A CREDITORS’ GUIDE TO INSOLVENCY
or . . . How to detect irregular proceedings - and what to do about it! |
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Introduction The Anti-Phoenix Campaign:
Aims and Objectives of the Anti-Phoenix campaign The overriding objective is to limit the ability of fraudulent practice by company directors (including shadow directors) and IP’s to deprive creditors of the maximum dividend in an insolvency. YOU can make a difference, by a) reporting any apparent corner-cutting or wrong-doing on the part of directors or the IP in any given Insolvency; and b) NOT wasting your Proxies by binning them or, even worse, sending them to the Chairman of the Meeting of Creditors. If you don’t have your own Professional Adviser (P-A), send them to us and we will see that you are fully represented.
Within the Print Trade we are fed up with the ease with which some companies shed their liabilities and re-emerge, virtually unscathed, to continue their trading activities. Often enough, some of these characters repeat the process within a relatively short period, two years being not untypical. Some of the transactions that take place appear so blatant that it is obvious that the perpetrators have been advised as to how to minimise the loss to them in an insolvency and from this it becomes plain that some insolvency practitioners are driving a coach and horses through both the relevant legislation and their own Insolvency Practice Rules. The newly created, or ‘Phoenix’ company has several advantages over its competition. To begin with it may have acquired its plant (and sometimes a healthy material stock) at a very low price. This allows it to slash margins to below that which others can manage. Quite often it has the ‘Goodwill’ (including the sales ledger) to help it get off the ground. Some of its suppliers will have taken heavy losses and their other customers end up paying for them through higher prices, further trimming their own margins. Then again, the directors of the new company, having discovered how easy it is to avoid their creditors, may set out on a deliberate policy to repeat the exercise as often as is practical.
Essentially it is our fault! There is plenty of legislation (some say too much) and Insolvency Practitioners (IPs) are governed by a very prescriptive (and proscriptive) code of conduct, the Statements of Insolvency Practice Rules (SIPs). Most if not all of the wrong-doing that occurs breaks one or more law and, probably, a number of Rules. Two things allow them to get away with their activities. Firstly, not enough of us know enough about Insolvency Law or SIPs to be able to pin down malpractice. Many of us do get very annoyed when we have obviously been stung but knowing what to do and how to do it - that’s another matter. Secondly, few of us can spare the time to attend creditors’ meetings, let alone sit on creditors’ committees, so the savvy IP can blind us with ignorance (sic), giving us so little information that we don’t know what questions should be asked.
In November 2001, assisted by a major weekly printing magazine, we launched the ‘Phoenix Posse’. The idea was to get creditors in a particular liquidation to pool their proxies and to try and snatch the Liquidation from an IP we were concerned about and to win it for our own IP. As a second option, in a compulsory liquidation, we would request the Official Receiver to appoint our own IP as liquidator to ensure that the directors were called to account, provided that we had enough Proxies. We had some limited success but the main problems were the high time overhead it imposed upon our debt recovery team and the reluctance to be bothered on the part of creditors - unless they could see a guaranteed return for themselves - impossible to provide, given the uncertainties of insolvency proceedings!
It soon became apparent that the best long-term plan of attack was to create an environment that was just too uncomfortable for IPs who did not follow their own rules and/or the Insolvency Laws. Originally we thought that it might be necessary to tighten up the SIPs - given that most of the wrong-doing was only possible because of lax reporting. However, there are adequate regulations and laws and the lack of enforcement would appear due mainly to a lack of information flowing from the field - i.e. aggrieved creditors, ICSM and the BPIF, to the Recognised Statutory Bodies (RSBs) who licence the individual insolvency practitioner; the Insolvency Practices Council (IPC), the Association of Business Recovery Professionals (R3), which publishes Best Practice guidance for its members (R3), and the Insolvency Service itself. More recently the Inland Revenue Insolvency Compliance Unit and HM Customs and Excise have registered their concern in this area. The problem is widespread and goes well beyond our industry. If we can put in place the means of dealing with errant IPs and Directors within the Print Trade, the tactics will most certainly be adopted elsewhere. Ultimately we hope to drive the unscrupulous out of business, thus ensuring that companies only fail when unavoidable and not as a soft option to paying their bills!
