Aziz Rahman examines some of the issues involved before, during and after a company collapses.
When a company collapses, there is often a temptation to look for a scapegoat. But while others may be looking to cast aspersions and accusations, the authorities will be more concerned with finding the actual cause of the collapse.
The recent allegations surrounding the demise of BHS are a classic example: Philip Green’s financial tactics, Dominic Chappell’s unsuitability for running a company and BHS’s failure to move with the times are just three of the accusations that have regularly been made.
The Parliamentary Work and Pensions Committee has asked the Serious Fraud Office (SFO) to start a formal inquiry, Green and Chappell seem intent on criticising each other, meanwhile BHS staff lose their jobs and worry about their pensions.
Any company that collapses will face investigation by somebody, whether it be administrators, liquidators or law enforcement bodies.
If you run a business and believe that all is not well, appointing a business crime lawyer to conduct an internal investigation can help identify current or potential problems, find ways in which they can be resolved or minimised and provide guidance on how to report any wrongdoing to the authorities.
This puts you on the front foot if and when the company collapses. As the SFO now has deferred prosecution agreements as an option – whereby a company reports wrongdoing, admits its faults, pays a penalty and then adheres to conditions imposed to prevent it happening again – it is less likely to prosecute companies self reporting. This is worth remembering if you identify problems in your company.
It should never be forgotten, however, that the best way to avoid collapse is to eliminate problems as early as possible. A thorough internal investigation can lead to strong, anti-corruption procedures being introduced – procedures tailored to that particular company and the geographical and commercial sectors that it functions in.
Investigators’ objectivity and acumen can also be of value in tackling some of the “home truths’’ that those running or working in a company may not want to recognise. For example, are those in control competent?
It is unlikely that any director will be keen to point the finger of blame at themselves or even a fellow director. But an internal investigator called in to identify the problems will have no such reluctance.
Acting on such advice may be a bitter pill to swallow. But if it turns out to be the advice that prevents a company’s collapse or minimises the damage when it does become insolvent, then it has been a medicine worth taking.
If such advice is not acted on, it could well be the SFO or another agency making the accusations. These can lead to prosecution, disqualification as a director and a variety of penalties for the firm or individual.
It is worth noting, however, that the SFO does not always get it right. Its disastrous raids on the premises of the Tchenguiz brothers five years ago showed that both its judgement and its application of the law are not always infallible. Appointing a solicitor the moment you suspect the firm is in trouble can provide the best defence to any allegations that are eventually made.
Any company that has had its affairs scrutinised by those with business crime expertise will be in a strong position to answer questions and challenge allegations should the SFO start investigating – regardless of whether the company has collapsed. Those who have carried out the investigation can explain the “wider picture’’ by showing how certain activities that may look questionable on paper are actually legitimate practices in such a business.
Lawyers can also negotiate with agencies such as the SFO to challenge the accusations. This can mean countering the allegations at all possible stages: before any formal investigation has begun, during interview, prior to charges being brought and during any trial.
They can also be of great value in defending directors if disqualification proceedings are brought against them or they face being expelled from a professional body. The collapse of a company can bring problems on many fronts. You need to have your affairs handled by someone experienced in dealing with the various agencies.
If a company is declared insolvent and an insolvency practitioner (IP) is appointed, this brings its own legal requirements. The IP may need to advise people within the company that they will require legal representation as wrongdoing is suspected. At the same time, it is possible that the IP may even be the subject of a legal action brought by someone within the company who either genuinely believes that practitioner has not acted correctly or thinks that such action is the best way to protect their assets in the company.
The Insolvency Practitioners Association’s Ethic Codes for Members emphasises the need for IP’s to provide a “competent professional service’’ based on the law and their profession. This certainly highlights the need for IP’s to be fully aware of the law when a company collapses.
But everyone has to know the legal position – and their duties under it – when a company is at risk of collapse.