Directors Beware -Disqualification

Posted on June 21, 2011 by zafarrafiq

The undoubted benefits brought in by the legislation under which directors, who it is felt by the Disqualification Unit at Department of Business Enterprise are unfit as directors, can undertake not to act as a director for a period of time has become a double-edged sword.

The Company Directors Disqualification Act (1986) provides that an Insolvency Practitioner (IP) appointed to an insolvent company must carry out a review of the director’s conduct to assess whether or not the director is fitted to hold the post of a director.

Regard is taken of a number of issues by the IP but includes whether the directors have traded on the Company whilst it was insolvent or whether the directors failed to keep proper books of accounts or made misrepresentations to customers or misapplied the company’s monies etc.

It was the case that if it was felt that the director was unfit as a director then proceedings would be commenced by the Disqualification Unit against the director through the Courts for a Disqualification Order. Those proceedings would continue until either the final hearing of the disqualification proceedings or an agreed negotiated settlement was achieved (known as “a Carecraft Settlement”). This procedure was not only time consuming but also expensive as the director would have to pay the Disqualification Unit’s legal costs if an Order was made. Consequently to save time and costs, the concept of a director giving an undertaking not to act as a director was introduced and now that procedure forms the bedrock of most disqualification proceedings today.

In appropriate circumstances the Disqualification Unit will contact the director within two years of the insolvency of the company and explain why they feel the director is unfitted to be a director and offer draft undertakings to the director under which he agrees not to act as a director for a specified period of time. Attached to the draft undertakings will be an agreed statement of facts, i.e. an admission by the director as to what his unfit conduct actually was.

To avoid costs, time and expense, the directors are naturally tempted to accept the undertaking rather than negotiate or fight the case. However directors must stop and think before giving that undertaking.

Acceptance of the undertaking is an important step. To breach the undertaking and continue to act as a director carries both criminal and civil penalties. The criminal penalty means that the guilty director can end up in prison.

The civil penalty is that the guilty director must contribute to the debts of the insolvent company. It is also important to remember that the definition of the director is not limited to an individual who is registered as such at Companies House. It includes, amongst other things, “shadow directors” that is individuals who are not registered as directors but whom other directors regularly receive instructions from; it also includes “nominee directors” i.e. directors in name only.

It is also important to remember that the director will be agreeing with the Disqualification Unit’s agreed statement of facts attached to the undertaking relating to the director’s alleged unfit behaviour. The director may find himself on the end of litigation proceedings brought by a Liquidator or Administrator for e.g. wrongful trading. The director, in signing the agreed statement of facts and the undertaking has admitted that alleged guilty conduct. Although the agreed statement of facts in the undertaking is not admissible in any court proceedings, the Administrator or Liquidator will be reassured of the strength of his/her case against the director by the director’s acceptance of the statement of facts and undertaking.

There is a safety valve and  applications can be made to the Courts by directors for permission  to act as a director notwithstanding having either a Disqualification Undertaking or a Disqualification Order against them. Those applications have been successful as long as the Courts are convinced that the public is protected.

The three essential points for a director to remember when faced with the threat of disqualification proceedings by the Disqualification Unit are:

  • Review the evidence put forward by the Disqualification Unit concerning the actions as that evidence may be factually incorrect.
  • Consider the effect upon your own personal position if a Disqualification Undertaking is given by you, not only now but also in the future.
  • Take advice immediately on your options and the strength of your position with a view to negotiating a shorter period or defending your position entirely.
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Beware-Buying an Insolvent Business

Posted on June 21, 2011 by zafarrafiq

As always, one man’s loss is another man’s gain. In the coming months there will be an increasing number of insolvent businesses up for sale at knock- down prices. If you have the funds to buy and the business fits with what you want, you can make a good deal.

However, there are some key issues you need to be aware of if you have not bought an insolvent business before and you are not familiar with the process. It is totally different from a normal business acquisition, where there can be due diligence, long and detailed negotiation and significant  protection for the buyer in case the position of the target business is not as it was thought to be.

Insolvent businesses will be offered for sale by their administrator, who will be looking for a quick sale. He will therefore go with the buyer who has the funds to do the deal and move quickly. The administrator will not accept any personal liability and is unlikely to respond in a meaningful way to any due diligence questions the buyer may have. You therefore assume a greater risk than normal, but this is reflected in the low price.