This Guide is intended only to help you identify potentially irregular activities, not to give you a comprehensive understanding of Insolvency Law or IPRs. If you identify apparent wrong-doing, use the form provided on our website (click the “Wrong-Doer Alert“ button above) to notify us. We will screen all incoming e-mails to weed out any misconceptions (and personal vendettas!) and forward the accepted ones to the IPs’ licensing body and to the appropriate section within the Insolvency Agency and other interested parties. ICSM will provide a focus for your proxies, if you do not already have a preferred IP to represent you. Please DO NOT send them to the Chairman of the meeting, he or she will be a director of the failing company, and hardly unbiased. We will get our own nominee to represent you and to provide a fair and full report of the outcome. If we manage to win the liquidation, you can be assured that we will rectify any untoward happenings prior to the meeting.
Yes, there is a result to be gained. By reporting apparent irregularities to the appropriate RSB we compel them to investigate the complaint. Whilst acknowledging that the thoroughness of the ‘investigation’ can vary, none of them can ignore repeated incidences of complaint and, by sharing the complaint with the Insolvency Service and other bodies, we put extra pressure on them to get to the bottom of each complaint. In addition, where multiple partner firms are involved, we will notify the managing partner of the complaint, so that he/she is aware that a partner in that firm might be putting their reputation in jeopardy. Undoubtedly some knuckles will be rapped and ears bent at a very local level, in addition to any remonstrances from higher planes. Given enough adverse publicity an individual IP could well lose his/her licence to practice - and therefore a significant part of his/her income!
This initiative has been developed in co-operation with the BPIF and with the active support of (very) senior figures in the Insolvency World. All the reputable IPs in the country are fed up to the back teeth with the members of their profession who continue to flout the Law and their own SIPs with impunity. We are writing to the RSBs requesting their endorsement and those who have replied to date are shown at the end of this guide, as are those of the IP firms who support the initiative. We should say that the fact that a given firm is not named does not mean that they oppose our actions - probably only that we have not got around to asking them for their support! Tell them to contact us! This guide has been submitted to the Insolvency Agency for their Imprimatur.
Read on, and find out how YOU can make a difference when it comes to nailing the Unscrupulous, be they rogue IP or rogue Company Director! Remember: All we are asking is that you use your Proxies wisely and that you notify us of any circumstances surrounding a company failure that appear to break the law as summarised below. What is Insolvency? Types of Insolvency There are two categories of Insolvency, those affecting personal individuals, such as sole traders and (most) partners in a Partnership (see Limited Liability Partnerships below) and those affecting Corporate individuals, i.e. Limited Companies and PLCs. There are sub-sections, including Companies Limited by Guarantee and Registered Charities but we will discard these as being - if not above reproach, then certainly rare enough to escape our scrutiny! Starting with the smallest (usually!).
Partnerships - although a collection of Individuals - do have one extra option, they can go into Partnership Administration. Basically this means that no nasty creditors can make them bankrupt while they try to get their chestnuts out of the fire! It is a Moratorium during which they can try to restructure their finances and come to a settlement with their creditors. Alternatively they can opt for a Partnership Voluntary Arrangement (PVA) which is very similar in effect to an IVA. Winding up an insolvent partnership involves making the individual partners bankrupt, because they are ‘jointly and severally’ liable for the partnership debts. This means that you can go after any individual partner for all the money that you are owed and they cannot insist on only paying ‘their share’. Limited Liability Partnerships - suffix LLP - are similar to Corporate Individuals as far as Insolvency matters are concerned - you cannot touch those partners personally who have limited liability. Probably the biggest LLP in the world is KPMG . . . Corporate ‘Individuals’ are private or public companies with limited liability on the part of their directors and shareholders (sometimes referred to in legal jargon as ‘members’). Corporate individuals are the ones most likely to bend, knot or even break the rules when it comes to insolvency. They have five possible options as far as Acts of Insolvency are concerned.
