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Wrongful Trading - Do we disengage?

We have a construction client that due to various difficulties is now hopelessly insolvent.

Difficulties were first identified in early March and we have been attempting to help in various ways since that point (cash flow forecasts, attendance at meetings relating to contractor disputes and various other support).

It has now become clear (over the last week or so) that the company is now trading whilst insolvent with no real prospect of being able to trade out of it and it is my view that an insolvency practitioner needs to be approached without further delay and I have given this advice.

The MD is carrying on regardless with what appears to be no real care for suppliers. They are incurring further liabilities and I have also heard (second hand) that the company are still applying for credit accounts. It appears his plan is to maximise recoveries from contractors and start a new company. Any report on his conduct would certainly be adverse.

To make matters worse, the MD has now resigned his directorship and a appointed someone else as a 'puppet' director whilst still being in control of the company. County court letters are starting to land along with threats of winding up notices.

What do we do?
Do we simply disengage?
Do we have to report this?
Who to?

It is only actually reading this back it has now dawned on me how bad this is and I am concerned how this may reflect on my firm.

Replies

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09th Apr 2012 10:31

Dishonesty?

If you think that anyone (such as the former MD) is behaving dishonestly then it may be that a criminal offence of fraudulent trading, contrary to s993 Companies Act 2006, is being committed.

In that event you need to seriously consider making a report to your firm's MLRO (or if you are your firm's MLRO, report to SOCA) under s330 PoCA 2002 / MLR 2007.

David

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09th Apr 2012 10:41

Have you put your concerns in writing to the MD ( and I assume majority shareholder)? If not you should do so to protect your position because when the proverbial hits the fan he will blame everybody in sight

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Act now

I was previously FD of a large construction group which went into administration and finally liquidation.

The business was trading whilst insolvent, I brought it to the attention of the whole board and they did not act on it. To cut a long story short, I resigned and around 6 months later the bank called in the administrators.

The MD laid the blame firmly at my door saying I hadn't advised the board properly, had dealt with all financing personally and had not consulted the board etc (all untrue and I had the evidence to prove this - board minutes, e-mails etc).

I managed to defend myself amidst all the mud slinging but it was not an enjoyable experience.

So my advice, detail your position in writing to the MD, setting out all the issues and referring to previous advice, e-mails, conversations and tell him that unless he acts in what you consider the appropriate manner - call in the administrators, that you will (notify SOCA).

Give him a deadline to respond to as well as otherwise he will ignore you (he probably will going by what you've said).

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09th Apr 2012 12:08

The previous reply seemed to suggest threatening to make an MLR report. I don't think you can do that or it would be tipping off, surely?.

 

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09th Apr 2012 12:23

Threatening to report to SOCA

In the circumstances threatening to report the MD to SOCA does not amount to tipping off because (a) at that stage no report has been made to SOCA, and (b) the communication is likely to fall under s333D(2) PoCA 2002 as a communication made to a client with a view to dissuading the client from committing an offence.

However, irrespective of the legality of doing it, I would not recommend doing it as it is unlikely to assist you in persuading the client to do the right thing, in my opinion.

David

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By zebaa
09th Apr 2012 14:40

Get out

Clearly there are issues which are not being resolved. My advice is get out now. The only good thing about such a move is that you can get out before the real mud slinging gets going. If it comes to a time where you have to defend your actions then you say 'told you so.' You are unlikely to get paid any outstanding fees, of course, but you will have peace of mind.

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09th Apr 2012 17:28

I would resign

Personally I only work with people I pretty much like as people, and whom I trust to behave with honesty and integrity.  It appears neither applies here.

From me, this guy would already have had my "yellow card" letter spelling out exactly what he needs to do and by when otherwise I resign - the date is normally no less than 4 weeks away, in this case 1 or 2 seems more appropriate.

I typically use this when someone is "deadline chasing" or failing to produce records, but have also used it in integrity issues.  It works about 75% of the time, acting as a wake up call and the client shapes up.  So far most have then stopped their old practices.

