A specialist financial services advisory team has advised on a landmark legal case in which the director and insolvency practitioner of a major insolvency practitioner business was found to have acted negligently in his capacity as director, and dishonestly in his capacity as office holder appointed in respect of IVAs administered by the business.

Following the high profile Administration of Varden Nuttall Limited, (having been in the UK top ten volume providers of Individual Voluntary Arrangements (IVAs)), the regulation of the IVA sector is now under growing scrutiny.

In the first reported case of its kind Philip Nuttall, licensed insolvency practitioner, and one of the Directors of Varden Nuttall Limited, was found to be in dishonest breach of his duties as former supervisor of the IVAs.

IVAs are legal arrangements between debtors and their creditors designed to help people who are in a vulnerable situation to manage and pay off a proportion or all of their unsecured debts, and to avoid bankruptcy. They are set up and administered by licensed Insolvency Practitioners who charge a fee in return for supervising the IVA.

This case attracted the interest of the industry when, during the investigation by the Administrators and the newly appointed Supervisors, it was discovered that there was not only a shortfall in the client account of approximately £9m, but also evidence of fraudulent practices by Mr Nuttall who was the leading Insolvency Practitioner at Varden Nuttall Limited leading to further losses to the creditors of the IVA estates.

At the time of its insolvency Varden Nuttall Limited was administering almost 2,800 insolvency cases and the massive shortfall of some £9m was spread over those cases.  The Administrators and the newly appointed Supervisors took Mr Nuttall to the High Court in a trial listed for 15 days.  His Honour Judge Pelling QC concluded that Mr Nuttall acted dishonestly as supervisor by enhancing the fees obtained from the insolvency cases in entering into secret commission agreements with third party services providers, and that he was also negligent in respect of his financial management of the Company and its affairs. This case also provides useful guidance and clarification in relation to the interpretation of the Statements of Insolvency Practice and, in particular, the treatment of category 1 and category 2 disbursements in accordance with Statement of Insolvency Practice 9.

Commenting at the beginning of his judgment, His Honour Judge Pelling QC stated that,”it is difficult to think of a more serious allegation for a chartered accountant to face in a civil context than one of dishonesty in a professional capacity or one where the consequences of that allegation being proved can be more serious.”

Administrator, Paul Boyle and newly appointed Supervisor David Clements (both from Harrisons Business Recovery and Insolvency), were the leading claimants.  They were represented by Hugo Groves of Enterprise Chambers (Barrister), and Duncan Lole and Olivia Robinson from Walker Morris solicitors who all advised on all aspects of the matter.

David Clements from Harrisons Business Recovery and Insolvency said What is particularly saddening about this case is that vulnerable individuals, who were facing difficult debt management situations, turned to Varden Nuttall for help and advice. They trusted that these professionals, would help and manage their situation.  Instead they have found themselves caught up in a situation not of their making. The actions of Mr Nuttall have quite simply been a betrayal of the trust that they have shown and this is before any consideration is given to the vast amount of monies that have been dishonestly extracted from the IVA cases and, in turn, lost by the creditors in the IVAs as a result of the dishonest schemes and arrangements that have been entered into by, or upon the instruction of, Mr Nuttall.”

Hugo Groves added “It appears to be the first reported case in which a licensed Insolvency Practitioner, in his capacity as supervisor, has been found to have acted dishonestly and fraudulently in respect of schemes and arrangements entered into with third party service providers. It is also important in considering the circumstances constituting contravention of the Statements of Insolvency Practice issued as guidance by the regulatory bodies. As such this is a landmark case and an important decision regarding the duties and obligations of licensed Insolvency Practitioners.”

Duncan Lole, commented “It was a complex and difficult legal case with serious consequences.  The burden of proof for dishonesty is a high hurdle to overcome, particularly on a major fraud case against a licensed insolvency practitioner professional.  It has triggered growing concern about regulation in the sector generally.”