the with other with other creditors

00:24:03:18 - 00:24:06:21
is that they may or may not be as commercial as a lender.

00:24:06:22 - 00:24:09:22
So you do have to bear that in mind

00:24:10:02 - 00:24:14:09
because once a winding up petition goes down or is issued, rather,

00:24:14:11 - 00:24:16:14
you know, there are some serious consequences.

00:24:16:14 - 00:24:20:04
If your bank gets wind of it, then, you know, bank accounts can be closed.

00:24:20:04 - 00:24:22:03
And as I mentioned earlier,

00:24:22:03 - 00:24:24:19
you've already been looking at section one, as you said,

00:24:24:19 - 00:24:27:05
and then go and disposition, which has a real

00:24:27:05 - 00:24:30:18
hamstring effect on or hamstringing effect, rather, on your business.

00:24:30:20 - 00:24:31:16
Yeah. Okay.

00:24:31:16 - 00:24:35:01
So I mean, my experience of the past of these types of actions

00:24:35:01 - 00:24:39:19
is some days I have some money and yet I can't get satisfaction through,

00:24:39:19 - 00:24:43:13
you know, communications to the company.

00:24:43:15 - 00:24:46:02
They may issue a statutory demand

00:24:46:02 - 00:24:49:11
for the sum of money making formal demand. Yes.

00:24:49:13 - 00:24:53:12
If that's not complied with, they then proceed to issue a winding up petition.

00:24:53:12 - 00:24:57:15
So in terms of the statutory demand process, yeah, is that

00:24:57:19 - 00:25:02:18
is that the company directors opportunity to to raise a dispute at that stage? Yes.

00:25:02:20 - 00:25:06:21
So such a demand is is is

00:25:07:00 - 00:25:11:22
used firstly that's required on a personal to individual insolvency level

00:25:11:24 - 00:25:15:14
for companies not strictly speaking, but is usually winding up.

00:25:15:14 - 00:25:19:03
Petition is preceded by a statutory demand that gives

00:25:19:05 - 00:25:22:05
basically 21 days to either to pay up

00:25:22:08 - 00:25:25:17
or to provide relevant security for satisfaction the debt.

00:25:25:20 - 00:25:27:19
But also as you mentioned, John,

00:25:27:19 - 00:25:30:14
that's the time if if if discussions

00:25:30:14 - 00:25:34:11
have taken place or beforehand and this hasn't quite come out yet,

00:25:34:11 - 00:25:37:20
it's the time sitting on that this debt is is disputed.

00:25:37:22 - 00:25:40:09
You have to explain why it's disputed.

00:25:40:09 - 00:25:43:08
Ordinarily, you might want to get some legal advice

00:25:43:08 - 00:25:46:17
as soon as you've been served with the statutory demand

00:25:46:19 - 00:25:49:05
in order to explain why it's disputed.

00:25:49:05 - 00:25:52:08
The importance of disputing it at that stage is because

00:25:52:08 - 00:25:57:05
the insolvency courts are not to be used in these circumstances.

00:25:57:07 - 00:26:01:12
If a debt is disputed on proper bona fide grounds,

00:26:01:14 - 00:26:05:02
you will often get disputes which are just complete nonsense.

00:26:05:04 - 00:26:07:17
And therefore it's a judgment call for the for the petition

00:26:07:17 - 00:26:12:02
to the creditor, rather, as to whether or not to continue it.

00:26:12:04 - 00:26:14:10
There's no obligation to continue,

00:26:14:10 - 00:26:17:10
but they would generally have to have to present that petition

00:26:17:12 - 00:26:19:15
within four months of the statutory demand.

00:26:19:15 - 00:26:20:16
But that's your opportunity.

00:26:20:16 - 00:26:23:02
So, you know, I appreciate what you're saying here,

00:26:23:02 - 00:26:26:23
but we don't owe you any money because and that might invoke might involve

00:26:26:23 - 00:26:29:10
a counterclaim of some sort, might just involve

00:26:29:10 - 00:26:32:20
there's not been a breach or actually the monies aren't payable yet.

