Winding Up Petition ~ lessons to be learnt for company directors

The recent winding up by the Insolvency Service of Jacob H Ltd (JHL) on 14th May 2014 provides a few lessons for directors; apart from the obvious one of making sure that you provide services that you are taking payment for. The company traded in London, but offered large goods vehicle (LGV) driving services across the UK and did not actually provide the services in the majority of cases. You can read about the actual Insolvency Service case by clicking here.

The Insolvency Service investigations supervisor David Hill said: “This company appeared to have no intention of providing the services it claimed it could and instead duped customers into paying for service they were never likely to receive and winding it up protects the public from losing more money in this way. “The winding up should serve as a warning that the Insolvency Service will take action to remove rogue companies from the business environment.”

The company failed to file accounts but it is known that £130,000 was taken in deposits and even where refunds were agreed they were never paid. The average customer paid £920 deposit to book their lessons so the number of customers involved and eventually defrauded were quite substantial. It is not clear if criminal charges may follow but the directors Hussain Ahmed and Mohammed Khaled will now be interviewed by the Official Receiver and a full investigation of the directors actions will now follow. The directors can receive disqualifications from 2-15 years, fines and even a jail sentence for the most serious offences. The Insolvency Service was alerted by Islington Trading Standards who had received 40 complaints of services not being provided despite being paid for.

What the Insolvency Service does

The Insolvency Service is a government body and is responsible for all compulsory liquidations (winding up) in the UK via the official receiver. One of the key tasks of the official receiver on behalf of the Insolvency Service is to identify why the company ended in an insolvent liquidation and became insolvent in the first instance. It has a lot of other wide ranging powers from paying redundancy to insolvent company employees to investigating live companies that warrant their attention. You can learn more about the Insolvency Service here http://www.bis.gov.uk/insolvency.

Failing to file annual returns

Directors should be aware that failing to file accounts with Companies House is a criminal offence so can leave a naïve director with a criminal record and there is no point in blaming the accountant even if it is their fault. Whilst there is no law stating Directors must have qualification as a director you have the responsibility for filing the accounts and you will be expected to demonstrate ‘sufficient levels of skill and knowledge’ to manage the company affairs.

Directors have a legal obligation under the Companies Act 2006 to file annual returns and failure to do so on time will result in escalating fines, dependent on the delays and end in possible personal prosecution of the director and directors' disqualification. It is also worth noting that as a director you also responsible for acting responsibly and complying with other laws too such as

• Employment Law
• Health & safety Law
• Insurance law
• Tax law
• Insolvency law

Failure to comply with these laws can have severe implications for directors and this can range from disqualification from acting as a director to going to jail so if you are in any doubt you should seek relevant professional advice.

Abandoning the company

Simply resigning as a director will not negate any liabilities or responsibilities you may have incurred whilst acting as a director. In any event leaving a company without a director is also a breach of the Companies Act and may lead to the directors being disqualified and investigated as if they had been “liquidated”. The investigation can be instigated by the director of corporate enforcement so abandoning your company should not be considered an option. By abandoning the company you are openly demonstrating disregard or ignorance of the law and either one will not be received well by the Insolvency Service.

Wrongful trading   

The directors have continued to trade and subsequently increased the debts to the company and therefore are likely to be charged with wrongful trading. Wrongful trading is better thought of as irresponsible trading and this would be accurate on the face of it in these circumstances. If proven, wrongful trading can mean the directors being made personally liable for the debts accrued in the time period when the directors knew, or should reasonably have known, the company would end in an insolvent liquidation.

There is also the point of the deposits themselves and clearly they should have been kept separate from the company funds so that customers wanting a refund could have been made easy. By ring-fencing the deposits they also protect customers money from being absorbed into the company account for paying bills and being misused. For example if the customers were told that they can have their money refunded if they were not satisfied then the ‘not isolating’ the potential customer refunds only adds more evidence of misuse of customer deposits. This situation can be made worse if those monies were then used for the director’s personal use. So the simple answer is keep personal and business funds separate, but also keep deposits separate too, possibly in a customer trust account or something similar – ask your bank for more information.

