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He was accompanied by BDO Insolvency expert Roger Sparkes who will be commenting tomorrow (November 12, 2002) on the EBT discussion forum (available via Shout99 to CFP/Dignatio creditors).
The creditors meeting, called by Simon Thomas the provisional joint liquidator from Tenon Recovery, proved to be notable for a number of reasons. The meeting attracted far more creditors than normal – around 50 or so. This was due in part at least Mr Thomas thought to the activity generated by the reports on Shout99.
The majority were contractors who had worked through CFP but, most unusually, two officers from the Inland Revenue also came to represent the Revenue’s claims. Their presence was to prove most enlightening as to the scale of the possible problems!
Also at the meeting was the company’s sole director Celso Meira and Matthew Lindsay of Bird and Bird, the legal adviser to the provisional liquidator. It was to become clear as the meeting progressed exactly why the liquidator was in need of legal advice and why the Revenue had taken the unusual step of attending.
The meeting started with Mr Thomas reading out a report on behalf of the director. He stressed that the information for the report had been supplied by the director. Thomas confirmed that he had been instructed by the board on 25 October 2002 under S98 Insolvency Act together with his colleague and joint liquidator Peter Dunn.
Their appointment had been effected at short notice to enable the company to go into liquidation as soon as possible, thereby enabling their contracts with agents to be terminated – leaving contractors free from that date to make their own arrangements with clients and agencies for billing any continuing work. One of the tasks of this meeting would be for the creditors to confirm their appointment as liquidators or make any changes they desired.
Mr Thomas ran briefly through the company’s history and then moved on to outline the company’s financial position as set out in the statement of affairs, which each creditor received. Mr Meira, who is a Portuguese citizen with links to South Africa, had started the company in 1998. His wife Maria Meira, the company secretary, is a South African. Mr Meira started working as an IT consultant, contracting via the company in 1998 and the company operated on that basis until February 2001. At that point, realising that IR35 would seriously impact his business Mr Meira changed the company’s focus to operate as an umbrella company. It sought legal advice from a large firm of solicitors and from Counsel and began to operate in a tax effective way designed to help minimise the effects of IR35. At the time it ceased to operate it had 240 consultants working for it.
Setting out the company’s assets and liabilities Mr Thomas said that the company has cash at bank of about £1.46 million – which was now under the liquidator’s control. It has net loans due from consultant’s of £57K, sundry other assets and debtors and, finally, it is owed about £129K by the company director. It had also invested £40K in a company in South Africa that was estimated to be worth £20K. Amongst its liabilities are preferential creditors for employee arrears of wages and holiday pay of £29K (employees get preferential treatment for £800 of outstanding salary each plus arrears of holiday pay), HM Customs and Excise, who are owed £310K, and PAYE /NIC due to the Revenue of £161K.
In addition, there are unsecured creditors including about £1.2m due to the employee benefit trust trustees, other employee arrears of wages of £33K and general expense creditors of about £30K.
Based on these figures the liquidator estimated that there might be a surplus of £240K.
However, and it is a very big however, these estimates make no provision for additional amounts that might be due to the Inland Revenue in respect of outstanding corporation tax and possible PAYE/NIC in respect of payments to contractors via the EBT. Mr Thomas said that the company’s accountants were unable to quantify what these potential liabilities might be with any accuracy.
Mr Thomas reported that the director had informed him that the crisis had been precipitated in early September when the director had realised that a failure to make a payment due to the EBT before the company’s year end on 28 February 2002 had resulted in the company making a possible profit of about £1.2 million on which corporation tax would be due. The director took legal advice from solicitors and from its auditors Grant Thornton, who also identified that under new accounting provisions, which affected contributions to EBT’s, CFP might have to consolidate the EBT into CFP’s accounts. In view of the uncertainties regarding the tax liabilities the director was advised to cease trading and appoint a liquidator.
Mr Thomas noted that Mr Meira had indicated that, if after the liquidation, there were any surplus assets due to the shareholders then they would pass those funds to the trustees of the EBT to help meet any unpaid commitments from the EBT to the company’s employees.
Having outlined this background Mr Thomas invited questions.
Roger Sparkes an insolvency expert from BDO Stoy Hayward who had been contacted by Shout 99 to help contractors noted that he held proxies for about 50 contractors. He asked Mr Meira a number of questions. Had he taken professional advice when setting the umbrella arrangements up? Had he received advice in writing and had he followed it?
Mr Meira indicated that he had taken advice from solicitors and Counsel and had received advice in writing and said he had followed it. However he went to explain that the EBT had only been set up at the start of 2002 and yet, due to an “error in planning”, the company had not made any payments to the EBT before the end of the financial year on 28 February 2002 and it was this error that had precipitated the problems regarding the company’s corporation tax position. Despite several questions from Roger Sparkes and others about the amounts and timing of payments to the EBT Mr Meira seemed surprisingly uncertain as to the details on this issue and was unable to remember any definitive details but said he would have to check with the EBT Trustees.
