Action by Insolvency Practitioners against company Directors

The Insolvency Act contains wide ranging powers to enable Insolvency Practitioners (“IPs”) to take action to recover corporate debts from Directors (including shadow and “de facto” Directors), personally. The most common reasons for launching such an action include:

1. The making of payments in preference to other creditors;
2. Continuing to trade when the company was insolvent and failure inevitable;
3. Recovery of dividends voted shortly before the company went into formal insolvency;
4. Allegations of misfeasance against Directors or;
5. Using a prohibited name for the new company

It is also becoming increasingly common for HMRC to support the appointment of an IP to their choice, removing the IP appointed by the Directors/shareholders or even other creditors. In such a case, the IP will seek to recover monies for the creditors, which will be largely Crown   debts:  PAYE, VAT, Corporation Tax, etc, from the personal assets of the Directors. This could include the forced sale of the family home.

In extreme cases, action can be taken under the Proceeds of Crime Act 2002, where an individual is found guilty of offences under the Insolvency Act. The financial consequences of such an action can be devastating and any such action must be vigorously defended from day one.

If you are subject of such an action, it is imperative that early legal advice is sought in order to defend the action, where possible, and minimize the disruption to your life. If Crown debts are included in the claim, the sum claimed should be scrutinized as often as estimates and assumptions are used when calculating the claim, which may be far in excess of the true sum due.

Recovery of Unpaid PAYE/NIC from Directors

 In cases where the PAYE and/or NIC deducted from a Directors pay has not been paid over to HMRC due to the formal insolvency of the company, HMRC can take action to recover the sums due from the Director personally. Determinations can be raised which will require payment of the sums believed by HMRC to be due within 30 days.

HMRC will usually contact the Director before raising such a determination and it is at that point that advice should be sought in order to check the validity of the claim and the quantum being sought.

Director Disqualification Proceedings

 One of the consequences when a company becomes insolvent is action being taken against its Directors by an IP. This can be triggered by direct action by an IP against a Director such as misfeasance proceedings or wrongful trading proceedings, as detailed above, or action by the Secretary of State following receipt of an adverse report by the company’s IP relating to the conduct of Directors prior to the company entering formal insolvency.

Director Disqualification Proceedings have to demonstrate “unfit conduct”. Such conduct may be as a consequence of one or more of the following actions:

1. Continuing to trade to the detriment of creditors at a time when the company was insolvent;
2. Failing to keep proper accounting records;
3. Failure to submit tax returns or meet Crown duties when due (including PAYE, VAT, CT, etc);
4. Excessive salaries or drawing when the company was insolvent;
5. Writing company cheques knowing they will be dishonoured;
6. The new company using a similar or prohibited name, or;
7. Failing to co-operate with liquidator or administrator of the company.

The Secretary of State, through the Insolvency Service, can take action to disqualify the former Directors (including shadow and “de facto” Directors) within 2 years of the appointment of an IP. This action is taken with the aim of preventing a Director from an insolvent company from becoming a Directors of any future companies for a period between 2 and 15 years.

The Insolvency Service will look at each former Director individually, so it is essential that all directors seek advice should such enquiries be commenced by the Insolvency Service. The issue of Director Disqualification can be particularly disruptive to the future trading prospects of professionals who are members of professional bodies or institutes, as the rules of those bodies may mean that the individual is unable to remain a member, which will severely restricts future earning potential.

Michael Hogan and his team, supported by Liz Coleman – ex HMRC Inspector-, are well placed to provide advice on all the above issues. They have a reputation of providing swift, pragmatic solutions to such issues and can be contacted on the numbers above for a free initial consultation.