Offering services you do not provide

There may be charges against the directors from Islington Trading Standards for not providing services as advertised.

Generally a company; when advertising goods must:

• Match the description
• Be of satisfactory quality
• Be fit for purpose   

Clearly in this case none of the above applied, so there may be a prosecution to follow on this matter, also.

To find out more information about a specific insolvency solution; get business debt advice, or to simply learn a little more about insolvency, in general, please visit our website by clicking here.

Are HMRC Withdrawing Support for Time To Pay Arrangements?

I have heard through the grapevine that HMRC are looking closely at withdrawing support for the Time To Pay arrangements from this April and these arrangements have been so popular in the past with SMEs in clearing company debt; too popular, perhaps. Some may be surprised to hear me say, but I believe generally that HMRC do a good job in very difficult circumstances.

IT System Changes and Staffing Losses

HMRC have had to endure IT system changes which have not always been as successful as they should have been. Cut-backs in staffing numbers reduction in pension benefits as have all civil servants along with chopping and changing of what jobs are completed where. The communication systems were antiquated though they are trying to catch up and some at the higher levels finally have access to external email. There is an awful lot of confusion inside and outside regarding the new phone systems which frankly leave a lot to be desired as there is only so many times you can hear Vivaldi or Green Sleeves before you start banging your head on the desk in tune with the beat.

Attempted humour aside, any cut-back on the SMEs ability to agree a time to pay arrangement would be a severe set-back to those companies who genuinely need help when coming out of recession. We deal with company debt and HMRC negotiations as part of our work and the time to pay arrangement has been a valuable tool and saved some companies - no question.

The longest recession in recorded history

Coming out of a recession is bad enough but coming out of the longest recession in recorded history is another. I am hoping that Carney keeps the interest rates down as businesses need as much help as is possible. Okay, I know there will be some out there saying “Well I pay my taxes on time so why shouldn’t they?” I accept the point, but I do come across a large percentage of smaller businesses who have cut to the bone to survive. Once a company does this they are very vulnerable and it is easy to get into difficulty for no other reason than a larger business debtor has decided to pay later than agreed. You can argue these companies should not have placed all their eggs in one basket, but the reality is these smaller businesses represent a significant part of the British economy.

I appreciate these HMRC time to pay arrangements are time consuming and so I assume they are costly to manage and monitor, but what is the alternative to a time to pay arrangement? 

A View on UK Economic Recovery; Bank Lending & SMEs:

Some interesting statistics flying around over the weekend what with the economy doing far better than expected it looks like the Bank of England governor may need to make a decision on interest rates in a matter of a few months. I am not sure Carney will be forced into making the decision that soon. He doesn’t strike me as a man who will be forced into any situation. The economy badly needs a long spell of stability and low interest rates, not a step into the unknown that a hike in rates would bring about. We have a fledgling housing market that is seeing a well-earned recovery and with wages still suppressed there is unlikely to be a return of a much feared ‘bubble’. Carney is more likely to link wages to inflation as a ‘get out of jail free card’ to get himself off the hook.

I may be proved wrong but I am hoping we don’t see any rates rising until well into Q4 2014 or early 2015.

Barclays decision to ‘transfer’ 800,000 of its small businesses away from free banking towards a charge based structure will do no favours for the already hammered reputation. Barclays insist the move will only affect about 250,000 businesses currently banking with Barclays – so that’s all right then. Business lending has never been a priority with the banks barring a few exceptions and is rarely more than 10% of any the major banks total lending. Major banks do not like lending to small businesses and never have to be fair to them and the Basel II rules make it more difficult for lending to take place.

Okay, so I understand business lending had risen slightly over the first half of 2013, but if you are already starting from a very low starting point then it’s not really great news. In any event, I now understand the percentage of lending to small businesses has fallen back by about a third to around 7% of total bank lending that may contribute towards businesses having cash-flow problems and seeking debt advice sooner, without the support they need from the banks. The bottom line is small to medium sized businesses are just not a core demographic for any of the major banks and the sooner businesses realise that banks are no friend to business the better.

Written by: Mike Smith