Voluntary Arrangements: The word ‘Voluntary’ is something of a misnomer, since it implies choice. Usually the choice you are presented with is ‘accept what we offer - or get nothing’. The Proposal usually demonstrates quite clearly that the fees involved in liquidation or bankruptcy are higher than for the VA and also the realisable value of any assets is written down severely because of the ‘forced sale’ factor. To help you evaluate the VA, understand that the subject has to be able to show substantial reductions in costs if they are going to be able to repay past indebtedness out of future income, whilst paying current suppliers. Note that it is a pre-requisite of any VA that the subject does not default on payment within Terms for current goods. You should ask yourself ‘What has changed’ and ‘are those changes enough to create the extra cashflow needed to make the VA work?’. IVAs sometimes work, if only because the subject is able to introduce outside capital to help meet the commitment. PVAs have the same prospects, although diluted by the number of partners involved. (No, the number of prospective fathers-in-law does not help the equation!) CVAs have a very poor success rate (we know of only one in the last 12 months that is still in with a chance) and the reasons for this, we believe, are two-fold. Firstly, there is the ‘double cherry’ effect described above, where the IP sees a revenue opportunity over and above a straightforward CVL, and secondly, however good their intentions, many directors do not seem capable of achieving the economies necessary to make the thing work. Sometimes the IP supervising the CVA will apply to the Creditors for an amendment to the dividend. If granted (and it most often is a significant reduction) the CVA is still regarded as a success, at least by the IP and the directors concerned!
The purpose of Administration is to maximise the chances of the operation surviving, thus protecting jobs (Ownership might change whilst achieving this) or of maximising the value of the Assets, thus protecting Creditors. Unfortunately in too many cases it is the Directors who are protected and both employees and creditors lose out. It is not uncommon for the assets to be sold in Administration and the creditors to be kept in the dark until post-event. Liquidation: The end of the road. By the time the IP and preferential creditors have been paid out there is rarely anything left for the unsecured creditors. Because we believe that the assets are sometimes disposed of at less than the ‘best price’ we are sure that there is mileage to be gained in reporting any apparent irregularities to the appropriate authorities. Whilst this might not affect a given Insolvency, if we can stop individual IPs breaking the rules in future, eventually we will be able to highlight sharp practice and advise those regulatory bodies that can remove licenses under which IPs earn a living!
The Insolvency Practitioner (IP) in any function (except, rarely, Administrative Receiver - see next paragraph), has Draconian powers. He (she) has absolute control over the subject company for the duration and can trade the company, dispose of its assets or simply liquidate it according to his ‘best judgment’. The overriding factors he must take into account are the interests of the Creditors. The DTI also have made it known that they consider that the protection of employment - wherever possible - to be a ‘desirable outcome’. Any thinking person can see the potential conflicts in that! An Administrative Receiver is appointed by the Charge-holder (usually a bank or Factoring Company) to realise the company’s assets that are subject to the Charge, to pay off the lender’s debt from the company. Just occasionally the charge is limited to specific assets, such as major capital equipment, and this needs to be established at the outset. (A Fixed Charge or Law of Property Receiver would be appointed to realise or recover specific assets. This person does NOT have to be an IP and does NOT have to call a meeting of creditors.) Obviously these powers can constitute a charter for incompetence, since the IP acting as an Administrator is not liable for any debts incurred during the Administration and therefore can make mistakes almost with impunity. Unfortunately, because it is the IP who is responsible for investigating the directors of a failing company - and he is the only one who can bring an action for fraudulent trading or trigger an action on the part of the Secretary of State for disqualification - it is also a charter for dishonesty at all levels of Insolvency, should the IP wish to favour the directors over other considerations. The IP who wishes to do so can ‘whitewash’ the directors - who may themselves have been culpable of anything from incompetence to criminal activity - allowing them not only to escape the consequences of their failings but also to re-commence trading, having shed their responsibilities to their Creditors. This may seem an appalling state of affairs but it must be stated that the IP himself has a strict set of Professional Rules to follow and by far and away the majority of IPs are honest and hard-working. Also that more than adequate legislation exists already to control company failure. The reason that so many ‘phoney Phoenixes’ arise and other liquidations are conducted improperly is that we, the Creditors, are too apathetic regarding losses through insolvency. Too many creditors mutter imprecations when they get a letter announcing a Meeting of Creditors and then bin it. Some take the trouble to fill in their Proxy Forms but appoint the Chairmen of the Meeting - invariably a Director of the failing company - thus assisting the IP who is so inclined to apply the whitewash brush. Very few of us have had time to study the relevant legislation and so are unaware of what we can do in a given situation.