It seems strange that having taken professional advice on this complex structure that the advice did not make it clear when payments to the EBT had to be made to be effective. And if that advice did include such details then it seems that failure to follow that advice was more than just a “planning error”!
Roger Sparkes also asked Mr Meira how he came to owe the company £129K. It appears that he took loans from the company in several tranches and with no clear terms for repayment. However Mr Meira confirmed to the meeting that, while it would be difficult, he would repay the loan in full as and when the liquidator asked for it.
After a number of questions of detail from several contractors the two Revenue officers David Anderson and John Lindsay asked a series of questions. They established that before the EBT was set up employees had been paid in salary and by way of foreign currency loans.
They then launched their own bombshell on the meeting.
They said that the situation was clearly very complicated. There were issues arising out of being an umbrella company; there were soft currency loan issues and then there was the EBT. They could not prejudge the Revenue’s position but it appeared to them that there was a possible claim from the Revenue against the company for unpaid PAYE and NIC of around £3m to £3.5m This was in addition to possible corporation tax liabilities of perhaps £0.75m.
They probed in some depth how Mr Meira, an IT consultant, came to be running a complex umbrella company? Mr Meira confirmed that having seen the issues raised by IR35 and seen similar schemes he devised the basic idea for CFP and then took advice from lawyers and Counsel. He had invested about £40K in such advice – all paid for by CFP. Mr Meira also stated that he appointed Grant Thornton as auditors about 6 months ago and they had just started the audit in September when the tax issues came to light.
Mr Lindsay asked how Mr Meira had marketed the scheme and questioned him at some length on whether he had made any verbal commitments to contractors about how much they would receive from the EBT? Mr Meira stated that he had advertised via the Contractor UK web site for about 13 months but had then relied on word of mouth. The scheme provided that contractors would receive a salary of 1/3 of the fees they earned and that the remaining 2/3 would be passed to the EBT. There were no guarantees as to how much they would get from the EBT, which had separate trustees in the Isle of Man. The Revenue obviously found it difficult to believe that a contractor would agree for 2/3 of the fees they generated to be passed to an EBT without some commitment as to what they would receive in return.
Mr Thomas confirmed that they had not yet ascertained what funds the EBT held and they were restricted as to what information they could seek until the creditors had confirmed their appointment.
In response to questions about how long the liquidation might take Mr Thomas noted that much would depend on the Revenue and any claims they might make. Until these were resolved the degree of uncertainty was too great for the liquidator to have any idea of what funds might be available for creditors.
Roger Sparkes asked if the company or the director carried any indemnity insurance? Mr Meira said yes but later questioning suggests that he was confused and there might only be public liability insurance, not any directors and officers or professional indemnity insurance. However, Mr Thomas stressed that one of his aims would be to establish whether there were any possible claims for negligence against the director or any advisers to the scheme.
He also confirmed that if the Revenue were to claim for £3 – 3.5m in unpaid PAYE and NIC it would be against the company. However, as Mr Lindsay from the Revenue confirmed, there were provisions in law under which the Revenue could claim PAYE and NIC from anyone who had knowingly received monies on which PAYE and NIC was known to be due!
After this question and answer session Mr Thomas moved on to the formal matters for the meeting. Mr Thomas and his colleague Peter Dunn were confirmed as liquidators.
A creditors’ committee was appointed comprising Roger Sparkes of BDO, Mr Lindsay of the Revenue and two employee/consultants. This committee would liase with the liquidators and would be consulted on all key issues – such as possible legal actions to determine the schemes tax position.
Conclusions
The meeting proved to be a valuable insight into the background to such schemes and the issues that such schemes involve. It is clear that the liquidators have many difficult issues to resolve. It also clear that Mr Thomas and his colleague will be very professional and rigorous in defending the company against wider claims from the Revenue and in determining to what extent, if any, the director and his professional advisers were negligent in the way the scheme was set up and run. It is not clear whether Mr Meira and his wife, who earned £100K between them from the company, have the resources to make good the loans from the company and any other amounts that might be due.
This liquidation will not be quick or easy to complete. It is clear that the Revenue sense that they may have a valid claim to a huge amount of PAYE and NIC. They are unlikely to give that up without a legal fight. Equally, it is unlikely that the liquidator will surrender to a large Revenue claim without testing the legal issues. Whether such legal actions will leave much for any of the creditors is not clear. The only winners in this liquidation may well be the lawyers!
It will make any meetings of the creditors’ committee interesting, as the Revenue representative will have to be excluded whenever they are considering the issue of possible claims from the Revenue and the strength of any defence against those claims. Mr Lindsay may end up not being present at the bulk of these meetings!
Finally there is the position of Nobel & Co the trustees to the discretionary EBT in the Isle of Man. We do not know how much they may have received from the company and what they are obliged to do with those funds under the trust deed.
This story is set to run and run. It is likely to prove to be something of a trailblazer.
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KevinM, © Shout99.com 2002
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