00:26:32:20 - 00:26:35:12
We're not Juliet

00:26:35:14 - 00:26:37:23
and things are only payable when the due process.

00:26:37:23 - 00:26:42:19
When you say June payable is a bit of a bit of a repetition effort.

00:26:42:21 - 00:26:44:12
Yeah that's that's important to note.

00:26:44:12 - 00:26:48:08
But again remember is if you get

00:26:48:10 - 00:26:51:18
presented with a statutory demand, say for £5,000

00:26:51:20 - 00:26:57:12
and you say but I only nearly £1,000, that doesn't mean that that's

00:26:57:12 - 00:27:01:01
the end of the road because of course remember the threshold is only 750.

00:27:01:01 - 00:27:02:10
So you've got to pay, you've got to pay the out.

00:27:02:10 - 00:27:07:14
So pay I would you know, the idea is to get you beneath that threshold.

00:27:07:14 - 00:27:08:13
Yeah.

00:27:08:13 - 00:27:11:13
And then and then they should not Well they cannot proceed without it.

00:27:11:13 - 00:27:14:09
And in reality being an abuse of court

00:27:14:09 - 00:27:18:14
and if you, if you, if you ignore the statutory demands or abuse of process or,

00:27:18:16 - 00:27:21:22
you know, the statutory demand and a wipe up

00:27:21:22 - 00:27:26:02
potential petition is presented, then

00:27:26:04 - 00:27:28:06
the it's prima facie evidence

00:27:28:06 - 00:27:31:06
of having failed to raise a dispute at that stage that that's due.

00:27:31:06 - 00:27:31:23
Is that right?

00:27:31:23 - 00:27:35:04
Yeah, it's failing to failing to pay or failing

00:27:35:04 - 00:27:38:23
to come up with any sensible reasons why you shouldn't

00:27:39:00 - 00:27:41:15
or failing to,

00:27:41:15 - 00:27:46:04
to, to, to, to go to court to for, to present

00:27:46:06 - 00:27:50:20
sorry to restrain presentation of the winding up petition.

00:27:50:22 - 00:27:53:19
The starting point is made out that you must be insolvent.

00:27:53:19 - 00:27:57:00
You must be unable to pay the debt, and therefore you better come up

00:27:57:00 - 00:27:59:16
with a very good reason now as to why you should grant this order.

00:27:59:16 - 00:28:03:06
Now, you know there will often be adjournments based on,

00:28:03:06 - 00:28:07:08
you know, the facts of a particular case and allow time to pay the bill.

00:28:07:10 - 00:28:09:04
And that depends, of course, on

00:28:09:04 - 00:28:13:01
whether or not there are other creditors also being paying for blood,

00:28:13:03 - 00:28:16:17
because winding up petitions are essentially a class action.

00:28:16:17 - 00:28:17:16
Yeah.

00:28:17:16 - 00:28:18:18
And it is for the benefit

00:28:18:18 - 00:28:24:05
of the general body of creditors is not just for that one one creditor.

00:28:24:07 - 00:28:26:14
And so that that needs to be borne in mind as well.

00:28:26:14 - 00:28:28:19
It's no good just paying off that one creditor.

00:28:28:19 - 00:28:31:07
If you know there's other creditors, who will.

00:28:31:07 - 00:28:34:07
It only takes one to what's known as support that action.

00:28:34:09 - 00:28:36:03
And they say to the court, now hang on,

00:28:36:03 - 00:28:38:07
you might you might have paid him, but he still owes me.

00:28:38:07 - 00:28:40:11
So I'm going to piggyback onto that petition.

00:28:40:11 - 00:28:42:15
Well, when I've done some of this work in the past,

00:28:42:15 - 00:28:46:10
I've had exactly that scenario set up as one creditor,

00:28:46:12 - 00:28:49:16
a supporter of creditors comes in and then you go deal with the two of them.