We have been asked to point out that an IP may fail to fulfil any specific part of his duties through lack of funding (i.e. inadequate assets within the failed company to cover the costs). No-one can be expected to work for nothing (although some IPs do so on a pro bono basis in individual cases) and you may need to offer to guarantee the IP’s costs if you want a particular course of action such as an investigation into past activities of the company or its directors. There are three main ways that an IP can fail in his duty. They are:
Initially any complaint about the conduct of a liquidation should be made to the IP concerned. He should answer your complaint within 14 days as suggested above. If you use the Notification Form included with this Guide (where appropriate) and copy ICSM we will monitor the situation and, depending upon the seriousness of the complaint and the relevance of the response, will circulate it to the several bodies that have asked us for such data. Individual concerns may not have a great impact but the fact that we now have this reporting structure in place and that the various bodies involved are committed to dealing with defaulting debtors and IP’s means that we can begin to make a difference. The next section of the Guide deals with the sections of the 1986 Act that apply to Directors’ conduct and the things they should NOT do. Note that it applies to Shadow Directors as well, a Shadow Director being anyone who is involved in the running of the Company, regardless of their actual job title. If you believe that any of the following laws have been broken, you must report it to the IP - and make sure that you copy ICSM with your statement! The fact that you are using what we expect will soon become a recognised vehicle for your complaint is in itself likely to encourage the IP to respond promptly. He will come to know that that complaint has been copied to a number of interested parties, including his own Licensing Authority.
A shadow director is any person employed by the company in a full or part-time capacity who, by virtue of their actions, is participating in the running of the company. Typical Shadow Director involvement would be negotiating on behalf of the company, being a signatory on the Bank Account or participating in decision-making at Board Meetings. Offences already defined within the Insolvency Act 1986. Sections 206 to 219 deal with Malpractice before and during Liquidation and are aimed at company officers, i.e. directors, the company secretary and anyone deemed to be acting as a shadow director. Note that these sections do not define the activities of the IP (s) involved but if he/she is trying to protect the company officers from the consequences of their misconduct, then any IP who knowingly conceals any offence under these sections of the Act is him/herself an accessory to the offence and could suffer the same penalties if his/her complicity can be established. The penalties could be a Fine, Imprisonment, or both! If you believe you have identified a breach of the Law you should notify the IP in writing, (copying us!) and ask him to investigate. This puts him on the spot if he is trying to whitewash the directors’ actions. If he fails to respond in 14 days, chase him up. If he still does not answer, let us know and we will invoke the complaints procedure with his RSB and others.
Fraudulent disposal of any asset of the company with a value in excess of £120 (for the time being) includes physically hiding the item or the fact of its existence or disposing of it in any way other than for its full market value or a value deemed to be acceptable in the process of liquidation. Several constraints apply but the rules apply to the period of 12 months immediately preceding the commencement of the winding up. The offences are split into fraudulent disposal per se and Transactions in fraud of Creditors. Significantly, the latter category can include actions up to FIVE years before the commencement of the winding up! Distortion of Fact includes almost anything to do with interfering with record-keeping within the company. Among the potential offences are:
The 12 month rule applies to these offences, so you can back-track and bring past sins to light - hopefully! Section 212 of the Act provides for Summary Remedy against delinquent directors, liquidators, etc. An action under section 212: An Application to the Court by the Official Receiver, the Liquidator or any creditor or contributory (shareholder) can cause the Court to examine the alleged defaulter and to apply penalties as below. The Court may order the delinquent(s) to ‘repay, restore or account for’ the money or property or any part of it, with interest at any rate at which the Court thinks just; or to contribute to the company’s assets any sum by way of compensation that the Court thinks just. Wow!
