A True and Factual Account of Fraud and Corruption
The Insolvency Service states on their website -
"We are a government agency that helps to deliver economic confidence by supporting those in financial distress, tackling financial wrongdoing and maximising returns to creditors."
Our Group felt that the Insolvency Service would be very interested in our case given the amount of information we had gathered, particularly with respect to company law. We knew that there was very strong evidence of serious financial wrongdoing, and we were confident they would maximise returns for us, the shareholders, as owners of the company.
..... but they had different ideas.
We knew that our submission to the Insolvency Service was an important part of our case, and decided that our submission should be thorough and robust. To this end, our bundle to the Insolvency Service contained a 900 page dossier and skeleton argument that our lawyers had put together for us.
Along with this, the group paid a five-figure sum to a very highly respected top firm of Forensic Chartered Accountants in London to examine one aspect of company law that was breached, S656 of the Companies Act.
We know from the Forensic Accountant's report that from a company accounting perspective it was a watertight case. However, to ensure that we had a solid case from a legal perspective, the group spent another five-figure sum on the opinion of a top QC specialising in company law. He was of the same opinion that S656 has definitely been breached.
S656 of Companies Act 2006 provides:
(1) Where the net assets of a public company are less than half of its called-up share capital, the directors must call a general meeting of the company to consider whether any, and if so what, steps should be taken to deal with the situation.
(2) They must do so not later than 28 days from the earliest day on which that fact is known to a director of the company.
(3) The meeting must be convened for a date not later than 56 days from that day.
(4) If there is a failure to convene a meeting as required by this section, each of the directors of the company who –
(a) Knowingly authorises or permits the failure, or
(b) After the period during which the meeting should have been convened, knowingly authorises or permits the failure to continue, commits an offence.
Our Forensic Accountants and our QC proved without doubt and conclusively that S656 had been breached, and that given the timeline of events and the statements made by the Board of Directors, they were absolutely aware that this section had been breached.
We had two meetings with the Insolvency Service at their London HQ, both times accompanied by our lawyers. We met on both occasions with the Head of Intelligence Team, and a Senior Intelligence Officer. We were encouraged in these meetings as it appeared that they fully understood our concerns and the fact that we had 100% professionally confirmed proof that the act HAD been breached (one of many), we were confident that the Insolvency Service would agree with our findings and launch an investigation.
Unfortunately, despite overwhelming and compelling evidence, once these Civil Servants were back behind their keyboards, they used every excuse they could muster not to launch an investigation.
Again, as with every other government body we encountered on this journey, they make the right noises when they are in front of you, but then somehow spend months making a case to NOT take action, despite much more qualified professionals who are experts in the field saying that there WAS wrongdoing and action SHOULD be taken.
We will examine the relative areas of responsibility that the Insolvency Service SHOULD have taken below, but it is worth noting that the Insolvency Service suggested that we take our case to the ICAEW (Institute of Chartered Accountants for England and Wales). Unfortunately we could not do this due to another massive CONFLICT OF INTEREST, as the ICAEW Chairman at the time Neville Kahn was the Chief Administrator for Deloitte acting on the Hibu administration. You could not make this up.
Our 900-page dossier and subsequent Forensic Chartered Accountant and QC reports conclusively show that Director misconduct was clearly evident, abundant, and fully supported by irrefutable documentary evidence. So we have to question WHY the Insolvency Service took absolutely NO Action Whatsoever? We proved beyond doubt that the Directors lied, breached numerous Company and Listing laws and regulations.
Some of the Director Misconduct actions we reported to the Insolvency Service (all with documentary evidence) were;
Clearly our Group had demonstrated to the Insolvency Service that there were numerous breaches of company and insolvency legislation, not just by the Board of Directors, but also by their administrators Deloitte. The Insolvency Service did not deem the fraud that we had exposed and highlighted worthy of passing on to the Department for Business, Energy & Industrial Strategy.
Instead they wanted our case to be investigated by the very individual who was the senior individual involved acting for Deloitte in the Hibu administration. Moreover, the said individual, Neville Kahn was under investigation for misconduct in the administration of Comet PLC, which resulted in a record Insolvency Service fine, and a £44 million liability for the UK taxpayer. Furthermore, this inquiry found that Deloitte, and Kahn had "Failed to comply with the Code of Ethics" and not ensuring that “accepting an appointment does not create any threats to compliance”. It said the firm’s procedure for taking on new clients "did not consider the risk of threats to its independence".
In view of this, how could our Group have expected any complaint taken to the ICAEW to be taken with the merit it deserved and looked at impartially?
As can be seen from the information above, The Insolvency Service failed abjectly in providing any kind of service whatsoever. Instead, they preferred to try and pass off our claims to the ICAEW (Chaired by the Deloitte administrator at the time Neville Kahn) despite us having overwhelming, and professionally verified evidence that they SHOULD launch an investigation.