00:28:49:19 - 00:28:53:19
And if you pay off the first one, the second substitute on the petition

00:28:53:21 - 00:28:56:06
and carry on with the action. So you see that it's pretty serious.

00:28:56:06 - 00:28:59:01
And of course, that paying off of the first one,

00:28:59:01 - 00:29:01:08
you need to be very careful because you haven't got a

00:29:01:08 - 00:29:02:10
if you do get wound up

00:29:02:10 - 00:29:06:12
and that will be avoid disposition unless a third party has made that payment.

00:29:06:12 - 00:29:09:17
So that's easier said than done for some.

00:29:09:19 - 00:29:11:04
And it depends on the level of debt.

00:29:11:04 - 00:29:12:14
But yeah, that's something to bear in mind.

00:29:12:14 - 00:29:15:23
So, you know, and again, my recollection of the process is once

00:29:15:23 - 00:29:19:02
the petition gets presented, yeah, you've got,

00:29:19:02 - 00:29:22:05
you got seven days haven't you, to a point to stop it from being advertised.

00:29:22:05 - 00:29:22:09
Yeah.

00:29:22:09 - 00:29:25:09
Well as seven the seven days

00:29:25:14 - 00:29:28:17
have to have business days have to elapse before it can be advertised.

00:29:28:17 - 00:29:29:22
Right. Yeah.

00:29:29:22 - 00:29:33:00
And it also needs to be advertised at least seven business days before

00:29:33:00 - 00:29:35:02
the hearing. Yeah.

00:29:35:04 - 00:29:39:01
So that there is a time frame to react to it.

00:29:39:03 - 00:29:42:00
But if it's reached that point,

00:29:42:00 - 00:29:45:17
you know it's, it becomes more difficult doesn't it.

00:29:45:19 - 00:29:48:10
And then once it satisfies, that's when the real damage is done is next.

00:29:48:10 - 00:29:49:23
That's when the banks get to find out.

00:29:49:23 - 00:29:51:15
Yeah, that's when the bank said to find out.

00:29:51:15 - 00:29:56:04
But also, it's worth it's worth noting that

00:29:56:06 - 00:29:59:15
you can hear you can learn about or find out about

00:29:59:17 - 00:30:01:17
on advertise petitions as well.

00:30:01:17 - 00:30:04:19
There are there are insolvency practitioners and other entities

00:30:04:22 - 00:30:08:22
that basically trawl through, trawl through what is essentially

00:30:08:22 - 00:30:12:13
a publicly available database on that point

00:30:12:15 - 00:30:16:02
to find out if there's been petitions set down against certain companies.

00:30:16:04 - 00:30:19:15
But yeah, the big the big difficulty will be in addition to not being able

00:30:19:15 - 00:30:23:19
to make any payments at all, it being inadvisable to do so.

00:30:23:22 - 00:30:25:22
Yeah, the banks may just freeze your account.

00:30:25:22 - 00:30:28:15
Yeah. In which case you're a bit stuffed. Okay.

00:30:28:15 - 00:30:31:15
So and that by the way, that includes receipts of moneys as well.

00:30:31:16 - 00:30:31:24
Right.

00:30:31:24 - 00:30:34:19
I was just saying that. Just say accounts frozen.

00:30:34:19 - 00:30:37:05
I mean and I say that all of your sort

00:30:37:05 - 00:30:40:15
of suppliers, your your clients get to find out their issues as well.

00:30:40:15 - 00:30:40:24
Yeah.

00:30:40:24 - 00:30:44:20
So if the company is experiencing some nasty event, what should that

00:30:44:20 - 00:30:48:13
director state what are their duties in those circumstances?

00:30:48:15 - 00:30:53:19
Well, their duties are to do what they can to prevent things

00:30:53:19 - 00:30:59:06
spiraling out of control, essentially on a on a on a sort of simplistic level.