Any officer of the company who has managed, permitted or condoned the company’s fraudulent trading is subject to the same sanctions Wrongful trading - continuing to trade when it was obviously impossible for the company to trade out of a negative situation - attracts the same penalties but the onus of proof in both cases is on the accuser. This is a more complex situation and charges of fraudulent or wrongful trading would be brought by the Official Receiver or the Liquidator.
Section 216 sets basic ground rules for the re-use of a company name. Importantly, trading styles are included within the rules but the rules only apply if an officer of the liquidating company is involved in the new company! (Watch out for Shadow Directors.) The most common way that this section is abused is as follows; Sludge Print Ltd goes into liquidation and Mr Sludge (MD) buys a shelf company, e.g. Wiggots 2003 Ltd, and resumes operations as ‘Wiggots 2003 Ltd Trading As Sludge Print’. There is a close resemblance between the logos and the proprietor’s name appears in very small print (if at all) on the bottom of the letterhead. Because Mr Sludge is a director of Wiggots 2003 Ltd he is breaking the law by trading as Sludge Print. If Mrs Sludge was the director, Mr Sludge could still be in trouble if he had anything to do with running the new company, as a Shadow Director. The interesting thing is that a person who breaches section 216 can be held personally liable for the debts incurred by the new company! Section 217 of the Act deals with the prosecution of offenders under section 216. It makes good reading! Section 218 gives details of the procedures for prosecuting delinquent officers and members (shareholders!) and a prosecution can be invoked by ‘a person interested in the winding up’. The legal definition of ‘interested’ comes close to ‘involved’ i.e. as a creditor, shareholder, or employee. It could mean anyone with relevant information about the conduct of the company before or during the winding up. Section 219 imposes a duty on all company officers and agents of the company (Bankers, Solicitors, Auditors, Business Advisors, etc.) to co-operate with the Court in the execution of prosecutions under Section 218.
We are tackling the problem from two directions, namely:
Company X and Company Y had common directors. At a given date, company Y wrote to all its customers and to a few chosen suppliers, stating that the two companies were to merge and that all future business would be placed through company Y. However, company X did not cease trading and did continue purchasing from other suppliers. However, its sales were disappointing and, even though it factored its debts, it was unable to keep trading. Company Y, however, flourished! Y? because purchases made through company X and some work done by company X was invoiced by company Y. With nil production costs, no wonder they thrived! Another case involved company A who could see the inevitable liquidation looming. They wrote to all their customers (funny how the suppliers never get included!) and said ‘Hey Chaps, We are changing our Name! We are no longer Wizzo Print Press Ltd - now we are WP Press Ltd and we have new administrative offices in Rochester. All your orders AND PAYMENTS should be sent there. We are continuing to print from our existing premises.’ In fact, WP Press Ltd was a new company and much of the money intended for Wizzo Print Press Ltd ended up in the bank account of WP Press Ltd. However and unfortunately for them, ICSM tipped off the liquidators, Moore Stephens, who ‘recruited’ one of the directors of Wizzo Print Press Ltd to collect the sales ledger of Wizzo Print Press Ltd (in Liquidation). The percentage of the ledger collected was extremely high! We can win! (Please note: The names ‘Wizzo Print’ and ‘WP Press’ are entirely fictitious but Moore Stephens is real!) A current case is that of Printers in Surrey. ICSM having commenced liquidation proceedings against them on behalf of several creditors, they were approached by a firm of ‘Ambulance Chasers’ (NOT IP’s) who suggested that they do a ‘Corporate Transfer’ by setting up a new company and transferring all the assets of the dying company into the new company. The Ambulance Chasers either were totally unaware of the provisions of the Insolvency Act 1986 or were sufficiently inflated in their own esteem as to assume that the laws did not apply to them! With the help of KPMG the Official Receiver was persuaded to revisit his interview with the directors of