  • The administrator will not confirm that the assets the insolvent company is selling are owned.
  • Goods in stock may be covered by retention of the title claims and belong to suppliers, so you may have to return such goods or pay the supplier for them.
  • If assets are subject to lease or hire purchase agreements, the company owing the assets may take the assets back or require you to pay any unpaid rentals as the price for keeping them.
  • The position with employees will need to be carefully considered since employees with their existing terms of employment can be automatically transferred to you.
  • If you want to trade from the insolvent company’s premises, you may have to take the risk that the landlord will be willing to let you stay, although in today’s climate he may well be happy to have a tenant. The insolvent company will not be free to transfer its lease to you and there is rarely the time to get the landlords consent.

You take more of a risk in buying an insolvent business, since there will be no ‘come back’ on the seller but this risk is often balanced by the much lower price you will be paying. However, you should still expert advice to ensure that the matter is properly handled and that ownership of the business is transferred to you.

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EAT- Prepack dismissal-Who picks up the liabilities ?

Posted on June 21, 2011 by zafarrafiq

Important news for those buying a business out of “pre-pack” administration.

The Employment Appeal Tribunal (EAT) in Pressure Coolers v. Molloy & others has clarified that where the purchaser of such a business dismisses employees that transfer under the  Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) after the transfer then the purchaser itself, not the Government, is responsible for paying their basic unfair dismissal award and notice pay.

In this case, Mr. Molloy was employed by Maestro International Limited, which went into “pre-pack” administration so Pressure Coolers could acquire its business. He was made redundant shortly after his employment transferred to Pressure Coolers under the TUPE Regulations.

Part of the “rescue culture” that the 2006 re-enactment of TUPE was supposed to promote is to allow buyers of insolvent businesses (defined as those businesses that are subject to insolvency proceedings “with a view” to liquidating their assets) would not have to take on the employees of the troubled business via the TUPE automatic transfer mechanism, as they previously had had to.

However, in this case, the purpose of instituting the “pre-pack” administration was not with a view to liquidating Maestro’s assets.  Instead, it was an administration purely designed to sell the business as a going concern.

The “rescue” provisions of TUPE  (i.e. Regulation 8(7), which would have excluded TUPE altogether if the purpose had actually been the liquidation of assets but see recent EAT decision in OTG Ltd v Barke which states Rule 8(7) will never apply in administrations as the purpose of administration is not to liquidate the assets of the transferor) did not therefore apply and the employees transferred to the buyer under TUPE – meaning Mr. Molloy could bring a claim against Pressure Coolers.

Pressure Coolers tried to argue that liability for sums payable to an employee under “relevant statutory claims” (i.e. the basic unfair dismissal award and notice pay) did not pass to it, but, instead, should have been picked up by the Secretary of State under other provisions of TUPE 2006.

Pressure Coolers argued that these provisions, Regulation 8(1) – (6), meant that the Government should have picked up the tab for these departing employees because, by reference to the Employment Rights Act 1996, Regulations 8(1) –(6) provide that the Secretary of State will pay up when and if he or she is satisfied that the “employer” is insolvent.  Pressure Coolers said that, because Maestro was insolvent, the Government should therefore pay these dismissal costs.

Mrs. Justice Cox disagreed.  She said that, for regulations 8(1)-(6) of TUPE to apply, then the relevant liability must have arisen prior to the transfer. The employee had been dismissed by Pressure Coolers after the transfer and the company was, therefore, solely liable for the sums claimed.

This decision would appear to be a blow to the intent of the 2006 revisions to TUPE to promote a “rescue culture”.  Firms are going to be less likely to want to “rescue” failing businesses if they are likely to be saddled with the liabilities incurred in dismissing the employees of that business.

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TUPE-Always transfers liabilities in Administration

Posted on June 21, 2011 by zafarrafiq

The Transfer of Undertaking (Protection of Employment) Regulations 2006 (“TUPE 2006”) are designed to protect employees where a business (or part of it) is being sold or otherwise transferred to another business.

Regulations 4 and 7 of TUPE 2006 have the effect that employees assigned to the business “undertaking” being transferred are automatically transferred to become employees of the business acquiring this undertaking.

Regulation 8(7) of TUPE 2006, however, provides an exception to this in the case of insolvent businesses.  It provides that “where…the transferor is the subject of bankruptcy proceedings or any analogous insolvency proceedings which have been instituted with a view to liquidation of the assets of the “transferor”, Regulations 4 and 7 will not apply.

Accordingly, a Liquidator appointed to an insolvent company can sell all or part of the company business to a purchaser without the purchaser having as a matter of law to take on employees properly assigned to the insolvent business transferring to it.

Until very recently, it appeared that Regulation 8(7) might well also apply to sales by businesses in administration.

Previously, in Oakland v. Wellswood (Yorkshire) Limited, the Employment Appeal Tribunal held that Regulation 8(7) could apply to transfers of all or part of a business in administration, and that it depended on whether or not the Administrator was appointed with the intention in fact of simply liquidating the assets of the company.