However, as with every other regulatory body and authority we approached, they all concur with your assumptions when in a face to face meeting (we audio recorded all of our meetings) then spend an inordinate amount of time trying to find every way possible not to find a reason to investigate. The Insolvency Service were particularly guilty of this, given the amount of information we provided to them (900 pages) backed up by Chartered Forensic Accountant and Queen's Counsel opinion. We find it astonishing that in all of this professionally verified evidence, they could not find ONE aspect from which to launch an investigation. There can be no valid reason for this, so our supposition is that those in higher places prevented the investigation from progressing any further.
However, for some further light reading, please see below all the acts that the Insolvency Service, the Financial Conduct Authority and Deloitte had the power to act and investigate on, but didn't.
Directors of a public company have a duty under Section 656 of the Companies Act 2006 to convene a meeting of shareholders in certain circumstances if there is a serious loss of capital.
The section provides that where the net assets of a public company are half or less than its called up share capital, the directors must, not later than 28 days from the earliest day on which that fact is known to a director, convene a general meeting of the company for a date not later than 56 days from that day for the purpose of considering what, if any, steps should be taken to deal with the situation. A breach of these requirements can lead
to the directors being liable to a fine.
There may also be a requirement under the UK Listing Authority’s Disclosure and Transparency Rules (“DTR”) for an announcement to be made.
DTR 2 requires a listed company to notify a Regulatory Information Service (“RIS”) (i.e. make an announcement) as soon as possible of any inside information which directly concerns that company. ‘Inside information’ is defined in Section 118C of the Financial Services and Markets Act 2000 (“FSMA”) as, broadly, information of a precise nature relating (directly or indirectly) to a company or its listed securities, which is not generally available and would, if generally available, be likely to have a significant effect on the price of the company’s listed securities or on the price of related investments (e.g. derivatives linked to the company’s shares).
Information is likely to have a significant effect on price if, and only if, it is of a kind which a reasonable investor would be likely to use as part of the basis for his investment decisions.
Likely relevant information includes information which affects the assets and liabilities of the company, the financial condition of the company and the performance, or expectation of the performance, of the company’s business. Listed companies have a separate, but related, obligation under LR 7.2.1R of the UK Listing Authority’s Listing Rules to communicate information to holders and potential holders of their listed equity shares in such a way as to avoid the creation or continuation of a false market in such shares.
Any breach of the requirements of DTR 2 or LR 7.2.1R could lead to potential censure, fines or compensation orders made by the Financial Conduct Authority under Sections 91 or 382 of FSMA.
As a separate matter, a failure to make an announcement may also result in the listed company or its personnel committing a criminal offence under Section 397 of FSMA, or Committing the civil offence of market abuse under Section 118 of FSMA (and in particular Section 118(8)). In relation to the latter provisions, the particular issue of concern which can arise if no announcement of financial difficulties is made is that there could be a false market in the trading of the company’s securities. The securities maybe trading on the basis of the latest financial report or announcement issued by the company which indicates or implies that its business is, say, reasonably profitable, whereas the directors may know that there have been breaches of covenants or other difficulties and that negotiations with the banks are underway. Without an additional announcement, dealings may take place on the basis of the earlier financial report or announcement which leads investors to attribute a false (higher) value to the securities.
Apart from the risk of incurring personal liability, where a director engages in fraudulent or wrongful trading or has been found guilty of other misconduct in connection with a company and is held to be unfit by the court, he may also be disqualified by court order or have a disqualification undertaking accepted by the Department for Business, Innovation and Skills under the Company Directors Disqualification Act1986 (“CDDA 86”). The relevant provisions of the CDDA 86 may now also apply to directors of banks that have been placed into liquidation or administration under the Banking Act 2009.
A director may be prevented from acting as a director or from having any involvement in the promotion, formation or management of a company for a period of between two and fifteen years.
The court will examine a number of factors in deciding whether a person is unfit to be a director or to be involved in the management of a company. These will include not only breach of duty or responsibility for the insolvency, but also issues such as late filing of accounts and other documents at Companies House. It is advisable to ensure that the company’s filing and internal records are up-to-date.
In addition to the above issues, directors should be aware that if the company enters into certain types of transaction within specified periods before its insolvency, an administrator or liquidator may be able to apply to the court for an order that the parties be put back into the position they would have been in if the transaction had not been entered into, or require some other appropriate remedy. With regard to certain of these matters, entering into such a transaction could be treated as a breach of duty by the directors, in particular if the transaction is at an undervalue or is a preference.
A transaction is at an undervalue (section 238 of the Insolvency Act 1986) if a company makes a gift to a person or enters into a transaction on terms where the company receives no consideration or one which has a value which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by the company. There is a defence that the transaction is entered into in good faith for the purpose of carrying on the company’s business and that there are reasonable grounds for believing that it will benefit the company.