00:30:59:08 - 00:31:01:22
They need to ensure that the creditors position

00:31:01:22 - 00:31:06:09
is protected from then onwards as best possible

00:31:06:11 - 00:31:08:18
so that there's damage limitation.

00:31:08:18 - 00:31:11:10
And so that what the company then

00:31:11:10 - 00:31:16:22
does is in the interests of the creditors, first and foremost ahead

00:31:16:22 - 00:31:21:02
of the interests of its shareholders and then the directors themselves.

00:31:21:02 - 00:31:24:07
Sometimes, of course, the directors will be shareholders.

00:31:24:09 - 00:31:26:17
And so seeking legal advice

00:31:26:17 - 00:31:29:21
and speaking and or speaking to an insolvency practitioner.

00:31:29:22 - 00:31:30:14
So I've mentioned

00:31:30:14 - 00:31:34:16
liquidators, administrators that essentially insolvency practitioners

00:31:34:18 - 00:31:36:00
to see what can be done.

00:31:36:00 - 00:31:41:05
Can things be restructured, can agreements be reached with certain creditors,

00:31:41:07 - 00:31:46:23
especially, as I say, HMRC, who now have you now have an elevated

00:31:47:00 - 00:31:52:15
secondary preferential status in insolvency in respect of

00:31:52:17 - 00:31:54:00
some of the liabilities owing to them.

00:31:54:00 - 00:31:58:19
So they they've become an even more important player in recent years.

00:31:58:21 - 00:32:02:17
So darts is just need to remember their duties.

00:32:02:19 - 00:32:07:14
But remember that they switch to director to creditors are the most important.

00:32:07:14 - 00:32:12:03
So we've already mentioned, you know board meetings and

00:32:12:05 - 00:32:15:00
legal advice and up to date financial information.

00:32:15:00 - 00:32:18:16
Yeah, that should certainly be maintained because the

00:32:18:17 - 00:32:21:17
this period between first getting wind of a

00:32:21:20 - 00:32:24:00
potential financial difficulties and a company actually

00:32:24:00 - 00:32:26:10
going into liquidation can sometimes be several months.

00:32:26:10 - 00:32:27:08
Yeah.

00:32:27:08 - 00:32:30:12
And that is what you do in those months which will first be scrutinized

00:32:30:18 - 00:32:32:16
by a liquidator

00:32:32:16 - 00:32:35:20
and so you have to have your make sure ideally

00:32:35:20 - 00:32:39:07
you're a director and you've got directors and officers insurance.

00:32:39:11 - 00:32:43:22
Yeah, if you haven't got it in place by then, it might be a little bit too late.

00:32:43:24 - 00:32:47:21
But that's something to, to, to bear in mind.

00:32:47:23 - 00:32:49:17
What does that insurance cover?

00:32:49:17 - 00:32:54:18
Well, it's essentially covered covers claims against you.

00:32:54:20 - 00:32:58:09
So it has been a wrongful trading claim or breach of duty claim.

00:32:58:11 - 00:33:02:15
What they tend not to cover, I think, is is essentially fraud.

00:33:02:17 - 00:33:04:07
And and there are certain

00:33:04:07 - 00:33:07:07
definitions, you know, for example, and the gross negligence.

00:33:07:10 - 00:33:11:08
So it's all about what the what the wordings

00:33:11:10 - 00:33:12:17
what the wording of the policy say.

00:33:12:17 - 00:33:16:15
But essentially if you've just been a bit inept

00:33:16:17 - 00:33:19:17
or you've been very unlucky or a combination of those,

00:33:19:20 - 00:33:23:01
then then a policy should cover you.

00:33:23:05 - 00:33:27:00
If you've been downright fraudster, then they won't.

00:33:27:02 - 00:33:27:15
Okay.

00:33:27:15 - 00:33:33:12
So if you take advice, a fairly early stage from an insolvency practitioner,

00:33:33:14 - 00:33:35:18
my experience has been that they're in quite

00:33:35:18 - 00:33:40:02
a unique situation, so they can give you sort of guidance of advice

00:33:40:02 - 00:33:44:08
as to how you should address the company's situation leading up to liquidation.

