The transition from a family business to a family office can be treacherous. In a family business, the family is still involved in the day-to-day operations of the business and is literally “watching the store.” In a family office, the day-to-day operation of the family business and other financial investments and endeavors of the family may be delegated to experts outside of the family. This should create an enhanced level of professionalism and provide institutional safeguards and protections for the family, but can backfire.

Bilta (UK) Ltd in liquidation) & others v Muhammad Nazir & others [30.07.12]

High Court refuses to accept that a claim by an insolvent one-man company against its director for breach of his duties would be barred by ex turpi causa.

Bilta had two directors, one of whom owned all the company’s issued shares, effectively making it a "one-man company". The directors used Bilta to perpetrate a huge VAT fraud which left the company owing £38 million to HMRC. As a result, it was placed into insolvent liquidation.

Introduction

In the recent High Court decision in Bilta (UK) Ltd (In liquidation) and others v Nazir and others [2012] EWHC (Ch), the court considered the application of the legal doctrine of ‘ex turpi causa non oritur actio’ in the context of fraud.

When is a company in insolvent? When is a company's assets less than its liabilities (taking account of contingent and prospective liabilities)?

Under English law this is a commercial test and requires that a company has reached a "point of no return" and is not based solely on a review of the company's balance sheet:  

Company Insolvencies

One of the criticisms that is often made of the UK’s complex insolvency legislation is that it is too easy for the directors of a company to put it into liquidation or administration, ‘dump’ the company’s debts and then effectively start the same business again under the guise of a new company. Such phoenixism has often been of concern to HMRC both in the civil and criminal fields and prosecutions have been made against directors who have undertaken such activities on a repeated basis.

Personal Liability Notices (‘PLNs’)

Payless Cash & Carry Limited v Patel and Others [2011]

The decision of Mr Justice Mann in the High Court in Payless Cash & Carry Limited v Patel and Others [2011] exemplifies the detailed investigation which can be carried out by the appointment of a provisional liquidator or a liquidator in cases of suspected fraud. It also contains some useful comments on the extent of the liquidator’s evidential burden in such cases.

HMRC is leading an increasingly tough stance against owners of businesses that have failed to pay their taxes before going bankrupt, says City law firm Wedlake Bell.

Figures from the Insolvency Service reveal that in the last year Bankruptcy Restriction Orders (or equivalent undertakings) were obtained against 443 bankrupts because of neglect of their business - a majority of which were alleged to have consistently failed to pay taxes to HMRC. This was an increase of 21% on last year and concern actions taken against sole traders and partnerships (Year ending March 31).

The Sinclair v Versailles1 decision has extinguished any prospect that a victim of a fraud has a proprietary claim to a fraudster’s secret profits. It also offers significant comfort to banks, insolvency practitioners and other potential recipients of trust funds by setting a high bar for whether a recipient person is “on notice” of a proprietary claim to those funds.

Nicola Jane Haworth (Bankrupt) v (1) Donna Cartmel (Trustee in Bankruptcy of Nicola Jane Haworth) (2) The Commissioners for HM Revenue & Customs

Case No. 3496 of 2009 in the High Court of Justice, Chancery Division, Manchester District Registry

Summary

In relation to insolvent liquidations under U.K. law, one of the primary objectives will be the implementation of an efficient process to preserve and recover assets for the benefit of the creditors. This is particularly so where there is a need to instigate costly litigation or cross-border recognition proceedings and where the liquidator will want increased assurances as to the likelihood that those steps will generate positive returns.