the failed company and, whilst the outcome is still to be determined, it seems highly likely that some significant additional assets will be available to the creditors once the dust has settled. Subsequent further information provided to the OR has resulted in the local Insolvency Examiner passing the case to Head Office in London ‘because of increasing complexity’! The case of RB Cook Ltd (trading as Serigraphics) has produced some headlines and there are unanswered questions about the liquidation that have been passed to the relevant authorities. Another case that has hit the headlines is the failure of The Gordon Press Ltd and the subsequent name-changes, which would appear to represent a Prima Facie violation of s212 of the Act. Note that we do not expect to be able to investigate any of these situations ourselves. We do not have the resource or the authority to do so, but we do have access to the people whose job it is to stop these abuses and, by collating and disseminating your information to the right locations, together we can make a real difference.
Sections 206 to 219 of the Insolvency Act 1986 have plenty of teeth, but if they are kept in a jar by the bed, they won't achieve much! We need as a Trade to do three things. Firstly, we must overcome the overwhelming apathy (however much linked with anger) which summarises our collective reaction when faced with a liquidation. Both ICSM and BPIF understand that you don't want to ‘throw good money after bad’ or waste time attending a creditors’ meeting at which you probably feel you can make no difference. Much of the malpractice and fraud today succeeds only because of this attitude! We intend to make it easy for you to ensure that you get the best result possible from a given liquidation, but we do require some limited input from you. Whenever you receive Notice of a Meeting of Creditors, fill in the top and bottom parts of the Proxy Form (leaving the name of your Proxy blank) and complete the Proof of Debt form. Send the originals to ICSM (or your own Nominee if you have one) and they will ensure that you are represented at the meeting. Given enough proxies, ICSM’s representative may be able to ‘grab’ the liquidation, making absolutely certain that all stones are turned to maximise benefit to the creditors. If you know of (or suspect) any specific fraudulence in respect of the liquidation, complete our Phoenix Report form and send that in with your proxy forms. (The Phoenix Report form can be downloaded in Adobe PDF format by clicking here. If you do not have the Adobe Reader utility, you can download that utility free of charge by clicking the Adobe button above.) Secondly, we must encourage a policy of Isolation of individuals who have previously cost us dear. At present the ‘Phoney Phoenix’ is encouraged by the willingness of individual suppliers to provide the materials they need to repeat their offences (as many of them do).
Thirdly, we must engender an ethos where ‘whistle-blowing’ is praised rather than condemned. ICSM run a unique database which all ICSM members can access and it contains adverse information (about 750,000 records) of poor payment records for customers of and within the Trade. If you have a bad experience, let ICSM know, even if it is only a case of putting a significant account on STOP. Your input might save another member problems, as their input might help you. When you are offered new business, check them out. It may be because they are in trouble elsewhere. The Insolvency Agency enforcement office and their Monitoring section in Birmingham; and BPIF, have access to all this data and in addition the BPIF arrange forums covering all aspects of Credit Control. If there is one near you, attend! You will benefit perhaps by technical know-how but definitely by seeing that your problems are not unique and are resolvable. This Guide has been prepared with the active support of top-level legal and accountancy firms and we appreciate their input. Neither they nor we can accept any responsibility for any interpretation placed upon all or any part of this documentation in a specific situation and we advise most strongly that you consult an appropriately qualified authority before committing yourselves to an action involving the issues discussed within this Guide. We are seeking a sea-change in attitude. Our problems are solvable - with your help! Andrew M Allies, MICM Debt Recovery Manager Information & Credit Search Management Limited
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