The Times reported yesterday on the continued promotion of an “insolvency avoidance” scheme, despite efforts by the Insolvency Service to close it down. The scheme claims to offer directors of distressed companies a means of avoiding formal liquidation – with the associated scrutiny of their actions and risk of personal liability. 

The scheme, marketed by the “Atherton Corporate” group, involved the purchase of the shares of a distressed company for a nominal sum. The purchased company would cease trading shortly before, or at, the point of sale, but would be kept “live” for as long as possible, with its directors replaced by “figurehead” appointees before ultimately being dissolved or liquidated. Supposedly, this would place some distance between the original directors, and any subsequent liquidation. For this service, Atherton would charge a fee depending on the level of the company's liabilities. 

Meanwhile, typically a newco would be used by the original directors to continue the business, including by using the trading name, intellectual property and in some cases even continuing to access the bank account of the distressed company. No value would be paid to the distressed company for the assets, and no attempt made to recover money or assets for the benefit of creditors. This is in contrast to a true pre-pack sale, where an administrator (who has a duty to act in the interests of all creditors) executes a (pre-arranged) sale of a business shortly after appointment. Allegedly, directors making use of this scheme were led to believe that they would not be under any obligation to co-operate with any future liquidator of the distressed company, nor would any recovery action be taken against them for any debts due by them to the distressed company.

Seven companies involved in promoting the scheme were wound up by the Insolvency Service in September, for actions which (according to the Chief Inspector of the Insolvency Service) “would appear to have deliberately undermined the insolvency regime”. However, an investigation by The Times, in collaboration with Tax Policy Associates, has found that the scheme continues to be marketed through another connected organisation, “National Company Rescue”. The Insolvency Service is reported to be considering action against directors who have made use of it, and it is claimed that, in at least one case, HMRC are conducting their own investigation.

Given the significant potential for personal liability, directors of distressed companies should be aware that there is no alternative to taking proper, timely professional advice. Directors have a duty to consider the interest 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. Resigning before the company enters an insolvency process does not absolve directors of liability.

At best, the former directors of the companies using this scheme were naïve in believing that it would enable them to avoid any negative consequences of insolvency, both reputational and financial. It seems more than likely that they could face substantial personal liability for the debts of the insolvent company, as well as disqualification. Meanwhile, creditors of the insolvent companies - which in some cases failed owing multiple million pounds worth of debts - are the ultimate losers.