Where there have been integrity issues, the yellow card letter puts a line in the sand.  It tells the guy in no uncertain terms that in my view something is wrong, and exactly what needs done to put it right.  As well as giving the guy a chance to put it right, it is useful evidence if the need arises that I was neither a willing party nor the sort of accountant that just thought of the fee and said nothing.

 

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09th Apr 2012 18:24

I agree with the views above

I would put my concerns in writing. The client may, or may not, realise the seriousness of their actions, as we all know that some clients only hear what they want to hear no matter how often we tell them the facts.

Putting it in writing may get them to realise how serious the situation is, but don't let them sweep it under the carpet. A deadline date is essential.

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09th Apr 2012 20:00

Trading whilst insolvent.

As accountant you may be regarded as colluding in this matter if you do nothing. From your comments the former MD will certainly make this claim. Report it as already advised, initially to the former MD; from what you say, he will certainly be regarded as a 'shadow' director, controlling the firm.

But, from experience I would caution you; take a second copy of this letter, lay them side by side, and make a mark running across both, your signature is perfect, to ensure that, if required in future, you will have proof that they are copies of one another. (Modern methods allow letters to be altered almost unnoticed) Post one to the firm, registered, with a receipt; as your MD has left, specify that it is for his replacement and he is to be shown it. post the second copy to yourself, getting it dated and franked. When it comes, do NOT open it. If the---- hits the fan, and the MD denies receiving your original letter, you will have a signed receipt and your unopened copy to produce.

This may sound melodramatic, but it is essential if your fears about the former MD are with foundation.

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10th Apr 2012 03:05

Registered letter

If the firm denies receiving the letter what can you say? They could say they received a blank envelope and you were trying to deceive them. I know most people wont say that but deceitful people may.

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10th Apr 2012 09:16

registered letter

True, 

There are certainly lots of dishonest people in this world. It is simply a matter of keeping one step ahead of them. If you wish to take extreme measures against the action you describe, go tou your local post office with the empty envelope, and the letter ready to insert. Insert the letter in front of the postperson, and have them sign a sheet of paper that you have done so. Keep hold of the sheet of paper. You will then have proof that your letter was in the envelope, it was delivered, and you will have a postcard signed by the firm stating that it has received it.

 

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10th Apr 2012 09:37

Have you done this?

I am doubtful that the "postperson" will do what you wish.

What postcard are you referring to?

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11th Apr 2012 11:31

Re Construction Company in Difficulty

It is not clear from your summary, if this is an Audit Client or not.

If it is an Audit Client then you will have to cover Going Concern in the Audit Findings letter, the Audit Report and ensure that the financial statements provide adequate disclosures.

If it is not an Audit Client, then the solution is clear. This company is paying you to provide accounting and financial advice. I would write to the Board and explain why in your opinion the company is insolvent. I would confirn the advice you have previously given, the various options they face, and the probelms they face if they do not follow the recommendations. I would request written reply from the Board within 3 working days, given the urgency of the situation.

If the reply acknowledges the problems and selects one of your recommendations- no problem. If on the other hand you get no reply, or a reply that dismisses your recommendations I would resign.

 

 

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11th Apr 2012 11:31

wrongful trading

Write and advise of implications of wrongful trading.

If you think that this has now become fraudulent trading that is a different matter.

Actions for wrongful trading are very rare as are fraudulent trading...

seems to be perfectly acceptable behaviour even though the law says its wrong.

You will be at risk however if you don't make a report (upon no action will be taken)

Absolve yourself and make a protective report.

Then any further work it's fees up front (so your independence and objectivity is not in question).

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11th Apr 2012 13:10

Fraud Act 2006?

Cover your rear end ASAP.

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12th Apr 2012 09:02

Priveleged Info?

I would consider whether the information has come to you in priveleged circumstances and you are prevented from making a report.

Any thoughts on this David?

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12th Apr 2012 17:33

Thanks All

For the advice given which has been followed.

We will swing for approximately £10k but that's life and a lesson learnt - some people are so plausible!

We won't act for the new company for the reasons Mr Mischief has pointed out.

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