The client instructed Samuel Okoronkwo Jr. in relation to potential claims arising following the liquidation of a company and correspondence received from the liquidator seeking repayment of approximately £280,000.
The client was a director of the company and had acquired the business through a restructuring arrangement involving the acquisition of another company. The transaction involved the use of funds including a CBILS loan of approximately £250,000 which had been obtained prior to the client’s involvement in the business.
The liquidator had approached the company seeking repayment of funds and had raised concerns regarding the circumstances surrounding the acquisition, the use of company funds and whether monies had been applied for legitimate working capital purposes. The client disputed any suggestion of wrongdoing and explained that the acquisition had been undertaken with the intention of developing the business and bringing existing products and revenue opportunities into the company.
The client explained that he had invested significant time and resources into developing the business since 2011 and had been working to expand the company’s products and commercial opportunities. The client stated that approximately £125,000 worth of work and intellectual property had been transferred into the company as part of the acquisition structure and that the intention was for these assets to generate future revenue.
The client explained that shortly after the transaction he suffered serious health difficulties as a result of Covid-19, which significantly impacted his ability to operate the business and generate the expected revenues. The company subsequently ceased trading and was unable to meet its liabilities.
Counsel was instructed to advise on the client’s position, the potential risks arising from the liquidator’s enquiries, the CBILS loan issues and the appropriate response to the liquidator.
The principal issue was whether the liquidator could pursue the client personally in relation to the repayment of company debts, including the CBILS loan and sums allegedly owed following the acquisition transaction.
Counsel considered the circumstances surrounding the acquisition and whether the CBILS loan had been used for a permitted purpose. Counsel advised that the key concern for the liquidator and potentially the Insolvency Service would be whether the loan had been used as working capital to support the business or whether it had effectively been used to fund payments to departing shareholders as part of the acquisition structure.
A further issue concerned the share purchase arrangements and the benefit obtained by previous shareholders. Counsel considered whether the transaction could be characterised as a management buyout or a third-party acquisition and whether sufficient new capital had been introduced into the company.
Counsel also considered the client’s role as director and whether there was any risk of allegations arising in relation to mismanagement, misuse of company funds or breach of directors’ duties. Counsel advised that the focus would likely be on whether the client had authorised or benefited from any payments made from the company and whether the company had sufficient working capital following the transaction.
Counsel considered the client’s explanation that the business failed due to external pressures, including Covid-related illness, increased costs, reduced margins and difficulties generating expected revenues. Counsel advised that evidence would be required to support these explanations, including medical evidence and financial records demonstrating the commercial position of the company.
A further issue concerned the involvement of another director/shareholder who remained involved throughout the relevant period. Counsel advised that responsibility would not necessarily rest solely with the client and that the involvement of other directors would also need to be considered, particularly in relation to decisions made before and after the acquisition.
Counsel advised that the immediate priority was to respond to the liquidator’s correspondence regarding the repayment demand. Counsel advised that the response should explain that the company was unable to repay the sums demanded due to its financial position and should set out the circumstances leading to the failure of the business, including the client’s serious illness and the impact this had on trading.
Counsel advised that the response should not admit liability or accept any allegation of misuse of funds. Instead, the client should provide a factual explanation of the acquisition, the intended use of the funds, the investment made into the business and the reasons why the anticipated revenues were not achieved.
Counsel advised that the key risk arose from the possibility that the liquidator or Insolvency Service may investigate whether the CBILS loan was misused. Counsel explained that the relevant question would be whether the loan was used for legitimate business purposes and whether the funds ultimately benefited shareholders rather than supporting the continuation of the company.
Counsel advised that evidence should be collated to support the client’s position, including bank statements, acquisition documents, company accounts, records of investment made into the business, details of the products transferred into the company and evidence relating to the client’s Covid-related illness.
Counsel advised that the involvement of the former shareholders/directors would also need to be considered and that the client should communicate with the relevant parties in relation to the potential issues arising from the transaction. Counsel advised that this should be approached carefully and without creating unnecessary conflict.
Counsel advised that the likelihood of personal action against the client was uncertain and estimated the risk as approximately equal, depending on the findings of any investigation into the transaction and use of company funds. Counsel advised that the former shareholders/directors were also potentially exposed due to their involvement in the company during the relevant period.
Counsel advised that the immediate step was to prepare a response to the liquidator by the relevant deadline, addressing the company’s financial position, the client’s health difficulties and the reasons why the company was unable to repay the debt.
Counsel further advised that if the matter progressed and the Insolvency Service became involved, further advice would be required regarding potential director liability, recovery proceedings and any allegations relating to the CBILS loan.
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