My colleague Sarah Wheadon (Head of Business Crime and Regulatory) and myself were honoured to be asked to contribute the ‘Legal Q&A’ section of the Autumn 2013 edition of R3′s illustrious RECOVERY magazine, published recently. A copy of the article can be found here: Recovery Article. The article has also been picked up in academic journal listings such as Westlaw.

The article itself is very much aimed at qualified insolvency practitioner accountants, the vast majority of whom across the country receive the magazine, but the theme of our publication is a perennial bugbear of mine, of much wider application and interest. It is the – sometimes uncomfortable – relationship between insolvency law and criminal law.

How often have we heard the accusation levelled at directors or bankrupts, “it’s criminal what they’re doing”, to describe situations where a company goes into liquidation and yet the same people are running a new business which is virtually identical, under the same name or a very near name, or where a former director is now bankrupt and so is disqualified from acting as a director, but doing the same job with the word ‘director’ scratched out on their business cards, with their spouse or sibling’s name now above the door? Sometimes, of course, what they are doing really is a criminal act, carrying very significant penalties including custodial sentences, but identifying which is which can sometimes be difficult.

This is hardly a new phenomenon. Gilbert and Sullivan were complaining about it in the late Victorian era, with satirical songs lampooning it. For example, in Utopia Ltd, Mr Goldbury explains the Joint Stock Companies Act 1862 as follows:-

“Though a Rothschild you may be,
In your own capacity,
As a Company you’ve come to utter sorrow,
But the Liquidators say,
Never mind you needn’t pay…
So you start another Company tomorrow!”

The law has of course moved on a great deal in the past 150 years (though in the corporate arena perhaps not as much as all that), but as with all satire behind such commentary is a very serious point. On the one hand, it is harmful to confidence in the security of business transactions, the giving of credit and the economy generally if people are seen to be “getting away with” ditching their debts without fear of tangible consequences. On the other hand, if we had not evolved a system where debt could be managed, with the unsuccessful parts of a business being stripped away so that new businesses can thrive, half the country would still be in a Victorian-style Debtors’ Prison and the other half would be limping along wondering how we were going to pay the wage bill at the end of the month. In short, business failure is endemic to a capitalist system and we need good, efficient insolvency procedures to stop the system getting backed up like so much bad plumbing. There is clearly a delicate balance to be struck which allows entrepreneurialism to thrive in a principled and properly managed environment, and where abuses are properly punished, to serve to discourage others. The laws discussed in the Legal Q&A aim to achieve just that balance.

Unfortunately, there will always be the less scrupulous people (sadly, some of them professionals or quasi-professionals) who are willing to try to take advantage of laws which are open to interpretation and/or difficult to enforce and in our view, with the public purse under constant strain, it falls to regulated professionals such as solicitors and qualified insolvency practitioner accountants to help keep those who consult with us away from transgression, and exposure to the law, or if we are appointed to investigate, to ensure that the appropriate measures are pursued. This is particularly important where, as with your classic scenarios where an essentially good business can only thrive if it is allowed to continue to exploit its existing brand and/or would fail without the continued involvement of an individual whose personal debts have caused them to enter bankruptcy, it is all to easy to cross onto the wrong side of the tracks.

My message to businesses approaching this sort of dilemma is simple. Retain a suitably qualified and experienced insolvency practitioner to advise by all means (if you don’t we will recommend you do anyway) but also consider retaining a suitably qualified and experienced solicitor. Whilst this may sound like it might be expensive and over the top, there is a very good reason why you should at least think about doing both, particularly where the criminal law is lurking in the background. It depends very much on the facts, but typically insolvency practitioners will be the best people to advise the board of ailing companies, lenders considering their options for enforcement in terms of economic outcomes and individuals looking to resolve their own debt problems. They are the numbers people and their input is immensely valuable to you. They are very often also genuine experts on insolvency law, but only very few of them have legal training and they will not normally be competent and/or confident to advise on matters of criminal, regulatory or Company law. If appointed, insolvency practitioners’ duties will typically be owed primarily to the creditors and not to the individuals who consulted them, and their advice is not normally covered by any sort of privilege, so if it is given (whether or not it is followed) it can (just like unqualified advisors’ input) later be used in court against those individuals. Legal advice, by contrast, is typically confidential and privileged, provided the extent of that advice and the identity of the person or persons to whom it is given are clearly defined.

Most insolvency practitioners in my experience, faced with a re-use of company name scenario, will provide directors with a copy of the relevant sections of the Insolvency Act but will be cautious to do any more than that, and will more often than not recommend that any director intending to continue the business (even in a personal capacity) after a liquidation, for example, take independent legal advice. All too often, however, in my experience, individuals elect not to take up that option and by the time we get to hear of it the opportunity to dispose of criminal exposure altogether may already have passed, meaning all we can do is a damage limitation exercise. Please don’t be frightened to talk to us; that’s what we’re here for, we really want to help and only very few of us bite!