1 Insolvency Insolvency, which in general terms means an inability by a company or individual to pay debts, is relevant to many SFO investigations and prosecutions. This section provides: an outline of different types of insolvency; an outline of insolvency offences. Statutory Framework The primary statute is the Insolvency Act 1986 (IA 86). The IA 86 deals with corporate insolvency and the bankruptcy of individuals. It does not cover insolvent partnerships. The IA 86 was amended by the Insolvency Act 2000 (IA 2000) which came fully into force in January The amendments were relatively minor. The Enterprise Act 2002 (EA 02) made more substantial modernising amendments to the IA 86. The provisions relating to corporate insolvency came into force on 15 September Provisions relating to individual insolvency and reforms to the Insolvency Service s financial regime came into effect on 1 April The main changes are: streamlining of administration procedures; restriction on the use of administrative receivership; abolition of crown preference; a reduction in restrictions imposed on undischarged bankrupts; the automatic discharge of most bankrupts after 12 months; the introduction of Bankruptcy Restrictions Orders to apply to bankrupts whose conduct has been culpable; the imposition of a restriction in dealing with a bankrupt s home; the introduction of provisions to ensure unsecured creditors are major beneficiaries; the reform of the financial regime of The Insolvency Service, with the intention of making it simpler, fairer to creditors and more transparent. For detailed and wide ranging information on insolvency, as well as the full text of the statutes go to Practice Points Many SFO investigations involve aspects of insolvency and working with the liquidators of insolvent companies. Insolvency Practitioners (IPs) have significant powers under the IA 86. The former officers and employees of an insolvent company are under a statutory duty to co-operate in providing
2 information to the appointed IP. Investigation issues which commonly arise when dealing with liquidators are: 1. SFO powers s2 Criminal Justice Act 1987 (CJA 87) are commonly used to obtain documents from the liquidators. As it is likely that the liquidators will have taken over the running of the business prior to the SFO investigation, care must be taken to ensure there is preservation and continuity of evidence. 2. The working papers of liquidators can greatly assist an investigation as they will often provide an early insight into the case. A decision will need to be taken on how much work conducted in the liquidation can be adopted by the SFO and how much work will need to be repeated. Working papers are likely to contain a significant amount of hearsay [See Hearsay ]. 3. The issue of legal professional privilege will often arise, resulting in the liquidators objecting to production of documents. LPP issues will arise both in relation to legal advice obtained by the company in liquidation and advice the liquidators may obtain when contemplating proceedings. The liquidators may of course opt to waive privilege. [See Legal Professional Privilege ] 4. Once a liquidator/official receiver/trustee in bankruptcy is appointed, the assets are removed from an accused and have a degree of protection. This could affect an SFO decision on restraint and confiscation. [See Restraint and Confiscation. ] 5. Liquidators may take civil proceedings in the course of liquidation against company directors or auditors. They can instigate and continue these proceedings even though there is a criminal prosecution underway. [See Parallel proceedings ]. 6. As liquidators are not designated as competent authorities under s3(5) CJA 87 the SFO is not able to disclose information gathered by it in the course of an investigation to the liquidators. However there are other routes which may allow information to be disclosed to a liquidator, including, for example, obtaining consent from the information owner. Additionally, under s236 IA 86 a court may require a person who has property of a company or information concerning the company s business affairs to give that property or information to the court. Types of Insolvency There are different types of insolvency relating to individuals and companies.
3 Corporate Insolvency 1. Company Voluntary Arrangements Company Voluntary Arrangements (CVAs) are used to reach a legally binding agreement with creditors for the satisfaction of debts. An IP prepares a proposal to put to creditors who hope to receive higher dividends than would be obtained on a liquidation. Acceptance of the proposal creates a moratorium on debts. 2. Administrations Administrations are intended as a route by which a company can be rescued as a continuing concern. Prior to the EA 02, appointment by court order was the only route to an Administration. The EA 02 provides that an IP can be appointed without a court order by the company, its directors or the holder of a floating charge. Once the administrators proposals are accepted and the administration is underway a moratorium is imposed on the company s debts. 3. Administrative Receivership An administrative receiver takes control of the whole business or substantially all assets. It is appointed by a secured creditor of the company to recover that creditor s debt. Once that aim has been achieved the company will be handed back to the directors, struck off or put into liquidation. The EA 02 has severely restricted the use of administrative receivers. 4. Receivership The process of Receivership is the same as Administrative Receivership but the Receiver only assumes control of the charged asset rather than the whole business. 5. Liquidation/winding up Compulsory Liquidation Compulsory liquidation is the winding up of a company by order of the court. A winding up petition is presented to the court usually by a creditor, although a petition can be presented on the basis that a business is being conducted in a manner that is contrary to the public interest. If a winding up order is made the liquidation is controlled by the Official Receiver, unless there are sufficient assets to pay the fees of an IP and provide returns to the creditors. Provisional Liquidation
4 Provisional liquidators are appointed to preserve a company s assets pending the hearing of a winding up petition where the assets are in jeopardy or the company is subject to certain regulations requiring the liquidation to be run in a prescribed manner to protect the creditors. Creditors Voluntary Liquidation The directors appoint an IP who presents a report to the creditors. If the creditors vote to put the company into liquidation the appointed liquidator takes charge of the company with a view to making the best realisations possible. Members Voluntary Liquidation A members voluntary liquidation is used when a solvent company is no longer required but is not being sold as a going concern. An IP is appointed and any assets remaining after distributions to the creditors are distributed to the shareholders. Personal Insolvency 1. Individual Voluntary Arrangements Individual Voluntary Arrangements (IVAs) are arrangements between an insolvent individual and his creditors requiring minimum court involvement. With the assistance of an IP the insolvent individual puts a proposal to creditors and, if accepted, there is a moratorium on debts. IVAs are usually cheaper than bankruptcy with greater returns to creditors and greater freedom to the bankrupt. 2. Bankruptcy The process starts when a petition is presented to the court, usually by a creditor, for a bankruptcy order. Once an order has been made there is a moratorium on debts. The case will be passed from the Official Receiver to an IP if there are sufficient assets to cover his fees. Insolvency offences The IA 86 contains a number of offences relating to both corporate insolvency and personal insolvency. A full list of the offences is set out in Schedule 10 IA 86.