00:33:44:10 - 00:33:48:24
Yeah, but if they actually get appointed as liquidators, so the directors take

00:33:49:01 - 00:33:54:10
take the step of appointing a percentage of their own pointed out positions

00:33:54:12 - 00:33:54:21
to the

00:33:54:21 - 00:33:58:21
credit company, the liquidator, then his duties

00:33:58:21 - 00:34:01:23
and responsibilities switch to Bain in the interest of the creditors, right?

00:34:01:24 - 00:34:02:16
Absolutely.

00:34:02:16 - 00:34:07:15
And this is something we find quite often that

00:34:07:17 - 00:34:11:06
you mentioned winding up, that the company can also go into creditors as well.

00:34:11:08 - 00:34:12:07
Sorry. Yes.

00:34:12:07 - 00:34:14:11
That's essentially by bye bye,

00:34:14:11 - 00:34:14:17
you know,

00:34:14:17 - 00:34:16:22
spearheaded by the board of directors, agreed by the members,

00:34:16:22 - 00:34:19:16
and then the insolvency practitioner takes office. Now. Yeah.

00:34:19:16 - 00:34:24:00
At that point and all my IP clients were stressed

00:34:24:00 - 00:34:27:15
to directors that we understand what you're going through.

00:34:27:17 - 00:34:30:00
But as soon as I'm appointed, I have

00:34:30:00 - 00:34:34:12
my statutory duties and obligations and they include, as I mentioned earlier,

00:34:34:14 - 00:34:37:11
the reporting duties to the Secretary of State.

00:34:37:11 - 00:34:39:14
There's no getting away from that. Yeah.

00:34:39:14 - 00:34:44:11
And a director must, must, must carry out reasonable investigations.

00:34:44:13 - 00:34:47:23
And if there is if there is, for example,

00:34:48:00 - 00:34:51:21
an overdrawn director's loan account and he's sitting there saying, director

00:34:51:21 - 00:34:55:20
owes the company 200 grand, then then that will be that will be called in.

00:34:55:24 - 00:34:57:18
Yeah.

00:34:57:18 - 00:35:01:16
Also there are things like unpaid share capital that will be looked at as well.

00:35:01:18 - 00:35:03:15
And of course all these potential transfers.

00:35:03:15 - 00:35:08:04
So any transfers that happened in the previous two years will be scrutinized

00:35:08:07 - 00:35:11:17
and unpaid share caps is an interesting one actually, because I am

00:35:11:19 - 00:35:14:18
I once had a client who set up an off the shelf company

00:35:14:18 - 00:35:19:20
with a £50,000 share capital gain of £1 shares.

00:35:19:20 - 00:35:23:16
They paid a pound, not realized the government's liquidation.

00:35:23:16 - 00:35:27:24
And so he was on the hook for the other 499 £999,000.

00:35:28:00 - 00:35:30:17
So they were worth parity, by the way.

00:35:30:17 - 00:35:32:17
But he set the company

00:35:32:19 - 00:35:33:22
in mind absolute.

00:35:33:22 - 00:35:37:07
So. So I guess if we talk if we're talking about the directors

00:35:37:07 - 00:35:41:23
taking the bull by the horns, if they if they if they feel that no liquidation

00:35:41:23 - 00:35:45:22
is an inevitable consequence of where the company is,

00:35:45:24 - 00:35:51:02
they can take control of the situation by by appointing their own liquidator.

00:35:51:02 - 00:35:54:00
What was the process for that? Yeah.

00:35:54:00 - 00:35:56:21
So that's essentially creditors voluntary liquidation.

00:35:56:21 - 00:35:57:01
Yeah.

