The dangers of using insolvency avoidance schemes for company directors

The Insolvency Service has been busy clamping down on companies promoting ‘corporate rescue’ schemes that undermine the insolvency regime. Yet The Times has revealed that despite these efforts, insolvency avoidance schemes were still being promoted — most notably from the Atherton Corporate Group.

Here, William Hardwick and Rob Turner explain how these schemes work and the significant dangers that directors face if using them.

What is an insolvency avoidance scheme?

Insolvency avoidance schemes seek to offer directors a means of avoiding liquidation and its possible consequences.

Atherton Corporate Group is an example of a company using an Insolvency Avoidance scheme. These schemes have been promoted by companies as a legal alternative to using insolvency practitioners. 

How does an insolvency avoidance scheme work?

The scheme that Atherton runs involves companies being sold to Atherton by their directors for a nominal fee. This is designed to help the directors distance themselves from the failing company. Atherton then installs new directors and waits for the company to be dissolved or fall into insolvency with no attempts to trade, repair the business or recover money for creditors.

Some of the misleading practices exercised by Atherton and highlighted by the Insolvency Service include:

• Selling companies in financial distress and misleading former directors by telling them that they’d be able to keep their company’s assets and continue to trade through a new company while avoiding responsibility for its debts. 
• Telling customers that there’d be no requirement for former owners to cooperate with liquidators, insolvency practitioners or the Insolvency Service — and that recovery action wouldn’t be taken against them by the new directors for any debts due by them to the company in financial distress. 
• Making claims that the new company could use the distressed company’s trading name without any need to pay for it — and that the books and records of the distressed company could be disposed of after the sale. 
• Advising customers that they could delay providing information to Companies House to continue accessing the distressed company’s bank account.
• Telling customers that resigning as directors before formal insolvency proceedings would remove the risk of reputational damage.

As a result of investigations by the Insolvency Service into such practices, Atherton Corporate (UK) Ltd and Atherton Corporate Rescue Limited were wound up and five associated companies that helped to facilitate the scheme were closed.

Atherton — the tip of the iceberg?

Atherton was by no means the only firm to be undermining the insolvency regime. 

Manchester-based Save Consultants Ltd was shut down in the public interest after investigators found that it had been acting as an unlicensed insolvency practitioner. Save Consultants acted in a similar fashion to Atherton — and despite claims that it had worked in the insolvency industry for years, none of its directors were licensed insolvency practitioners. 

David Usher — Chief Investigator at the Insolvency Service — said: “Save Consultants claimed to offer services to the public which put the integrity of the insolvency regime at risk. They were offering the services of an insolvency practitioner without the authority to do so.”

Risks & impact on directors & creditors

The misrepresentations made to company directors about such schemes can have far-reaching consequences. Directors have a duty to consider the interests of creditors when they know (or ought to know) that a company is insolvent or bordering on insolvency or that an insolvent liquidation or administration is probable. This means that resigning before the company enters into an insolvency process will not absolve a director of liability. 

Directors participating in this scheme may be found to have engaged in fraudulent and wrongful trading and breached their fiduciary duties. As a result, they could face substantial personal liability for the debts of the distressed company, as well as disqualification as a director (for up to 15 years) and even criminal liability. 

Moreover, these schemes ultimately fall short for creditors. Many will be left with huge amounts of debt unpaid as a result of these schemes, which may ultimately lead to more insolvencies.

Case in point — Neville Taylor

To give an example of the potential consequences of engaging in an insolvency avoidance scheme, Neville Taylor was recently revealed to have been paid £266,914 by Atherton to become the sole director of 12 companies that ceased trading but hadn’t entered into liquidation. 

The Insolvency Service stated that Taylor had made “little or no attempt to verify information relating to their affairs… breaching his duties as a company director and subverting the insolvency system in the process”. This included failing to identify more than £7.6m in assets across these companies, obtain company records and make himself aware of the companies’ trading. 

As a result of his involvement, Taylor was disqualified from being a director for nine years. 

Importance of consulting licensed practitioners

Any business owner who hears that they should avoid engaging with licensed insolvency practitioners should consider this a legitimate red flag. While the promises made by insolvency avoidance schemes are often false, in times of crisis many businesses will continue to risk their futures and reputations by turning to these unlicensed services.

Any business undergoing financial challenges should speak to a licensed insolvency practitioner or legal advisor who can assist you regardless of whether or not they actually end up working with you. They’ll always let you know what you can and can’t do and be straight with you about the consequences of trying to avoid your responsibilities as a director to a financially distressed company. 

Alternatively, the Insolvency Service issued a guide in March 2022 to help directors recognise the signs of insolvency and understand their duties as a director.

Talk to us

Our insolvency team has a vast amount of experience in all manner of contentious and non-contentious insolvency and restructuring matters. We work alongside trusted insolvency practitioners who conduct insolvencies professionally and avoid the need to use insolvency avoidance schemes.

Our corporate defence and compliance team is also on hand if you or your company are facing criminal charges or need to implement a stronger financial crime and counter fraud compliance programme. With specialists in criminal fraud, we can react fast and advise you on the best course of action. 

Talk to us by giving us a call, sending us an email or completing our contact form below.