Insolvency Update : January 2024

Introduction?

As we head into 2024 and face whatever challenges emerge, one suspects that the insolvency landscape will continue to show an increasing number of financial challenges, both personal and corporate.? The fact that interest rates remain fairly high has resulted in many businesses slowly being drained of cash and, for those companies who did not enjoy robust income in the last month or so of 2023, it may be time to consider the restructuring options. This may include trying to save all or part of the business activity, refinance, or merge with a suitable entity i.e. avoiding permanent closure and the loss of jobs.?

Individuals faced with a continuing high mortgage servicing obligation and increasing credit card/loan repayments also face challenges in terms of addressing their situation.?

Plenty to keep the insolvency profession occupied in the months to come it would seem.?

Director disqualification?

As has been reported in recent Updates, the most recent focus by The Insolvency Service “TIS” has tended to be upon directors who abused the bounce-back loan facility provided during the Covid-19 difficulties.?

However, TIS haven’t overlooked the activities of other delinquent directors and, for example, at the end of last year a company director was sentenced to two years in prison.? Back in 2017 the director sold five cars to a car dealership despite not being the legal owner of any of the cars (gaining ￡75,400 as a result). Further, in the following year he then sold the same car to two separate dealerships on consecutive days (netting ￡6,850 from such fraudulent activity).? One of the key aspects of the director’s character that attracted attention from TIS is that he had also failed to disclose around ￡60,000 of income whilst an undischarged bankrupt.?

Not letting the grass grow under their feet, TIS also turned their attention to a couple who misapplied a bounce-back loan of ￡30,000 and then sought to close the company in an attempt to avoid having to repay the money. Two days after receiving the loan, the directors transferred a total of ￡28,950 into their private bank accounts. Four days later the directors applied to the registrar to have the company struck off and dissolved. For their clumsy and delinquent efforts, sentences of 14 months and 10 months were issued. TIS remain on the trail of recovering the full sum.?

Solvent liquidation : a speedier process??

The Aberdeen office of MHA has been handling solvent liquidations (often referred to as a members voluntary liquidations) for over thirty years.? One of the frustrations, as mentioned in the July 2023 Update was the delay in obtaining written clearance from HMRC that all main taxes have been agreed/settled.? In December 2023, and in response to consultation process, HMRC advised that they will no longer provide tax clearance in solvent liquidations.? Whilst acknowledging that there is no statutory framework that requires HMRC to provide clearance, it has been insolvency best practice for many years that a liquidator would seek clearance from HMRC. After all, he has had no prior involvement with the company and hence, unaware of trading activities and HMRC status.??

The liquidator is always happy to proceed with tax returns and other submissions after the date of his appointment because he is in control of matters, but cannot vouch for pre-liquidation activities.?

Typically, obtaining written clearance from HMRC was a lengthy process and it is good news that HMRC are content for this aspect to be dropped, but it now leaves the onus on the liquidator to ensure that final returns are submitted and any statutory interest calculated/paid.?

One aspect of this change is that directors and shareholders are likely to be asked to sign an indemnity in favour of the liquidated estate confirming that, to the best of their knowledge and belief, all tax matters are up to date and that there are no ongoing HMRC investigations.? Once the company has been struck-off and dissolved by the registrar of companies, the indemnity will no longer apply and, as long as the accounts and final tax returns are submitted within a few months of the date of liquidation, the whole solvent liquidation process should be capable of prompt resolution. However, there are many examples where, many months after date of liquidation, HMRC emerge with a payroll or VAT query e.g. non-submission of forms for a particular period, inability to reconcile data in a return with statutory accounts, or incorrect charging of VAT on certain transactions. In such cases, the liquidator turns to the directors/shareholders and reporting accountant for assistance in resolving the query.

That sounds perfectly reasonable, but what happens if the HMRC system has encountered difficulties and the query, however valid, is not raised until after the liquidation has been completed and the company is dissolved? Is that HMRC’s fault because they no longer wish a company to remain on the register until their enquiries are complete and clearance is issued? What happens if the query arises in good time, but interest in the company has waned and those involved with it have moved away because they realise that formal clearance is not required as part of the process??

The result is likely to be a more lengthy/detailed indemnity and a view taken by HMRC about what steps are open to them if a late query is unanswered. More points to ponder for the licensed insolvency practitioner.?

Is now a good time for a solvent liquidation??

As readers may well be aware, the 2023/24 annual capital gains tax allowance is ￡6,000, dropping to ￡3,000 for 2024/25, and eliminated thereafter.? Thus, it is fairly common practice for solvent liquidations to commence towards the end of a tax year i.e. February/March, in order that shareholders can benefit from the annual CGT allowance, particularly if Business Asset Disposal Relief applies and the tax rate on the funds received from the solvent liquidation is only 10% for the first ￡1 million of lifetime gains.?

The MHA request is simply that if a solvent liquidation is under consideration, notification is provided well before 5 April such that a planning discussion can take place, and the appropriate documentation prepared for? ?the meetings that require to be held.?

Successful use of a debt litigator?

There are occasions when a liquidator considers that there is a sound basis to raise an action for recovery of money e.g. a book debt or director’s loan, but there are no funds within the liquidated estate to pursue the matter. Creditors generally express an unwillingness to provide core funding, if only on the basis that they have already lost money and don’t want to risk any more.?

In such cases it is becoming standard practice for a liquidator of a Scottish-registered company to sell the potential asset to a debt litigator who, on the basis that they agree that the prospects of recovery are good, will pursue the case and, upon the successful outcome thereof pay a set percentage of monies recovered to the liquidated estate.?

A case concluded recently with a successful outcome in respect of a liquidation handled by this office. There are more in the pipeline because this option creates better recovery options for a liquidated estate and ensures that those who have a genuine debt are made to pay.?

Secured and floating charge creditors : prescribed part access denied?

For many years, unsecured creditors have expressed concern that there was never any money left to pay a dividend on the basis that the secured creditor and the floating charge creditor took everything.? In September 2003, the law was changed in order to introduce something called the “prescribed part” which effectively ringfenced a defined proportion of a liquidated company’s assets and allowed the liquidator to use this sum to pay a dividend to unsecured creditors.? Perhaps unsurprisingly, there have been situations where there has been a shortfall to a secured creditor e.g. proceeds following the sale of a building are insufficient to meet the loan.?

Two recently reported legal cases have confirmed that a standard security holder’s shortfall cannot share in the prescribed part available to unsecured creditors and further, that a floating charge creditor cannot expect all of the money from, say, book debt recoveries, to the exclusion of unsecured creditors who share the prescribed part.? Accordingly, the secured creditor and floating charge creditor will have to stand aside and allow the prescribed part calculation such that all other unsecured creditors receive something from a liquidation process.? This seems to be a fair division of cash distributed from a liquidation process on the basis that, normally at least, the secured creditor and floating charge creditors tend to receive the lion’s share of what is available.?

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Conclusion?

This Update is provided for general interest purposes and does not purport to offer definitive advice. Thank you for taking the time to read this Update and feel free to pass it to anyone who you think might be interested in reading it.?

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MHA (the trading name of McIntyre Hudson LLP registration number OC312313 )