Is this a Police matter?

Is this a Police matter?

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Scenario is:

Ltd Co A, two directors, discussing separating/closing the business from Sep / Oct 2012

2nd director sets up Co B, so that he has a vehicle to take his share of the business going forward and agrees that 1st director keeps Company B.( cannot work with Director 1)

As a result of numerous tearful sessions with Director 1, he doesn't leave Co A till Dec 2012.

Now, new director 3 of Co A calls us claiming that 2nd director has 'embezzled' and commited 'fraud' against Co A, as he has invoiced and done worl under Co b.

Any thoughts?

Both Co A and Co B are clients, but not for very much longer as one will need to go.

Replies (6)

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David Winch
By David Winch
11th Feb 2013 11:53

Advice

I would suggest that you advise director 3 to see a solicitor if he thinks that company A is a victim of crime.

It is not clear from your original post, but is director 3 saying that co A did work for a customer who has been invoiced for that work by co B instead?

Frankly if director 3 goes to the police with that he is likely to be brushed off with the response "it's a civil matter".  I doubt that the police would even acknowledge that "a crime" has been reported in these circumstances or issue a crime number.  (That is not to say that the police view would necessarily be correct.)

From your point of view the issue is do YOU suspect that a crime (i.e. an act involving deliberate dishonesty) has been committed from which someone has obtained a benefit?

If you do then you need to consider your reporting obligations under MLR 2007 / s330 PoCA 2002.

David

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By murphy1
11th Feb 2013 12:12

Hi David,

 

Thanks for that. The director did work and invoiced from Co b instead of Co A. However, there had been discussion that he would move all 'his' customers over to his company and leave the other directors customers in the Co A, so I guess it will have more to do with the timing.

The police apparently told him to speak to his accountant, but I think the new director is just trying to get info about the new company and is irate at the moment.

Thanks again

 

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By SwanseaJack
11th Feb 2013 13:07

Issues

It appears to me that there are a number of contractual issues here that would need to be investigated before a view can be taken as to whether a crime was committed.

1. Which company was a party to the contract with the customer?

Did the director explain to the customer that it was company B that would be doing the work?

2. Did the director breach any clause of his service contract with Company A?

Does his service contract have any clauses prohibiting him from undertaking work for other companies?

3. Were any of company A's resources used to fulfil the work done?

If so, at the very least, company B should reimburse company A for that. (If the director carried out the work himself, but was taking a salary from company A for that time, then there is a reasonable argument that company B should reimburse company A for that time at an appropriate hourly rate)

 

Depending on the value involved, seeing a solicitor may be advisable. I would always advocate that the transfer of 'his portion' of the business from company A to company B should be the subject of a formal legal agreement, and would suggest that this could be wrapped up in that agreement. (Otherwise I could foresee bigger legal bills in the future as other arguments arise)

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By murphy1
11th Feb 2013 13:48

@ SwanseaJack

Thanks and I think this is the issue.

Director 2 took a small wage and expenses so should pay this back. Directors verbally agreed and would not consult a lawyer. Even if they actually split end Dec 2012, it would be very difficult to prove anything else without it in writing.

Or am I missing something?

 

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By BakerCrane
12th Feb 2013 12:10

Secret Profits & The Director

If we look at a recent case on Secret Profits, this will give you a general idea of what the Courts think about the matter. I do note however that there was an agreement in principal that the Director leaving and was taking his clients (and future clients?) and therefore belive there is no case to answer.

"A director was doing up his house and, in his personal capacity, hired equipment from a customer of the company. The Court of Appeal decided that he had breached his duties to the company and so he had to account to the company for his secret profit, even though the company had had no use for the equipment."

Background law

A director of a company must use his position in the company to promote its success and protect its interests. He has a duty of loyalty to the company and a duty to avoid a conflict between his personal interests and his duty to the company. These duties embrace a duty not to make a secret profit for himself.

The facts of the case

Mr Towers was a director of Premier Waste Management Limited. Through another employee of Premier, Mr Towers arranged for one of Premier’s customers, Mr Ford, to lend him for free some equipment for him to use to renovate his country home. The equipment, which was in a poor state of repair and was of little value, stayed on his property for five years. At no time did Mr Towers inform Premier of the arrangements, nor seek its permission. Indeed, Premier discovered the arrangement only when Mr Ford attempted to invoice Premier for the loan of the equipment five years later.

The decisions

The judge at first instance found that Mr Towers was liable for breach of his duties to the company and ordered him to pay Premier £5,200 plus interest. The Court of Appeal agreed with the judge.

The facts of this case took place before the statutory statement of directors’ duties, enshrined in the Companies Act 2006, came into force. The Court of Appeal clearly considered that the statutory statement does not change the law in these respects.

Lessons from this case

This case is a timely reminder of just how strictly the courts view the duties owed by a director to a company, the meaning of “absolutely loyalty” and the importance of disclosure. What appeared to be an informal loan of equipment between friends, was viewed by the court as a breach of the director’s duties to the company.

The lesson here is that a director must always be mindful as to whether an opportunity has come to him in his position as a director and he must always disclose to the board at least any such benefit or any arrangement however small or insignificant.

You can read the Court of Appeal judgment of the case of Towers v Premier Waste Management Limited [2011] EWCA Civ 923 if you click here. 

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By jndavs
14th Feb 2013 10:23

Industrial Development Consultants v Cooley [1972]

In a similar vein, you may want to check out this case.

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