00:35:57:01 - 00:36:00:15
So meetings I had with the liquidators the directors

00:36:00:15 - 00:36:03:19
resolve to to appoint

00:36:03:21 - 00:36:06:21
and then will be a

00:36:06:23 - 00:36:09:16
members of the shareholders

00:36:09:16 - 00:36:13:10
meeting essentially to ratify the appointment.

00:36:13:12 - 00:36:17:22
Sometimes you get into positions where the members are, then they might

00:36:18:00 - 00:36:22:14
they might want another IP, an office, but the company is in liquidation.

00:36:22:14 - 00:36:26:09
So you sometimes have these scenarios where is in liquidation that

00:36:26:09 - 00:36:28:18
they're not quite sure is going to be in the long run.

00:36:28:18 - 00:36:32:05
Yeah, but even if the liquidator takes office,

00:36:32:07 - 00:36:34:02
if things don't

00:36:34:02 - 00:36:38:13
work out in terms of the creditors of the company

00:36:38:13 - 00:36:42:12
think, hang on, I think the liquidator is not doing his or her job properly.

00:36:42:13 - 00:36:45:02
Yeah. Should be going a different direction hasn't it.

00:36:45:02 - 00:36:48:19
Hasn't carried out these investigations, you know, despite

00:36:48:21 - 00:36:52:02
all I the creditor having passed on a lot of information

00:36:52:02 - 00:36:56:05
about potential claims, be it against the directors or third parties,

00:36:56:07 - 00:37:00:19
then essentially the creditors with the have sufficient voting

00:37:00:21 - 00:37:03:21
can can can remove and replace a liquidator.

00:37:03:24 - 00:37:06:24
Okay in a nutshell yeah. Okay.

00:37:06:24 - 00:37:10:20
So so I think that you know, my again, my experience has been

00:37:11:01 - 00:37:15:14
that quite often there is some some merit in taking control of the process

00:37:15:14 - 00:37:18:21
and hopefully getting the liquidator appointed that you want to said

00:37:18:21 - 00:37:22:17
Yeah, and some, some of that some liquidators are office

00:37:22:17 - 00:37:26:14
holders, you know, are more commercial than others, let's say.

00:37:26:15 - 00:37:31:02
Yeah, but I think that I think, you know, the key point is and also of course

00:37:31:02 - 00:37:36:22
if you have if you have had a falling out with a creditor and that creditor

00:37:36:24 - 00:37:37:23
basically presents a

00:37:37:23 - 00:37:41:21
petition, it is the secretary of state who gets appointed first.

00:37:41:21 - 00:37:47:08
But then depending on on the voting, on on the creditor values of claims

00:37:47:10 - 00:37:49:11
that creditors preferred

00:37:49:11 - 00:37:53:12
insolvency practitioner can then be appointed by the secretary of state.

00:37:53:14 - 00:37:57:21
And then, you know, you may well get a particularly aggressive, you know,

00:37:57:24 - 00:38:02:12
IP appointed and you'll find yourself having having to deal with that.

00:38:02:14 - 00:38:06:06
That said, you know, as I say, all insolvency

00:38:06:06 - 00:38:09:08
practitioners are appointed, have have their duties, their statutory

00:38:09:08 - 00:38:12:19
duties and obligations, and they must comply with.

00:38:12:21 - 00:38:16:05
But I think in terms of getting a grip of the situation,

00:38:16:05 - 00:38:20:08
as you as you're alluding to early or taking the bull by the horns,

00:38:20:10 - 00:38:24:10
it's better to to do that than to sit by and wait.

00:38:24:12 - 00:38:27:18
And in the meantime, if you are increasing,

00:38:27:20 - 00:38:31:23
you know, what is owing to creditors, that's not really going to help you.

00:38:32:03 - 00:38:33:13
So, yes, it will help you.

00:38:33:13 - 00:38:34:24
It will show that you've been proactive,

00:38:34:24 - 00:38:37:12
that you've considered what your duties are,

00:38:37:14 - 00:38:40:06
and that at a point in time that you thought

00:38:40:06 - 00:38:43:24
was, well, you know, the company is now doomed, I'm going to take steps.