This Judgment was controversial and created confusion.  Now, however, the EAT have reversed this decision in the recent case of OTG Limited v. Barke & Others.

In this case the EAT decided that Regulation 8(7) of TUPE 2006 can never apply to a transfer of a business in administration.  As a result, a purchaser acquiring a business in administration (or part of it) will be required to take on the employees assigned to that business undertaking transferring to them.

It should be noted, however, that even when Regulation 8(7) operates (that is, in liquidation) and employees do not automatically transfer to the purchaser, the business transfer should still technically be covered by the remainder of the Regulations in TUPE 2006 not excluded by Regulation 8(7).  As a result, the seller and purchaser will still be under their respective obligations to inform and consult with the representatives of all employees affected by the business transfer taking place.

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Validity of Administrators Appointment

Posted on June 21, 2011 by zafarrafiq

In the recent case of Minmar (929) Limited and Teejinder Paul Chohan v Freddy Khalatschi and Martin John Atkins [2011] EWHC 1159 (Ch), a director of Minmar applied to the High Court of Justice Chancery Division for an order setting aside the appointment of Administrators by the directors using the “out of court” route.  The application was opposed by the directors who had appointed the Administrators.  The Administrators adopted a neutral stance.

Minmar Background

Minmar was incorporated in January 2010 to operate a gambling business.  Minmar’s Articles of Association provided, amongst other things, that:

  • decisions of directors could be taken at directors’ meetings by majority, or in writing where unanimous;
  • directors had to be given notice of meetings (though not necessarily in writing); and
  • the quorum at a directors’ meeting was 1 if there was a sole director and 2 if there was more than 1 director appointed.

Events leading up to appointment

Towards the end of 2010, Minmar unsuccessfully attempted to purchase a number of gambling businesses out of administration.  These acquisitions ultimately failed due to lack of funding.  They were acquired by a competitor, Baleday.  Minmar had paid a substantial non-refundable deposit and remained the owner of the licences necessary to operate the targeted businesses.

Following on from the failed acquisitions, agreements were entered into which would later become relevant to the appointment of the Administrators.

A number of events took place on 16 March 2011.  The share capital in Minmar was transferred to the competitor company, Baleday.  Three new corporate directors were appointed to Minmar on the basis of a resolution passed by Baleday.  A Board Meeting was held and one party attended, representing one of the corporate entities appointed as a director of Minmar that day.  At the Board Meeting, a resolution was passed to place Minmar into administration.  The notice of appointment was lodged on 17 March 2011, and a copy was sent to Minmar’s solicitors by email around 4pm that day.  Also on that day, the Administrators agreed to sell the licences held by Minmar to Baleday.

Challenging the Administrators’ appointment

The validity of the appointment of Administrators was attacked on a number of grounds including:

  • the three new directors appointed to Minmar on 16 March 2011 were not validly appointed;
  • even if they were validly appointed, they did not form a majority, as there were three pre-existing directors of Minmar;
  • the pre-existing directors were not given notice of the Board Meeting so it was not validly convened;
  • the Board Meeting was not quorate;
  • the decision of the new directors was not in Minmar’s interests and was therefore a breach of fiduciary duties; and
  • no notice of the intention to appoint administrators was given to Minmar under paragraph 26 of Schedule B1 of the Insolvency Act 1986.

Defending the validity of the Administrators’ appointment

A number of arguments were put forward to support the validity of the appointment including:

  • one director out of six did not have standing to bring the application to challenge the appointment;
  • reference to paragraph 105 of Schedule B1 dealing with majority decisions of directors was a defence to the suggestion that the meeting was invalidly called and that there was no quorum; and
  • the obligation to give notice to parties including the company under paragraph 26(2) of Schedule B1 which only arises where there is an obligation under paragraph 26(1) to give notice to the floating charge holder.

The decision

The Court concluded that the Administrators’ appointment was invalid and ought to be set aside for the following reasons:

  • paragraph 105 of Schedule B1 does not validate the appointment of the Administrators.  In addition, no notice of the Board Meeting was given to the existing directors.  The ”meeting” which was held was therefore invalid and no quorum was present.  Paragraph 105 is designed to give force to a majority decision (as if it were unanimous) but it goes no further than that; and
  • no notice was given to Minmar as required by paragraph 26 of Schedule B1 and Insolvency Rule 2.20 (the Scottish equivalent being 2.13 of the Scottish Insolvency Rules).  The appropriate course in the case of a directors’ appointment is to give notice to the company regardless of whether there is a floating charge holder with power to appoint.

