Regulatory Pitfalls for Directors of a Limited Company

Obtaining Credit – The Start Of The Problem?

Obtaining credit underpins the whole concept of carrying out business in the modern world. It is rare to find a company that goes about its affairs without taking out loans and overdrafts or paying its suppliers weeks or months after receiving its goods and supplies. Indeed, it is often our own government backed public sector entities that pay late, taking extra credit from its suppliers.

Therefore, as a company director you will undoubtedly search for good credit deals both to maintain and to expand your business. This is to be expected, and it would likely be a failing in your directors’ fiduciary duties if you did not maximize the credit available to you in the market place. However, along with the benefits it brings, credit can also be the undoing of many companies who find themselves struggling to pay back what they have borrowed. This could be as a result of difficulties in the market place leading to reduced cash flow, failure of customers to pay back what they owe or simply poor business decisions leading to losses.

Companies in this position may find themselves under scrutiny from Insolvency Practitioners, who are attempting to support the company or alternatively sell its assets and wind it up completely. Their responsibility is to ensure a company meets its obligations to its creditors in a fair and balanced way, which can sometimes mean continued survival or at other times its demise.

The Task Of The Insolvency Practitioner

Whatever the course of events, a company facing insolvency proceedings will have its former workings unpicked by the Insolvency Practitioner. It is his duty to investigate the possibility that directors have taken too much remuneration from the company, or sold off assets as times got harder – perhaps to friends for less than market value. Inappropriate management of the business by the directors in the company’s last year or two can result in them having to pay back monies they have taken.

Mark Jenner & Co Limited has extensive experience of investigating insolvent companies on behalf of Insolvency Practitioners, tracing and recovering assets that have been hidden away by directors of failing businesses. We recognize the desire that some unscrupulous directors may have to keep some of the wealth built up over years of hard work, that is however now (rightly) destined for the creditors. It means that Insolvency Practitioners and those who investigate and recover assets in their name, must take a very robust stance against the errant directors. The role of the Insolvency Practitioner is not for the faint hearted and is why some are often described as “terriers who will worry their quarry until something breaks”.

The trouble is that, as with all prosecuting or regulatory authorities, we have seen this “robustness” taken much too far. Under the guise of being on the side of “the good guys”, Insolvency Practitioners who get the “bit between their teeth” sometimes forget they are dealing with directors who are human beings …and may not be guilty of anything other than having some bad luck. Mark Jenner & Co Limited has assisted a number of directors over recent years who have found it hard to convince certain blinkered Practitioners who feel that any director is fair game for their oppressive tactics.

Failure to accept rational explanations is all too frequent, else the courts would not be full and we would not have such a massive litigation market. The case of two directors that we recently assisted illustrates this situation very well, and highlights the needless stress and protracted unpleasantness individuals are sometimes forced to suffer because somebody in authority is treating them as statistics.

Fraudulent Trading – Not Always! A Case Example

John and Julie (real names withheld) had the opportunity to use some family land to build houses. This was to be their move into property development and so they set up a limited company to be their vehicle for the business. They consulted with accountants, lawyers and architects all along the line, ensuring every “i” was dotted and “t” was crossed. The properties were built to a very high standard and sold easily. Money that was borrowed from the bank was paid back leaving their company in a reasonably healthy state.  Because the land had been professionally valued for them, their balance sheet at the end of the development was slightly negative. This was only because of the very large sum of money the company owed the directors on account of the land. The directors had not taken huge amounts out of the company because they wanted to roll things forward to another development.

More money was borrowed and the process repeated, more houses were built. The houses sold, but as a result of a worsening property market John and Julie were forced to take out personal “buy to let” mortgages and buy a number of the properties themselves, thereby supporting the second phase of the development personally. This released enough money to pay off all the creditors including the main financier. As a result, the company was in a position to commence a third development, financed by yet another loan.

Unfortunately, during this third development the main sub-contractor began having financial difficulties, and in collusion with the company’s quantity surveyor began billing work in progress much too early. On eventual discovery of this fact, the directors were faced with a quandary. Their only recourse would be to sue, and no doubt they would have won but for the fact that the sub-contractor entered insolvency proceedings themselves! The directors were forced to obtain professional advice, consulting legal counsel and their own Insolvency Practitioner. The advice given was for their own company to become insolvent, selling the development to a new company that was able to finish the building with different contractors, eventually paying off all the creditors with the exception of the original main sub-contractor who had gone bust. The sub-contractor’s insolvent estate had a claim lodged with the directors’ original company without any hope of this being repaid.

Possibly a complex solution for the directors? Yes but one that had been engineered and managed by a series of professional advisors at not insubstantial personal cost to the directors. The directors gained nothing, simply ensuring the third project was completed and creditors paid off. Suddenly however, they faced a claim from the liquidator of their original company for a seven figure sum – said to be monies taken out of the company by the Directors when it was trading while insolvent.

Explanations were provided but these were ignored. Months and years went by, with many sleepless nights. It is hard to build your life back up after corporate failure when being pursued relentlessly for something you knew you had not taken. Eventually, the directors sought specialist corporate forensic accountancy assistance and Mark Jenner & Co Limited were delighted to help in this case.

As the claim mostly included transactions originating from the first and second phases of development, it was easy to show that the directors’ company was solvent for the relevant parts of its trading life. Once this was demonstrated, and some massive instances of double counting by the Insolvency Practitioner were removed from the claim, it was easy to present a situation where there should have been no case to answer.

A Satisfactory Outcome – But These Financial Disputes Drag On!

This may sound a simple solution to the directors’ problem, but the dispute took quite a bit longer to resolve. Eventually, faced with overwhelming evidence and refusal by the directors to cow tow to bullying and threats, the Insolvency Practitioner bowed out and the directors at long last were able to sleep soundly at night.

The sad message from this tale is that it can be very hard for innocent individuals to face regulatory intervention. It is stressful and can be expensive, especially when the regulator simply refuses to see reason. In this case, the directors were up against the might of a mainstream city based firm that was treating them as a potential source of funds, rather than people with feelings. You might say the directors were naive, but remember they themselves had taken professional advice from start to finish.

 

 

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About Mark Jenner

Mark Jenner is an experienced forensic accountant specialising in fraud and white collar criminal matters. He provides independent financial investigation and expert accounting witness services to police forces, fraud regulators and criminal defence lawyers, also providing assistance and solutions to organisations embroiled in financial disputes.

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