Liquidators Appointed To Supporting Companies Following Provisional Liquidations

A Press Release by the Insolvency Service issued on 2 September 2024 says “Companies promoting ‘corporate rescue’ scheme shut down after undermining insolvency regime”.

The press release details:

Seven companies have been wound-up following Insolvency Service investigations

Sale Of Shares In Insolvent Companies

The background to this is the matter of companies that provide services which avoid the use of Insolvency Practitioners to deal with the winding up of companies and corporate recovery services.

A feature of such services is the sale of a distressed company’s shares by its owner managers and the resignation of the directors. As we have outlined in our article Can You Sell An Insolvent Company? it is perfectly permissible to sell a shareholding in an insolvent company. That however is not the issue. 

The issue is what has a director of an owner managed business been advised when engaging in such conduct. 

The question that one might want to ask is why would anyone wish to acquire the shares in an insolvent company that has ceased trading.

Sale Of Shares Ineffective Against Effects Of Insolvent Liquidation

Insolvent companies that do not trade will often end up in insolvent liquidation. That is a fact of life but it is not inevitable. However, the question of such a potential liquidation is crucial. If the company is going to go into liquidation, have directors been informed about that reality and the consequences? 

The directors who have been responsible for the company during its trading life will have their conduct scrutinised on liquidation. There is no getting away from that reality, particularly if they were a director in the last three years. A sale of shares is wholly and utterly ineffective (and rightly so) to avoid that position. 

Some companies that opted for such services may instead be dissolved and avoid liquidation altogether. It depends on the facts of the case.

Would You Buy Shares In An Insolvent Company?

Outside of the position of a company with a valuable brand, database, assets, order book or some other logical reason, there would likely be limited commercial rationale for anyone acquiring shares in an insolvent company. Typically a business person would want the assets of value.

There may be circumstances in which a share acquisition does have commercial sense but it is unlikely to be the case that someone would wish to buy an insolvent company that had ceased trading with few assets. The shares would enable the new shareholders to appoint new directors but when saddled with debts the company’s viability would remain in question. Any movement of assets out of the company risks falling foul of the Creditor Duty, not being actions for a proper purpose and thereby in breach of duty.

The problem of course is when a company is insolvent the assets cannot be hoovered up by the directors personally (or the shareholders) and the debts left languishing behind. That is a complete non-starter. 

The Insolvency Service press release highlighted that two of the companies Atherton Corporate (UK) Ltd and Atheron Corporate Rescue Limited that featured in a recent press release from the Insolvency Service “Provisional liquidators appointed to two connected corporate rescue companies” were providing services as:

… a legal alternative to using insolvency practitioners … misleading former directors by telling them they could keep their company assets, continue to trade the business through a new company and avoid any responsibility for its debts.

One of the Atherton companies was said by the Insolvency Service to make use of a website:

www.nationalcompanyrescue.co.uk

This appears to be conceivably at the heart of the matter.

When a company is insolvent a breach of duty by moving assets out of an insolvent company is incapable of being ratified by the shareholders (the members). The members cannot do it; the creditors would not do it.

In general terms, new directors upon appointment would have an interest in safeguarding the assets of the distressed companies. It is therefore unclear how that would chime with the aforesaid where it appears to suggest there is no interest in the company bank accounts, book debts or company assets.

Potential Issues Identified By The Insolvency Service

The Insolvency Service’s press release highlights a concerning catalogue of matters that it submits was information put forward by “Atherton”.

It is further suggested by the Insolvency Service that the advice provided extended to:

… use the distressed company’s trading names without any need to pay for them and that the books and records of the distressed company could be disposed of after the sale.

Disposal of company records would not be permissible. Both the Companies Act and the tax legislation require directors to keep company records for material periods of time to show the accounting position of a company. 

These are detailed in an article what records must a company keep?. Destruction of records is not permitted within the prescribed statutory periods.

Separate from that the re-use of company names is restricted by directors who have traded companies that go into insolvent liquidation due to Section 216 of the Insolvency Act 1986.

The Insolvency Service said: 

They told customers there would be no requirement for former owners to co-operate with liquidators, insolvency practitioners or the Insolvency Service and that recovery action would not be taken against them by the new directors for any debts due by them to the company in financial distress.

Such a suggestion is troubling because a former director would always be required to cooperate with a liquidator under Section 235(3) of the Insolvency Act 1986.

Section 235 is abundantly clear a person who has been a director of a company at any time might have a duty to cooperate with a liquidator if the same is reasonably required.

Furthermore, if a director acts in breach of duty then it is axiomatic that loss caused can give rise to misfeasance proceedings by a liquidator.

Supporting Companies

According to the Insolvency Service, a series of supporting companies have been identified as providing the distressed companies with new directors to take over from the former owner managers who were selling their shareholding:

The companies in financial distress ceased trading shortly before or at the point of sale. The purchasing company and new directors existed to keep the company active for as long as possible to create a gap between the former owners and directors and any future liquidation.

…

The Official Receiver has been appointed as liquidator of Atherton Corporate (UK) Ltd, GPA KLM Ltd, Namare GRP Ltd, Summers & May Ltd, and TPG GRP Limited following the winding-up of the companies at the High Court in London on Tuesday 27 August.

These events are unlikely to come as a surprise to the insolvency professionals. Indeed one Insolvency Practitioner, Scott Bebbington, reported this matter on Linkedin said:

… I personally welcome the news in particular that the Insolvency Service have progressed their action beyond those that gave the advice to those that helped carry it out.