Thursday, 29 November 2012

Zombie companies – the Need for Advice

Contrary to the predictions of many commentators at the start of the credit crunch, the continued recession has not led to a surge, but a decline, in corporate insolvencies and numbers now are now at their lowest level since 2008[1].
Instead there has been a rise in the number of so-called ‘Zombie’ Companies[2]. These companies are carrying a heavy debt burden, but with few assets, that financiers are allowing to continue to service their interest charges without reducing their debt instead of pursuing any formal insolvency procedure against the company due to the poor prospect of any dividend.
Zombie companies need expert insolvency and financial advice now if they are to survive the much anticipated economic recovery. Restructuring existing finance arrangements is a key strategy for a Zombie company and the company’s accountants should be encouraging directors to think seriously about their present situation as well as preparing for their future.
Outof court restructuring can be either by a consensual route with the financier to obtain the relaxation of financial covenants, payment holidays, revised payment plans, standstills or other amended terms or by using the companyvoluntary arrangement regime under the supervision of an insolvency practitioner which would give the company the necessary time and flexibility to resolve its financial difficulties.
Directors of Zombie companies also need advice from insolvency practitioners and lawyers on the risks of trading in this twilight zone of the company being insolvent on any of the conventional insolvency tests or if the directors ought to have known the company was insolvent (particularly if they are concentrating on meeting the cash flow test at the expense of satisfying the asset test). It may be crucial in the event of any investigation of the conduct of a director and defending any director disqualification action in the event of the company entering administration or liquidation in the future, if it can be shown that the director was taking professional advice throughout this time.
Rather than wait for what many insolvency experts view as the inevitable collapse of Zombie companies, now is the time for insolvency practitioners and financiers to become involved in the strategic planning of this crucial phase of SME survival.
For more information please feel free to contact Ambuja Bose, Partner, on 0207 841 0390.

[1] Insolvency Service statistics released on 2 November 2012
 [2] 146,000 zombie companies in the UK, around 8% of all businesses: R3

Avoiding Deadlock – Court Intervention or Shareholders’ Agreement?

If the attendance of a specific director is a requirement of a company’s constitution, can a decision made at a directors’ or shareholders’ meeting be valid if that director is not present?  Further still, can that director’s removal as a director of the company be possible without their attendance?  
Simply put, the answer to this question is no, which leads to a situation in which it may be impossible to remove an uncooperative director without breaching the company’s constitution, resulting in a deadlock situation.
Perhaps unsurprisingly this situation is commonly encountered by many small and often family run businesses and, whilst understandable that a director wishes to ensure that the management and strategy of the company remains under their control and that their interest remains secure, the situation becomes complicated when director relations start to fall apart.
Court Intervention
Section 306 of the Companies Act 2006 provides some comfort to companies, as a court may, at the request of a director or shareholder, order a general meeting to be called, held or conducted in any manner it thinks fit where it is impractical to call or conduct the meeting in the manner prescribed by the company’s articles (as supplemented by the Companies Act 2006).  Furthermore, the court has the general power to make any necessary directions to give efficacy to the operation of the company, which may include amending a company’s quorum from two to one, amongst other things.
Smith v Butler & another [2011] EWHC 2301 (Ch)
The case of Smith v Butler successfully illustrates s.306 in action.  The claimant, Smith, was the Chairman of a company and held 68.8% of the shares whilst the Managing Director, Butler, held the remaining 31.2%.  The quorum requirement for general and board meetings was two, one of which had to be Smith unless he waived the requirement.  In 2011 the parties fell out with suspicions of fraud being raised by Butler against Smith culminating in Smith wanting to appoint a new CEO and Butler seeking to suspend Smith as a Director.  Butler proceeded to hold a meeting in which Butler and a third director signed a resolution of the board authorising the suspension.  Following this, Smith requested that a general meeting be held in order to remove Butler and the third director as directors, Butler’s refusal to attend the meeting led to the meeting be held inquorate causing Smith to make an application to court to seek an order that a general meeting be called with a quorum of one.
It was held by the court that a quorum of one would be allowed as the Articles were designed to give excessive protection to Smith who could not be dismissed as a director.  As a point of interest, the court also commented that Butler, as a minority shareholder, could in fact have commenced unfair prejudice proceedings and/or sought permission to commence a derivative action.
Conclusion – the need for a Shareholders’ Agreement
Whilst this case is an example of court intervention in a deadlock situation, the reality is that a s.306 application is often an option of last resort, as the courts are generally hesitant to interfere in company matters unless absolutely necessary.  A preferable and potentially more cost effective option would be for a company to invest in the drafting of a clear and concise shareholders agreement to strike an effective balance between protection and flexibility and which contains specific provisions dealing with potential deadlock scenarios. This would enable the company to function successfully and thrive irrespective whatever the situation.
For more information on the drafting or interpretation of shareholders’ agreements or any of above, please feel free to contact Partner Andy Wilks  on 0207 841 0390.

