PKF VIEWPOINT - Ending insolvency abuse

With a resurgence of insolvencies among dealers and Vars, Nitin Joshi, a director at Pannell Kerr Forster, examines the emotionally charged issue of phoenix companies rising out of the ashes of insolvent businesses.

Perhaps one of the most frequent complaints made by creditors of an insolvent company is that the directors are continuing to trade in the same business, having purchased the assets of the insolvent company at a knock-down price - so-called phoenix companies. Often the directors are the only people willing to buy an insolvent company's assets, providing at least some return to creditors.

Nevertheless, insolvency practitioners are well aware of the problems that can arise when selling to directors. The Society of Practitioners of Insolvency (SPI) has issued guidelines, known as SIPs, for selling assets to a director.

The guidelines should reassure creditors that insolvency practitioners deal with insolvency companies and directors in a fair and professional manner. In addition, the detailed disclosure required by the guidelines should ensure that creditors have full knowledge of any transactions between directors and an insolvent company.

Advice to companies in financial difficulties.

When advising an organisation in financial difficulty, SIP 13 states that an insolvency practitioner should:

- Agree and record the identity of the instructing client

- Act in the interests of the client with objectivity, integrity and independence

- Ensure that the client is made aware of the legal obligations of directors

- Keep under consideration whether the client has any conflicts of interest or duty and bring any such conflicts to the attention of the client. Where a client persists in disregarding material conflicts of interest of duty, the member should cease to act unless the client agrees to limit the client's retainer to one such duty or interest and to take advice on the other elsewhere

- Not accept instructions to assist a client in conduct which will undermine public confidence in the proper administration of insolvency procedures.

Section 98 meetings

A section 98 meeting is a meeting of an insolvent company's creditors called for the purpose of appointing a liquidator.

When assisting the directors in convening a section 98 meeting, the insolvency practitioner must remain independent and act impartially in dealing with the directors.

The SPI has issued guidance, Summoning and Holding Meetings of Creditors Convened Pursuant to Section 98 of the Insolvency Act 1986 (SIP 8). This sets out the role of the insolvency practitioner in section 98 meetings and the information which the chairman of the meeting - usually a director - must provide.

If the insolvency practitioner receives instructions that would require them to act in a matter materially contrary to the SIP 8, they should only accept them after careful consideration of the implications of acceptance in that particular case.

Where the directors act contrary to the SIP 8 guidance, the insolvency practitioner may be called upon to show that the directors' actions were undertaken either without their knowledge or against their advice.

In addition, SIP 8 requires extensive disclosure requirements of directors' transactions with the company in the period leading up to the meeting. There should also be provided at the meeting details of any transactions - other than in the ordinary course of business - between the company, any of its subsidiaries or any other company in which it has or had an interest and any one or more of its directors, or any other associate of him or them, during the period of one year prior to the resolution of the directors that the company be wound up.

The information should specify:

- The assets acquired and the consideration together with the date(s) of the acquisition(s) and the date(s) the consideration for their acquisition was paid

- The names and qualifications of any person who advised independently on the value of any assets the subject of such transactions

- The dates on which any resolutions of the company authorising any such transactions were passed

- There should also be reported to the creditors whether (or not) the advising member or the proposed liquidator or any partner or employee of either of them acted in any capacity either for the company or any other party

- to any transaction subject to the disclosure requirements set out above.

It is hoped that this information will assist creditors in assessing the honesty - or otherwise - of the directors of an insolvency company.

Nitin Joshi of Pannell Kerr Forster is an accountant and insolvency practitioner specialising in the computer sector.