Lessons to learn

When contemplating a directors appointment, the company’s memorandum and articles need to be carefully reviewed to ensure all provisions are complied with, particularly where the Articles are extensive and onerous.  The current officers of the company should also be confirmed.

Notice should be given to the company in the case of a directors’ appointment whether or not there is also a floating charge holder to notify in order to avoid any challenge as to validity by a dissenting director.

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Uneven UK Recovery

Posted on January 24, 2011 by zafarrafiq

Recovery unevenly spread in UK, says Centre for Cities

Economic recovery will be “unevenly spread” across the country with some cities needing extra government help to create jobs, a study has suggested.

Research group Centre for Cities said places such as Hull, Doncaster and Northampton were now “bouncing back”.

But Sunderland, Liverpool, Birkenhead, Swansea and Newport might not feel the full benefits for some time.

Centre for Cities said areas more reliant on public sector jobs would have the most difficulties.

Financial support

Milton Keynes, Reading, Aberdeen, Leeds and Bristol were regarded as being better insulated from the effects of the government spending cuts, with the potential to create private sector jobs.

Hull, Doncaster and Northampton – some of the cities hardest hit by job losses – all saw falls of 1.2% in the number of people claiming Jobseeker’s Allowance in the past year. That was more than twice the UK average, the report said.

The study found that more than one in three jobs in private companies were provided in 11 cities – London, Birmingham, Bristol, Edinburgh, Glasgow, Leeds, Liverpool, Manchester, Newcastle, Nottingham and Sheffield.

However, the cities “vulnerable” to spending cuts would need extra financial support and a “realistic” local plan of action, the group said.

Employment balance

Centre for Cities chief executive Alexandra Jones said: “Buoyant cities like Leeds and Bristol, which have been fast-growing and have lots of private sector jobs, are best placed to lead the UK’s recovery.

“It’s time these places had new financial freedoms such as full control over the local business rate, and new powers to raise money. They could also benefit from having London-style mayors.

“During 2011, the UK cities most dependent on the public sector, and which have seen slower economic growth over the last decade, will find it more difficult to rebalance towards the private sector.

“These cities will need realistic plans of action to ride out the spending cuts and create jobs – but they will also need additional financial support from central government.

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Corporate Insolvencies Set to rise in 2011

Posted on January 24, 2011 by zafarrafiq

More UK firms are experiencing serious financial difficulties than at any time in almost two years, research suggests.

Almost 148,000 firms had serious problems in the final three months of last year, the first year-on-year rise in the past seven quarters, said insolvency specialist Begbies Traynor.

Government cuts were exacerbating the problem, it said.

The report forecast a 10% rise in insolvencies in 2011, which would lead to 23,500 firms being affected.

Compared with the July to September quarter, there was an increase of 20% in the number of companies experiencing “significant” or “critical” financial problems.

There were “real signs of distress” among UK firms, it said.

Those with critical problems owe more than £52.7bn to creditors and suppliers, Begbies said. This is less than the £57.5bn owed during the previous quarter.

There were also increasing signs that creditors are losing patience with their debtors, the firm added.

Corporate failures’

Government spending cuts explained in part the increase in financial distress being felt by UK companies, the report said.

The IT, business services and construction sectors in particular were feeling the pinch, it found.

“The figures demonstrate that the sectors most reliant on government spending are already feeling the impact of public sector cuts,” said Ric Traynor, chairman of Begbies Traynor.

“With the full implementation of budget cuts only starting to show through in these figures, public sector-exposed sectors are likely to face significant increases in the level of corporate failures over the course of 2011.”

He added that retail firms would come under increased pressure as disposable incomes were hit by higher inflation, tax rises and job cuts.

Sectors exposed to discretionary spending would, therefore, see “an increase in business failures”, he added.

Figures released last week showed that inflation, as measured by the Consumer Price Index, rose to 3.7% in December from 3.3% the previous month.

The Retail Price Index, which includes mortgage interest payments, rose to 4.8% from 4.7%.

Also last week, figures showed that UK unemployment rose by 49,000 to almost 2.5 million in the three months to the end of November.

And while the most recent official figures showed that the economy grew by 0.7% between July and September last year, many analysts expect the figures for the final quarter of 2010 to show a slowdown in growth.

Across all sectors, increasing financial distress was likely to lead to about 23,500 formal insolvencies in 2011, a 10% increase on the 21,500 firms that went insolvent last year, Begbies forecast.

In 2010 there were 15% fewer insolvencies that in 2009.

“For smaller businesses, we are entering the darkest hour before the dawn, as they face the dual challenges of weak domestic demand and greater pressure from larger competitors and business customers looking to preserve their own profitability,” said Mr Traynor.

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