Insolvency practitioners and those whose companies they handle face many complex legal, as well as financial, issues. This is why access to specialist legal expertise is crucial for both insolvency practitioners and their clients.
When insolvency practitioners step into a firm that has collapsed they don’t expect the scene to be a pretty one. Complex financial deals, angry creditors and staff and assets that need to be logged urgently and assessed for potential sell-on value. As solicitors dealing in business crime cases, we know that insolvency is often a highly-charged and complex environment in which to work.
Not everyone can be kept happy when the insolvency practitioner is called in – few will receive what they believe they are entitled to. But, despite the grumblings of disappointed creditors, insolvency practitioners act with a duty of care and an abiding principle of fairness when it comes to dealing with creditors. The finances can be analysed and acted upon within the constraints of the law. But what is often at issue is the legality of the conduct of those running the company before its collapse.
When it comes to insolvency, practitioners will be using their auditing abilities to establish if there are any signs of irregular or unexplained conduct by management or employees of a company. The tracing of assets or funds that may have gone missing before or just after a company becomes insolvent can be part of the workload, as can investigations into fraud involving the company by either its management, staff, suppliers or creditors.
Employees and management will have the best overview of a company. As a result, they are the people ideally positioned to either commit fraud or identify it. But, from a legal point of view, insolvency practitioners must balance the need for achieving the maximum obtainable return on the company’s assets with the obligation to look into what has happened and identify any wrongdoing. Placing more emphasis on the former rather than the latter can lead to accusations that the practitioner has simply sold off the assets cheaply to ensure they receive their fees – or, even worse, that they colluded with those who appointed them – to the detriment of the company and its creditors. Selling an insolvent company back to its owner or shareholders at a low price (albeit one approved by the Court) that leaves creditors empty handed is nothing new. It will make many people unhappy. But it can only really become legally contentious if practitioners can be shown to have ignored or failed to identify fraud that had been committed prior to their appointment.
Such cases indicate the scope of the insolvency practitioner’s powers. But with such powers comes responsibility.
Every insolvency practitioner is faced with legal obligations that - as business law continues to develop - place more and more responsibility upon them. Legal knowledge, or at least access to it, has become an increasingly important necessity.
In an insolvency situation, the practitioner needs to be able to access legal experts in business crime for an informed opinion on whether their suspicions of fraud are well founded. And if they are, the practitioner will then need to refer those who ran the collapsed company to an appropriate legal expert: someone who is experienced in such cases and capable of offering informed advice to either the practitioner or the client.
Money laundering, the proceeds of crime and bribery are just three areas of business crime that have been the subject of far-reaching UK legislation in the past decade or so. Such legislation is symptomatic of the UK’s desire to crack down on all forms of business crime – which places legal duties on those working within insolvency. Those duties make it more important than ever before that practitioners seek the best available legal advice on business crime; whether it is for them or their clients.
So how can we identify fraud? Or at least assess the potential for it? For more than a decade, Rahman Ravelli has defended professionals including accountants, investment brokers, hedge fund managers, directors, mortgage brokers, independent financial advisors and a host of other types of professional. The cases may differ greatly but they all have the issue of dishonesty at their core. So, if we take a case that is brought under the Fraud Act, the prosecution will fail unless it can persuade the jury that the defendant had dishonest intent.
This is a matter of fact for the jury and it relates to the defendant’s state of mind – not his conduct. In the case of Ghosh (1982), the Court of Appeal ruled that a jury has to decide whether “according to the ordinary standards of reasonable and honest people what was done was dishonest’’ and, if so, whether the defendant “himself must have realised that what he was doing was by those standards dishonest…’’. This is the so-called objective/subjective test of putting a reasonable, ordinary man in the shoes of the defendant. For example, if the findings of an insolvency practitioner lead to a company director being charged with defrauding the firm out of thousands of pounds, the prosecution has to convince the jury not only that he did defraud the company but also that he knew he was acting dishonestly at the time.
All defenders in these types of case must keep the question of dishonesty at the heart of their strategy. To put it bluntly, they must show either honesty of a clear lack of dishonesty. Similarly, the Ghosh test can serve as a vital fraud indicator when insolvency practitioners are examining what is left of a company.
In recent years, it has been said that anyone selling off assets of an insolvent company risks removing the very reasons for its demise. Much, if not all, of a company’s records and the activities of its personnel are now usually stored digitally. When the pressure is on to realise cash from what is left of a company’s assets, its computer system is one of the most glaringly obvious – if not one of the biggest earning – items to come up for sale. Such sales can mean the removal of data that could have proved the innocence or otherwise of those in control when the company failed.
In the emotional, financially-challenging world of insolvency, taking the time to look for data and examine it in depth may seem time consuming and possibly irrelevant. But maybe it would not seem so irrelevant if further investigations by another authority uncover wrongdoing. Wrongdoing that could have been identified by the insolvency practitioner if they had made those data checks – or had received timely legal advice.
We know that, as trained professionals, practitioners know their role and carry it out. Their findings are often the final word. But there is no guarantee that they will identify any evidence of fraud that has been committed in that company. Those who committed the fraud will have gone to great efforts to hide it. Insolvency practitioners may have the opportunity to spot it but company accountants may also have had the chance (and not taken it) in previous years.
For the insolvency practitioner who suspects wrongdoing at a failed firm, they must seek specialist legal advice. Such legal advice can clarify matters for the practitioner and also, as events develop, ensure anyone under investigation receives appropriate representation.
If criminal activity has gone completely undetected in a company that is now insolvent it would be unfair to expect an insolvency practitioner to identify it immediately. But if wrongdoing is suspected, it would be in all parties’ interests if a practitioner accessed specialist legal advice for themselves or anyone likely to be investigated.
