Pre-pack sales and Phoenix companies

When you are going through the process of deciding whether to place your company into Liquidation, Administration or Administrative Receivership, the best outcome for all stakeholders concerned may be via a sale back to the existing directors in a newly formed company.

The sale of the insolvent business and the purchase of the business by the same directors though a new company or “newco” is usually known as a pre-pack sale.

Over the last few years there have been a number of court cases regarding pre-pack sales whereby the actual sale transaction has been confirmed by the courts.  So in the main when a pre-pack sale has been agreed they can usually be completed without any undue delay.

There are a couple of areas that you need to be aware of as a director when purchasing an insolvent business.

1.    As a director you are banned from using the same or similar company name as the insolvent company, whether this is a trading name or actual registered company name, unless you have satisfied one of the three rules relating to this,type of transaction, summarised as follows:-
a.    When you acquire the business from the Liquidator or Administrator that you give notice in the prescribed form to all creditors of the insolvent company and publish in the London Gazette (if company registered in English and Wales) that you intend to, or continue to, act as a director of the new company.
b.    That you get permission of the court to use the same or similar name.
c.    The continuing company with the prohibited name has been known by that name for at least the 12 months before the Liquidation and has not been dormant in that time.

Further guidance has been issued by the Insolvency Service click here for further details.

Directors' duties as laid down by the Companies Act 2006

The Companies Act 2006 brought into place the codification of a number of directors’ duties, a summary of the duties are listed below.

(1)    Duty to act within powers - A director of a company must act in accordance with the company's constitution, and only exercise powers for the purposes for which they are conferred

(2)    Duty to promote the success of the company - A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to:

(a)    the likely consequences of any decision in the long term,
(b)    the interests of the company's employees,
(c)    the need to foster the company's business relationships with suppliers, customers and others,
(d)    the impact of the company's operations on the community and the environment,
(e)    the desirability of the company maintaining a reputation for high standards of business conduct, and
(f)    the need to act fairly as between members of the company.

(3)    Duty to exercise independent judgment

(4)    Duty to exercise reasonable care, skill and diligence - a director of a company must exercise reasonable care, skill and diligence. This means the care, skill and diligence that would be exercised by a reasonably diligent person with the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and the general knowledge, skill and experience that the director has.

(5)    Duty to avoid conflicts of interest - a director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company. This applies in particular to the exploitation of any property, information or opportunity (and it is immaterial whether the company could take advantage of the property, information or opportunity).

(6)    Duty not to accept benefits from third parties - a director of a company must not accept a benefit from a third party conferred by reason of being a director, or doing (or not doing) anything as director.

(7)    Duty to declare interest in proposed transaction or arrangement - if a director of a company is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, he must declare the nature and extent of that interest to the other directors. The declaration may (but need not) be made at a meeting of the directors, or by notice to the directors in accordance with (i) section 184 (notice in writing), or (ii) section 185 (general notice).

Ordinarily, the duties of directors are owed primarily to the shareholders of the company. However, recent case law has identified where that duty shifts to be primarily to the creditors of the company. Where it is probable that the company will enter insolvency, whether on the balance sheet or cash flow test, the directors will then primarily owe their duties to the creditors.

It is clear from the codification of directors' duties that as a director you have a higher standard to aim towards. Failure to act appropriately may result in actions being brought against you whether this is a Director's Disqualification or any other civil remedy.  Contact us now for advice.

Wrongful trading

Wrongful trading can be claimed when you as a director, prior to the company entering insolvent Liquidation, should have known or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent Liquidation.

As a director, you have a number of duties, as discussed in Director's Duties, which are taken into account to determine whether you have acted appropriately as a director in your dealings and that you have taken every possible step to minimise any loss to creditors.

The consequence of being found guilty of wrongful trading is for you as a director to make a contribution to the company as the court thinks proper. This could be for the total loss to creditors including interest in addition to all the costs of the proceedings.

At the first sign of any financial trouble you should get professional advice, so that you can minimise any potential losses that maybe encountered.

Directors Disqualification

If you are subject to a director’s disqualification order or undertaking, you are banned from acting as a director of a limited company and from being involved in the formation, promotion or management of any company, without permission from the court.  Point of reference; if you are an undischarged bankrupt you are automatically disqualified as a director unless you have permission from the court.

The disqualification of directors is usually made on the application of the Secretary of State for the Department for Business and Trade (“DBT”). This can be whilst a company is trading for being in breach of the relevant legislation in the main Companies Act 2006 and if you are an unfit director of a company that has gone into insolvent Liquidation, Administration or Administrative Receivership.

For every company that goes into insolvent Liquidation and/or Administration, the Insolvency Practitioner dealing with the case has to make a report to the DBT following the guidelines detailed in Statement of Insolvency Practice 2. It is then up to the DBT to decide whether any further investigation is undertaken in order to initiate proceedings.

Dealings with HMRC

There are a number of key areas that have been identified which can be of a personal risk to Directors.

Below are examples of what potential actions can be brought against you. It is clear that if you take advice early, we can help you to avoid any of these actions being brought against you.

Security Bond and Personal Liability for VAT

HMRC can make a requirement for a security bond to be put in place where you have in your previous or current business: Failed to comply with your VAT obligations, your business is run by disqualified directors or by undischarged bankrupts, you have previously been prosecuted or penalised for a VAT offence or other persons concerned in the current registration of your business are connected with past failures to pay VAT. This is especially to be considered when a company has entered into a pre-pack arrangement or phoenix company which has taken over the operations of an insolvent company whereby the same management structure remains in place.

If you make quarterly returns, and HMRC issue a Notice of Requirement for security in accordance with VAT Notice 700/52 then you will be required to give a security deposit based on the VAT that is estimated your company will pay over six months and if you make monthly returns this will be to cover four months VAT.

It is a criminal offence to trade without providing the security once a Notice of Requirement has been issued whereby you may be prosecuted for failure. In addition you may be liable to a penalty of up to £5,000 for each taxable supply.  This is against the directors personally as well as the company. You will not be covered by protection of limited liability that a company offers should this be required.

Personal Liability for NIC

At any time during the operation of a company, HMRC have sufficient powers to enable the issuing of a Personal Liability Notice for any unpaid National Insurance Contributions (NIC).

Personal Liability Notice may be issued when there has been an underpayment of contributions and HMRC consider that failure is attributable to the fraud or neglect of the directors.  This can also be the case when there may have been a Pre-Pack sale or Phoenix company taking over the business with the same management structure in place as the previous failed company.

In order to protect the directors of genuinely failed companies and those regarded to have taken all reasonable steps to minimise the debt to HMRC, a Personal Liability Notice should only be issued where HMRC believes that the failure to pay the contributions due was attributable to fraud or where there is history of failure to pay NIC due whilst making significant and/or regular payments; to other creditors, connected persons or companies, or where directors continue to take salaries

Disqualification

In considering conduct of directors that may need to be subject to a report to the DBT, one of the key areas of importance to identify is whether there has been any non-payment of Crown debts to finance trading. If the DBT believe that this has been the case then they can initiate proceedings for your disqualification as a director.