Aziz Rahman, of award-winning solicitors Rahman Ravelli, considers the Carillion crisis, the issues surrounding a company’s collapse and how best to manage them.
The scale of the fall-out from the collapse of Carillion is yet to be fully known. Carillion has placed a question mark over a large number of UK building projects and over many companies that were in its supply chain.
When a company collapses, it is the senior figures in that company that come under closest examination. The government has asked for the Official Receiver to fast track its investigation into Carillion’s collapse. A number of former Carillion directors have already been called before the Work and Pensions Committee to explain what went wrong.
Wrongful or Fraudulent Trading
As yet, no clear conclusions have been made public. But issues such as wrongful trading and fraudulent trading are certain to be considered.
Wrongful trading is a civil sanction, where a company director knows, or should have realised, that the firm was going into liquidation but continues trading. Fraudulent trading is a criminal offence, where a company director knows or should have realised that the firm was going into liquidation but continues trading, with the intention of defrauding creditors.
Section 214 of the Insolvency Act 1986 allows a court to order a director of a company in liquidation to contribute personally to the assets in the liquidation if they are found to have wrongfully traded. That person can also be disqualified as a director.
Much depends on how much a director knew at the time of the alleged wrongful trading. A director will be liable under S214 if he or she allowed trading to continue when the company could be seen to be insolvent on its balance sheet, failing to pay its debts or not meeting its tax liabilities.
Fraudulent trading can carry up to 10 years imprisonment under the Companies Act 2006. It is regarded as a more serious offence than wrongful trading.
Defending an allegation of either wrongful or fraudulent trading involves assembling the relevant evidence – accounts, business plans and relevant correspondence - to challenge the authorities’ claims and assumptions.
A company collapse may lead to the Insolvency Service or Official Receiver asking a director for answers to written questions or to give oral testimony. If later on, however, a criminal investigation begins into the collapse, different rules apply regarding issues such as self-incrimination and the right to silence.
Anyone questioned about the demise of a company must, therefore, take advice on how best to respond to such questions - and take that advice from the moment they suspect an investigation is about to start. This is the only way a person in such a position can protect their interests; whether it is a civil or criminal investigation.
With Carillion, we don’t yet know whether the matter is one of fraudulent trading, other regulatory offences, wrongful trading or other civil /criminal enforcement issues. But when it comes to placing the blame for the problems at any collapsed company, the authorities will be looking at the behaviour of those at the top.
This means any number of directors or senior executives could be questioned, arrested or even charged. Being interviewed by the authorities and having to watch while your workplace - or even your home - is searched, is never pleasant.
Anyone who believes they face such a prospect, therefore, must be proactive. Seek the appropriate legal advice, keep notes or copies of anything that could help your defence and be prepared to defend your assets and your reputation.
Aziz Rahman is founder of Rahman Ravelli; a top-ranked business crime law firm in national and international legal guides.
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