5 Corporate Insolvency Offences 1. It is an offence for an officer of a company to make any false representation or fraudulently do or omit to do anything for the purpose of obtaining approval to a proposed voluntary arrangement, s6a(1) IA The offences set out at a. to f. below apply to a past or present officer in the 12 months preceding as well as post winding up. It is a defence for a person charged to show he did not intend to commit the offence. A person is deemed to have committed an offence if he was privy to the commission of the offences at paragraphs 3, 4 or 5: (a) to conceal company property (to the value of 500 or more) or to conceal any debt due to or from the company s206(1)(a); (b) to fraudulently remove company property (to the value of 500 or more) s206(1)(b); (c) to conceal, destroy, mutilate or falsify any book or paper affecting or relating to the company s property or affairs s206(1)(c); (d) to make a false entry in any book or paper affecting or relating to the company s property or affairs s206(1)(d); (e) to fraudulently part with, alter or make any omission in any document affecting or relating to the company s property or affairs s206(1)(e); (f) to pawn, pledge or dispose of (not in the ordinary course of business) any property of the company which has been obtained on credit s206(1)(f). 3. Where a company is to be wound up an officer is deemed to have committed an offence if he has mis-conducted himself in fraud of the creditors, for any part of the company s property by fictitious losses or expenses. It is a defence to prove he had no intention to defraud the creditors: s207 IA Where a company is to be wound up an officer is deemed to have committed an offence if he has mis-conducted himself in the course of the winding up by either not co-operating fully with the liquidator or attempting to account for any part of the company s property by fictitious losses or expenses. It is a defence to prove he had no intention to defraud: s208 IA 86. The defence carry the full persuasive burden of proof: R ( Griffin) v Richmond Magistrates Court  1 Cr App R Where a company is to be wound up it is an offence for an officer to make any material omission in any statement relating to the company s affairs or to make any false representation or commit any other fraud for the purpose of obtaining the consent of the creditors to an agreement relating to the company s affairs or the winding up, ss210, 211 IA 86.
6 6. Where a company has gone into insolvent liquidation it is an offence for any director to use or be in any way involved in using the same or a similar name for a business, without leave of the court, s216(4) IA The IA 86 also includes: offences in which civil liability and/or financial penalties apply. For example, misapplying or retaining money or property or breaching a duty to the company can result in the court compelling the person to account for the funds; civil fraudulent and wrongful trading provisions in IA 86 Act which could result in the court ordering contributions to be made to the company s assets by way of compensation. It is for the IP to instigate civil proceedings which can be run in tandem with a criminal prosecution. [See Parallel proceedings ] Personal Insolvency Offences 1. In relation to voluntary arrangements, it is an offence for an individual to make any false representation or fraudulently do or omit to do anything for the purpose of obtaining approval of his creditors to a proposed voluntary arrangement, s262(a)(1). 2. Chapter VI IA 86 sets out offences which may be committed by a bankrupt following the making of a bankruptcy order which include: failure to give full disclosure of property comprised in his estate or of any disposal of property (excluding payment of ordinary business expenses) s353 IA 86; failure to deliver up as required property, books, papers and records s354(1) IA 86; concealing any debt due to or from him or concealing or removing property s354(2) IA 86; without reasonable excuse, failing to account for the loss of any substantial part of his property incurred in the 12 months before the bankruptcy petition s354(3) IA 86; preventing the production of books/records or concealing, destroying or falsifying books/records or causing the aforementioned in the 12 months prior to the bankruptcy s355 IA 86; making any material omission in any statement relating to his affairs s356 IA 86; fraudulent disposal of property, including making or causing to be made (within the 5 years preceding the bankruptcy) any gift or transfer of property s357 IA 1986; fraudulent dealing with property obtained on credit s359(1) IA 86. It is a defence to prove that there was no intention to commit the offence.
7 3. There are various constraints imposed on undischarged bankrupts, breach of which constitutes a criminal offence, s360 IA 86. For example a bankrupt may not: incur credit in excess of 500 without disclosing the bankruptcy, act as a director or in the management of a limited company; engage in business under a name other than that in which he was adjudged bankrupt. Human Rights A number of offences contained in the IA 86 contain a reverse burden of proof. In R v Sheldrake HL  EWHC 273 the House of Lords gave guidance on the interpretation of a reverse onus provisions and the extent that such provisions may be read down under the Human Rights Act 1998.
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