00:38:43:24 - 00:38:46:13
And I think that will only help

00:38:46:13 - 00:38:50:01
you as a director in terms of the claims that you've

00:38:50:07 - 00:38:51:21
you've not done your job properly.

00:38:51:21 - 00:38:55:18
So so I guess in summary, if we look back at what we've discussed, the

00:38:55:20 - 00:39:01:03
the key takeaways are if you are anticipating financial difficulties

00:39:01:03 - 00:39:04:22
or you are in financial difficulty, don't bury your head in the sand.

00:39:04:24 - 00:39:06:01
Be proactive.

00:39:06:01 - 00:39:10:06
Yeah, document your actions by regular board meetings.

00:39:10:06 - 00:39:10:16
Yeah.

00:39:10:16 - 00:39:16:05
If you take professional advice early and if liquidation is looking inevitable.

00:39:16:06 - 00:39:16:15
Yeah.

00:39:16:15 - 00:39:19:00
Make sure speech explains Solvency practitioner

00:39:19:00 - 00:39:22:21
Speak to a lawyer such as yourself to get some direction

00:39:22:21 - 00:39:26:13
on whether everything's above board, how you should best proceed.

00:39:26:15 - 00:39:31:05
And you know ITV, if you really didn't do it, you take control of the process now.

00:39:31:11 - 00:39:33:09
Absolutely. It's a must.

00:39:33:09 - 00:39:35:10
If the judge says, Who did you take advice from?

00:39:35:10 - 00:39:37:01
And you say, Well, nobody.

00:39:37:01 - 00:39:40:14
I just thought I'd muddle through or the company couldn't afford it again,

00:39:40:20 - 00:39:42:19
there should be contingency plans in place.

00:39:42:19 - 00:39:46:21
They should be, you know, money set aside for a rainy day sort of thing.

00:39:46:23 - 00:39:48:08
But also a very key point.

00:39:48:08 - 00:39:49:05
I haven't mentioned earlier.

00:39:49:05 - 00:39:52:01
But in terms of of your duties as a director,

00:39:52:01 - 00:39:55:17
and it'll be particularly important when a company goes into insolvency, is

00:39:55:19 - 00:39:59:14
is your duty to maintain proper books and records.

00:39:59:16 - 00:40:03:18
Hopefully if things if things have have, have they have been done properly,

00:40:03:19 - 00:40:06:04
but they haven't worked out because, for example,

00:40:06:04 - 00:40:10:02
one of your one of your big suppliers suddenly collapses or one of the contracts

00:40:10:02 - 00:40:14:11
collapses and it's no fault of your own, or as we've just had the

00:40:14:13 - 00:40:18:21
hideous experience of going through COVID and it was just over to blame.

00:40:18:22 - 00:40:22:24
Yeah, if you don't have books and records that support your position,

00:40:23:01 - 00:40:26:03
that's not going to be a defense to claims against you for,

00:40:26:03 - 00:40:29:22
you know, potential breaches of duty or transfers out.

00:40:29:24 - 00:40:33:08
So just, you know, just remember those the future

00:40:33:10 - 00:40:37:10
while having an absolutely fascinating insight into the world,

00:40:37:14 - 00:40:40:19
I want to see if any of our listeners want to make contact with you.

00:40:40:21 - 00:40:42:24
What's your email address and telephone?

00:40:42:24 - 00:40:44:08
Well, my email address is on this.

00:40:44:08 - 00:40:48:19
And of course, a rather long, long name, Alejandro Dot Worthington,

00:40:48:21 - 00:40:52:14
J.M.W., Echo Dot UK and hopefully it'll be on on our website somewhere.

00:40:52:15 - 00:40:53:05
Yeah.

00:40:53:05 - 00:41:00:00
And have you got a work mobile number and yet it's a7787516760.

00:41:00:02 - 00:41:01:13
So by all means give me a call.