16 legal focus


What (or who) seems to be the problem, officer? – directors at risk in the twilight zone


Following the administration of BHS in April 2016 and confirmation of the Insolvency Service’s further inquiry into its demise, Mike Pavitt, head of corporate restructuring & insolvency at Paris Smith LLP, considers what lessons we can all draw from the impending scrutiny of the former directors


During almost 20 years in or around the insolvency industry I have heard nearly every excuse imaginable as to why businesses fail, and why no fault should attach to those managing those businesses. The difference normally lies in whether decision-makers are able to produce contemporaneous, documentary evidence which demonstrates reasonableness of their decision- making over time.


I do not know how much genuine legal scrutiny will fall upon those managing BHS before its demise, but I imagine it will be significant and expensive.


Of course, not every former director of every failed company will be scrutinised to such a degree. Some businesses will be dissolved quietly, hopefully owing no significant debt, but most will enter an insolvency procedure of some kind at some point, and it is the duty of every insolvency practitioner (IP) appointed to investigate directors’ conduct preceding an insolvency event. There is a risk in every case that one or more investigations and/or court proceedings could follow, based on such allegations as wrongful trading, preferences or undervalue transactions.


Here are my top three survival tips to safeguard against these risks:


Tip 1: Records are your friend


For many, record keeping is a distraction from more important jobs. Many will employ staff to do the


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‘boring’ stuff, and will not even know necessarily where the paperwork, minute books and management accounts information can be found.


Simply, it is the obligation of every director to maintain company books and records, to be able to produce them when required. Not only will a carefully prepared board minute serve as a contemporaneous record of why a director’s decisions ought to be excused, but it could very often prevent a potential wrongful trading claim or disqualification investigation.


Questions may well be asked about company records years after the events in question (the SoS has three years to commence a disqualification, liquidators typically six years to bring a claim). By then they may have been consigned to an IP’s archive and not readily accessible. Therefore, try to agree with the IP that you retain copies of these records and invite them to image your hard-drives instead of taking them away. This will ensure you hold the same information and will save time, cost and stress in the future.


Tip 2: Take and follow the right professional advice at the right time


When contemplating anything out of the ordinary course of your business, talk to your accountants and lawyers. Make sure the professional advice you receive is recorded and retained with your


minute book, and that you follow that advice or record your reasons for not doing so.


The same care should be taken when seeking insolvency advice. The sooner you seek that advice typically the more options the company will have in avoiding an insolvent procedure. If the advice is that the company is still viable, subject no doubt to some changes, that advice may insulate the directors against potential claims. If in doubt, seek a personal recommendation from your lawyers and/or accountants and make sure that the IP is qualified and fully licensed.


Remember, though, that IPs are not lawyers and their advice is therefore not confidential in the sense of being privileged from production in court in most scenarios. It may therefore be prudent for directors to take independent legal advice in conjunction with insolvency advice, from a specialist insolvency solicitor.


Above all, if faced with any sort of conduct-based investigation, legal advice should always be considered. Even an apparently innocent questionnaire, or interview, can result in inadvertently admitting behaviours which constitute serious criminal offences.


Tip 3: Don’t blame your accountant


Directors have to recognise that the accountants are there to advise, not to manage, and that the buck stops with the directors. If you


do not understand why you are being advised to take certain action you should ask and record your understanding in writing. If the accountants’ advice then turns out to be at fault it may assist the directors in managing any claims.


Likewise, if your accountants are involved in facilitating an insolvency procedure, you should still establish direct contact with the IP as soon as possible and you should not abdicate to the accountants responsibility for the company’s books and records.


Summary


Only time will tell if the various inquiries and investigations into the failure of BHS result in financial exposure for former management. The insolvency of a company remains the main threat to the privilege of limited liability and whether directors face personal claims will very often come down to the quality of their record keeping and the prudence of their decision-making, both before and after insolvency.


Pavitt specialises in corporate restructuring and insolvency and is the current vice-chairman of the southern region committee of R3.


Details: Mike Pavitt mike.pavitt@parissmith.co.uk 023-8048-2275 @InsolLawMan


THE BUSINESS MAGAZINE – SOLENT & SOUTH COAST – JUNE 2016


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