Mark Jenner & Co Limited has provided forensic accountancy services in numerous cases involving disputes surrounding the insolvency process. Formerly investigators for both the Department For Business and private sector Insolvency Practitioners, as a firm we now focus on how best to defend against these regulators’ sometimes overzealous attentions. If you are facing allegations of fraudulent or wrongful trading or are finding attempts being made to recover assets from you (or void previous business transactions) give us a call.
The chances are you have been running your business for a number of years – but now as a director of an insolvent company or as a bankrupt sole trader you are having a stressful time facing the liquidator or trustee’s attempts to recover assets from you. While this is an appropriate course of action in many cases, in others it may not be merited. If you had been trading while insolvent you may be facing the repayment of funds taken out of the business in the period leading up to insolvency. However, proving insolvent trading has taken place is not straight forward and sometimes impossible to prove. It is not enough for the Insolvency Practitioner to simply assume that any wrongful trading had ever taken place.
You may have struggled to keep you business afloat, injecting funds from time to time to meet creditors’ demands and find yourself having to explain transactions dating back a couple of years. This is where we can help.
Challenging The Insolvency Process
It is often the case that a liquidator will examine an insolvent business and highlight unusual transactions such as cash withdrawals and large purchases to see if they were appropriate or whether the expenditure might have contributed to the business failure. He or she will often make assumptions, such as the business was insolvent at the time of the transaction or that the transaction only benefited the director (or sole trader). Lets face it, the business must have been insolvent at some point, because it went under. But when did that insolvency actually start?
The practical test is not technical balance sheet insolvency – it is the ability to pay creditors as and when they come due that is the real evidence. This is something that an expert forensic accountant’s report can address. Many companies can demonstrate a negative balance sheet occasionally, this does not mean that they are insolvent!
The liquidator will attempt to recover the assets, or their value, for the benefit of the disadvantaged creditors. The only problem is, the transactions may have been valid or the business was not insolvent at the particular time they were made. The Liquidator may be quite zealous in his attempts to recover value from you, treating you as a detail within his investigation rather than a human being with feelings. The process will seem incredibly stressful, and the temptation will be to try to settle as quickly as possible.
It could be necessary for the liquidator to fully recreate the accounting records, going back at least two years, to show clearly that insolvent trading was taking place at a particular point in time. If the management records for the business were not sufficient, perhaps because it was beginning to struggle, it may be quite a hard job to rebuild the accounts. This equates to time costs which a liquidator may be reluctant to risk – leading to speculative demands being made that are not properly substantiated.
The liquidator does have a duty to investigate irregularities. If there is little money left in the pot after insolvency, he may be reluctant to risk his time on a detailed investigation. This is why it is possible in some cases that unsubstantiated demands for repayment might be made.
If the recovery attempts are a little harsh in the hope that you will capitulate, you may prefer to stand your ground. We recently assisted a couple of directors who owned their own house that was worth around one million pounds. After their company collapsed the liquidator relentlessly pursued the directors, in the knowledge that they owned substantial assets that could potentially be realized. After investigating the company, my forensic accountant’s report showed that there never was any insolvency until the very end, and in fact the directors were by far the largest creditor still outstanding. This was after they had personally propped the company up to ensure all loans were properly paid after a fraudulent sub-contractor caused their company significant losses. The only creditor left was the fraudulent company and much of our client’s problems stemmed from it going bust itself! Everything the couple did was after consulting leading professionals, including lawyers and insolvency practitioners, every step of the way.
It is no surprise that the liquidator eventually backed off. One lesson to be learned is to clarify the trading situation as early as possible and ensure all the details of the directors interaction with the business are clearly presented in order to avoid protracted and stressful arguments with the Insolvency Practitioner. This is where we can help.
Asset Tracing And Recovery
Most liquidators carry out reasonable investigations into directors who may have stripped assets from a company. This allows them to recover value for the creditors who have lost out when a company goes under. We have carried out such investigations using the powers of the Insolvency Act 1986 on behalf of practitioners resulting in substantial recoveries. These are fraud investigations, where minority shareholders and creditors have lost out as a result of the theft by controlling parties.
Sometimes a majority shareholder will enter the insolvency process, only to buy back the company in a back to back deal, perhaps using the controversial “Prepack” process. A new company is formed without the burden of the previous creditors and without any ongoing participation by the minority shareholders.
Businesses going under can be unpleasant at the best of times. Mostly it is a tragic playing field that brings out the worst in people. Lives are affected and greed and fraud prevail. It is no wonder that Insolvency Practitioners must be strong and sometimes ruthless. It is no career for Fainting Violets! Our numerous enquiries under S447 on behalf of Companies Investigations Branch (for the Insolvency Service’s Department for Business – DTI as was) have shown that you cannot treat some businessmen with kid gloves, they will fold their company to their own advantage time and time again leaving unpaid bills in their wake. However, if you find you are being unfairly targeted, we can investigate and present your case robustly and help with a credible defence against these regulators.