To be vulnerable, a transaction at an undervalue must have been entered into during the period of two years before the commencement of winding up or administration and the company must have been insolvent on a cash flow or balance sheet test at the time it entered into the transaction or become insolvent as a result of entering into it.
There is a presumption of insolvency if the parties to the transaction are connected, for instance if it is an intra-group transaction or a transaction with a director.
The same undervalue definition applies in respect of transactions defrauding creditors (section 423 of the Insolvency Act 1986), although there is no time limit between the transaction being effected and the onset of insolvency for the transaction to be challenged. However, the transaction must have been entered into for the purpose of putting the assets beyond the reach of the claimant or of otherwise prejudicing the interests of the claimant.
Under Section 212 of the Insolvency Act 1986 if, in the course of a winding up, anyone who has been involved with the promotion, formation or management of the company is found to have misapplied, retained or become accountable for any money or other property of the company, or been guilty of misfeasance or breach of a fiduciary or other duty in relation to the company, a court may on an application by the official receiver, liquidator or a creditor compel him to:
(a) repay, restore or account for the money or
property of the company with interest; or
(b) contribute such sum to the company’s assets
by way of compensation in respect of the
misfeasance or breach of fiduciary duty or
other duty as the court thinks just.
Breaches of duty which could be relevant here would include a director’s involvement in the company granting a preference or entering into a transaction at an undervalue
Personal liability attaching to the director can also arise following an application to the court by a liquidator for fraudulent trading (section 213 of the Insolvency Act 1986). The court can order that any person who was knowingly a party to carrying on the business of the company with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose, is liable to make such contributions to the company’s assets as the court thinks proper.
Fraudulent trading is also a criminal offence carrying with it the risk of imprisonment, a fine or both. Such an offence may apply whether or not the company has been, or is in the course of being wound up.
A preference (section 239 of the Insolvency Act1986) is given to a creditor or a guarantor or a surety of the company’s debts if the company does anything or suffers anything to be done which has the effect of putting that person in a position which, if the company were to go into insolvent liquidation, would be better than the position he would have been in if the thing had not been done.
The repayment of an unsecured debt by a customer to its bank could fall within this wide definition. The company must have been influenced in deciding to give the preference by a desire to produce the preferential effect, in order for the transaction to be vulnerable. There is a presumption that the company was influenced by such a desire if the transaction was with a connected person.
Any such transaction will be set aside if, in the case of a non-connected person, it was entered into within six months of either the commencement of the winding up of the company or its entry into administration. This period extends to two years in the case of a connected person. The company must have been insolvent at the time it entered the transaction or become insolvent as a result of entering into it.
If a transaction is established as being at an undervalue or a preference, the court has very wide powers to put the parties back into the position they were in before the transaction was entered into, although there is protection for a third party who enters into such a transaction in good faith and without notice.
It must be borne in mind that where the company in financial difficulties is part of a group, the structure needs to be considered, and similar issues addressed in respect of each company. If, for instance, a subsidiary is relying on its parent’s support for finance and the parent is in financial difficulties, the directors of the subsidiary should meet to decide whether it is appropriate for it to continue to carry on its business, or whether alternative finance is available. In cases where a subsidiary has guaranteed the parent’s bank borrowing, the directors will need to consider the implications of an increase in the subsidiary’s liabilities if a call is made under the guarantee.
Issues of conflict must be considered if directors of the parent are also directors of a subsidiary.
Different interests and duties will be owed by directors of different companies to each of those companies, and they will have to address how to handle information received as a director of one company when considering issues in respect of another company.
Section 154 Companies Act 2006. A public company must have at least two directors, even if in administration.
Section 167 Companies Act 2006
(1)A company must, within the period of 14 days from—
(a)a person becoming or ceasing to be a director, or
(b)the occurrence of any change in the particulars contained in its register of directors or its register of directors' residential addresses, give notice to the registrar of the change and of the date on which it occurred.
(2)Notice of a person having become a director of the company must—
(a)contain a statement of the particulars of the new director that are required to be included in the company's register of directors and its register of directors' residential addresses, and
(b)be accompanied by a consent, by that person, to act in that capacity.
(3)Where—
(a)a company gives notice of a change of a director's service address as stated in the company's register of directors, and
(b)the notice is not accompanied by notice of any resulting change in the particulars contained in the company's register of directors' residential addresses, the notice must be accompanied by a statement that no such change is required.
(4)If default is made in complying with this section, an offence is committed by—
(a)the company, and
(b)every officer of the company who is in default.
For this purpose a shadow director is treated as an officer of the company.
(5)A person guilty of an offence under this section is liable on summary conviction to a fine not exceeding level 5 on the standard scale and, for continued contravention, a daily default fine not exceeding one-tenth of level 5 on the standard scale.