Risks for parent company executives when a foreign subsidiary fails

Most directors are aware of the UK’s wrongful trading offence (Section 214 of the Insolvency Act 1986), and know something about director disqualification, but, in reality, there are not many prosecutions under these provisions in the insolvency legislation.

With the spread of global trade, even small UK businesses can have one or more foreign subsidiaries. When these must be closed down too, their parent company executives can quickly find themselves facing a completely different set of rules, regulations, and possible personal liabilities to anything they know.

The difficulties are not just about complying with unfamiliar insolvency regimes in foreign jurisdictions. Quite often these overseas operations aren’t large and haven’t been managed to the same standards as the parent company. Not only are their finances in a mess, but there may be serious issues with regulatory non-compliance.

There may not be enough management resources to maintain proper internal controls and financial records. There may have been too much reliance on external service providers, such as local accountants or legal advisers who have not performed satisfactorily. Maybe the parent company management have simply taken their eye off the international ball.

Because these issues only emerge in a financial crisis when UK directors are at their most vulnerable, managing directors’ expectations and worries can be a real problem for their financial and legal advisers. In two recent cases, dealing with these overseas situations threatened to disrupt the main restructuring activities in the UK.

In one case, a small UK group is being restructured through a Company Voluntary Arrangement (CVA). It had insolvent retail branches in France and the United States, which were closed down to stem losses and stop them draining group cash flow. The US subsidiary has not been a problem so far and is being dealt with through the Assignment for the Benefit of Creditors process, which is less well-known internationally than either Chapter 7 or 11, but is entirely appropriate for the circumstances.

The French subsidiary is a very different situation, especially because there has been a major regulatory breach. The company has not filed any annual accounts at the Commercial Court Registry for the seventeen years since it was set up in 2008. The possible penalties total almost EUR 50,000 and there is a risk that its only director, the owner of the UK group, could be held personally liable for damages for the failure to file. This significant omission was uncovered by the excellent GGI law firm Herald Avocats instructed to assist in France.

There was a proposal to move the French inventory back to the UK to maximise the realisations for it, but Herald warned that this would have exposed the director to personal liability for any damages suffered by creditors in France caused by moving assets out of the jurisdiction of the insolvent French company. Dealing with this and the filing problem have significantly delayed the UK restructuring.

On another case, administrators were appointed three days before Christmas to a UK group with a sales operation in Germany, which is also insolvent. The timing caused issues with complying with the strict three-week deadline for an insolvency filing. Filing late would have exposed the sole director, who is the UK parent company CEO, to potential personal penalties and responsibility for the German company’s debts. There may also be personal issues for him over non-compliance with payroll tax regulations for employees in Austria and Switzerland. He became seriously distracted by this risk at a crucial time for the UK business, almost causing its rescue to fall apart.

This is not just an issue for UK restructuring and insolvency (R&I) professionals. The differences between insolvency regimes around the world and the potential consequences for “home” executives when their “away” operations collapse can disrupt and damage the outcomes for stakeholders in the home jurisdiction. This makes access to top class professional advice overseas vitally important.

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Nick Hood is Senior Adviser to the Opus Business Advisory Group. He was a Chartered Accountant for over fifty years and a licensed insolvency practitioner between 1992 and 2010, specialising in mid-market and SME business problems. He is a committed internationalist, having previously created and run the largest international association of specialist business rescue firms.