11 July 2011
Insolvency practitioners must stay on top of the Bribery Act as they run an increased risk of personal criminal liability. Alex Fox and Anna Brooks-Gallerani report
Despite the long lead-up to the controversial Bribery Act’s implementation on 1 July, a recent survey found that almost 40 per cent of UK businesses felt they needed more time to prepare for it. Lack of board-level awareness was pinpointed as a cause for concern.
While this sentiment might resonate with many insolvency practitioners they cannot afford not to get up to speed with the legislation. The Bribery Act enhances their potential exposure to criminal liability in a number of areas and could lead to a prison sentence of up to 10 years, a fine or both.
Like other individuals and organisations, insolvency practitioners may face liability under the act’s new statutory offences if they are found to have bribed another person, accepted a bribe or bribed a foreign public official. They may also fall foul of the controversial new “corporate” offence of failing to prevent an associated person, such as an agent, employee or subsidiary, from bribing another person.
Practitioners will suffer the dual burden of having to ensure their own houses are in order as well as those of the businesses they are trading, such as those in administration. To avail themselves of the defence of having “adequate” anti-bribery procedures in place, insolvency practitioners should roll these out both within their own organisations and within the businesses they are trading as a bribery conviction could deal a fatal blow to the finances of a struggling company and the practitioner’s reputation.
Practitioners should be wary of the increased risk of personal criminal liability the act imposes. For example, practitioners working in a senior capacity while trading a business may face personal criminal liability in the narrow additional scenario whereby they are found to have consented to or connived with that company in committing one of the bribery offences.
The criminal offences introduced by the act also have a knock-on effect on practitioners’ liability under the UK money laundering regime. The money laundering and tipping-off offences enshrined in the Proceeds of Crime Act 2002 are focused on “criminal property”, which is widely defined as a “person’s benefit from criminal conduct” where the “alleged offender knows or suspects that it constitutes or represents such a benefit”.
Since the money laundering offences are widely drafted to cover acts such as acquiring, using or possessing criminal property, this means in practice that insolvency practitioners who realise assets from companies that have been bribed could be found to have acquired criminal property. Even possessing assets that were acquired through bribery prior to the practitioner’s appointment could be enough to attract criminal liability.
Insolvency practitioners who suspect that the funds or assets of a business they are trading constitute a benefit from bribery - in whole or in part and either directly or indirectly - should make a report to the Serious Organised Crime Agency with a view to obtaining its consent prior to carrying out activities that would otherwise contravene money laundering legislation. After making a report practitioners will also need to bear in mind their duty to avoid tipping-off.
The Bribery Act is not the only new law insolvency practitioners are adjusting to. The Court of Appeal’s (CoA) recent judgment in BNY Corporate Trustee Services v Eurosail & Ors (2011) provides, for the first time, important guidance on the interpretation of the so-called ’balance sheet’ test of insolvency contained in Section 123(2) of the Insolvency Act 1986.
That section, on which a winding-up petition can be based, provides that “a company is also deemed unable to pay its debts if it is proved to the satisfaction of the court that the value of the company’s assets is less than the amount of its liabilities taking into account its contingent and prospective liabilities”.
The CoA rejected the argument that if a company’s last set of audited accounts showed a negative balance this should be enough for it to be deemed insolvent. While the figures in an audited balance sheet would carry some weight for the purposes of Section 123(2), the court held that the section could only be relied upon by future or contingent creditors of a company that has reached the “end of the road” or the “point of no return” - and this was a question to be decided by the court “with a firm eye both on commercial reality and commercial fairness”.
The requirement that companies must have reached the point of no return, a test that the court acknowledged is “imprecise, judgment-based and fact-specific”, will make it harder for a creditor to petition for a company to be wound up on the basis of balance sheet insolvency.
The cashflow insolvency test contained in Section 123(1) - that the company is “unable to pay its debts as they fall due” - is currently the most common basis for a winding-up petition, and this is likely to remain the case.
Alex Fox is a partner and Anna Brooks-Gallerani is an associate at Manches