Fundamental to the whole process is the action that you take in the initial few days following an appointment. The natural starting point is SIP 2, which requires you to ascertain the location of, and then safeguard and list, the company’s accounting records. Although this sounds straightforward, we all know it often isn’t, yet if it has not been done it is highly likely that any D1 report will be rejected, as the ability to obtain relevant evidence will be severely hampered. In the absence of records, and in particular where inadequate attempts have been made to recover them, the Courts have been known to give credence to even the most seemingly spurious defence.
Any report based upon absence of, or deficiencies within, the accounting records will be rejected if you have not made at least two written requests for the directors to deliver them up. Added insurance in this area can be provided by issuing the accounting records schedule, once produced, to all individuals involved in the management of the company and requesting that they either confirm that these are all of the company’s records kept since a specific date or provide details of the content and location of any further records in existence.
Once all available records have been collected, make sure they are kept in a secure environment and not sent out to third parties or moved around unnecessarily. Again, the risk that records have been misplaced or lost in the possession of the office holder will jeopardise any future proceedings which rely upon them. A strong audit trail is a pre-requisite.
So, you’ve got the records safely stowed, you’re sure they are all that were maintained, but there are some big holes in them – big enough to hide assets in. The chances are that there is a decent allegation of unfitness based upon those deficiencies and to make it as strong as possible you need to show the following:
- Detriment: the clearer the quantification of the loss, the better. Specify the time frame during which the records are considered inadequate and state what can’t be accounted for. For example:
o £100,000 of cash withdrawn in the period 01 Jan to liquidation.
o Fixed assets of £50,000 shown in the accounts to 31 March but not identifiable at liquidation.
o A favourable but inexplicable movement of £60,000 on a director’s loan account in the final six months of trading. - Impact: To back up the detriment also state how the deficiencies have hampered your ability to complete your SIP 2 investigation, perhaps by being unable to verify and/or collect book debts, identify potential antecedent recoveries or account for fixed asset movements; its a case of loss is more.
But what if you’ve got no records at all, despite your best efforts? If you can show that they once existed but have in some way been lost or destroyed as a consequence of the director’s actions then there is a strong likelihood of an allegation based upon failure to preserve records. In such a scenario explore what was maintained and obtain an explanation of the disappearance (this can then be tested by the investigator). If, however, the records are simply being withheld by the director(s) it becomes more of a co-operation issue and you should consider whether it is appropriate to use your powers under Section 236 of the Insolvency Act 1986. Finally, not keeping any records at all simply reverts the case back to one of failure to maintain adequate records.
Of course, there is also a criminal element to the behaviour which will require submission of a separate report, although on the basis of present guidelines a prosecution will not be considered unless the unsecured third party liabilities are in excess of £250,000. Despite the fact that the Secretary of State will not make direct reference to the provisions of the Companies Act 1985 when drafting an accounting records allegation, the content of Sections 221 and 222 of that legislation provides the basis for the standard of conduct expected (see also Sections 386 and 387 of the Companies Act 2006, fully applicable from 1 October 2008). This can often then be supplemented with any failure to prepare and/or file annual accounts, breaching Section 242 (Section 442 Companies Act 2006).
At the end of the day, an accounting records allegation is very often a fall back position. What you're essentially saying is I'm pretty sure that there have been misappropriations from this company, but because of the inadequate records I can't evidence that, and can't make a recovery for the benefit of creditors. But no matter what the individual facts of the case keep in mind the four M’s – Misconduct, Motive, Materiality and Mitigation – the guiding mantra for your thought process.
In future articles I shall take a look at other areas with a high level of relevance to the most commonly presented allegations of unfitness, exploring detriment arising through insolvent trading, Crown debt as an issue of unfitness in its own right and the involvement, in a company, of an individual subject to an existing restriction.
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