Shadow Directors - Beware

A recent press release from the Department for Business Innovation and Skills (BIS) reports that a disqualified director has been sentenced to 6 months imprisonment pursuant to s.13 of the Company Directors’ Disqualification Act 1986 (CDDA) for breach of a 7-year undertaking imposed in 2007.  His fellow director was also found guilty of aiding and abetting the breach and sentenced to a 12 month community order and 180 hours of unpaid work.
The two individuals were held to have actively attempted to circumvent the sanctions of a BIS undertaking by allowing the disqualified director to sign off cheques on behalf of the company, take part in the management of the company and intentionally turn a blind eye to his undertaking by allowing the non-disqualified director to register himself as a sole director.
This case undoubtedly serves to send a clear message to all disqualified directors that the Insolvency Service and BIS are monitoring disqualified directors and will not hesitate to take firm action in respect of any breach of undertakings given to protect the public and the business community.  Furthermore, caution must also be paid by anyone who currently is or is looking to work alongside a disqualified director, as they too can be subjected to sanction for the actions of a disqualified “shadow director”.
S.17 CDDA Leave
It should be noted that options are in fact available to disqualified directors who can apply for leave to continue to act as a director under s.17 of the CDDA.  Such an application allows disqualified directors to act as a director of one or more specified companies, despite their disqualification, and opens up opportunities to disqualified directors to continue to run or be involved in the management of a business.  
This area of law is rarely black and white and the need to obtain specialised advice upon a director’s options cannot be underestimated.  For more information on seeking leave applications or defending disqualification claims, please contact Andy Wilks, Partner and head of FWJ’s Director Disqualification team on 0207 841 0390.

Wednesday, 7 November 2012

Decision making – shareholder trumps director

It is fairly commonplace for a director to hold a dual role within a company, acting as director and/or shareholder, officer or representative of a shareholder. These roles should for the most part align with one another, however, if these dual interests come to conflict, the importance of reconciling the terms of any shareholders’ agreement with the company’s articles of association soon becomes paramount.
The recent case of Jackson v Dear and another [2012] EWHC 2060 (Ch) examines the position of parties to a shareholders’ agreement who are also directors of that same company and are accordingly subject to the usual fiduciary and directorial duties.
The case concerned three individual founders of a company who together owned a second company, which held all the voting shares in their founding company. The Claimant, being one of the founders, entered into a shareholders’ agreement with the other founders, which provided for (amongst other things) his appointment as director of both the founding company and the second company, terminable upon the occurrence of agreed termination events. The Articles, however, provided for the removal of a director by notice given by two or more other directors. This latter power was invoked by the 2 remaining founder Defendants on the premise that they viewed the Claimant to be unsuitable as a director and as such were fiducially required to remove him.
Essentially, the Defendant directors sought to remove the Claimant in their capacity as directors through the use of the company’s Articles thereby actively circumventing their commitment to the Claimant as parties to the shareholders’ agreement.
It was held by Justice Briggs that it was an implied term of the shareholders’ agreement that the Claimant would not be removed unless there was an event justifying termination under that agreement. Furthermore, the Claimant, as a contracting party, was entitled to assume that the other parties would not voluntarily render the agreement inoperative. Significantly, Justice Briggs went on to outline three alternative methods to avoid a breach of fiduciary duty on which the Defendants’ case so heavily relied, as follows:
1.      By making the second company sanction the breach of fiduciary duty in not removing an allegedly unfit director, or
2.      By the Defendants’ giving a direction to the board not to remove the Claimant under the Articles of the second company; or
3.      By amending the Articles of the founding company so as to disable the Article against the Claimant, save for a Termination Event occurring.
Crucially, in as much as this case essentially reconciles the current case law relating to implied terms and interpretation of contracts, it also acts as a caution to all directors who may be under the illusion that, by regarding themselves as two separate entities (being director and shareholder), they can advantageously rely upon a company’s Articles to circumvent onerous clauses within the shareholders’ agreement. It is instead the case that, unless there’s an effective carve out in the shareholders’ agreement; the contract principle that a party must do nothing of his own motion to render an agreement inoperative, will prevail.
For more information on the drafting or interpretation of shareholders’ agreements or any of above, please feel free to contact Partner Andy Wilks, 0207 841 0390.

Tuesday, 6 November 2012

10 Common Mistakes in Litigation

Unnecessary Delay
If you believe that you have a cause of action against another party then avoid unnecessary delay. If you have a monetary claim, you need to act fast in the current climate to get your money back. Otherwise the debtor might pay other parties in priority to you and ultimately go out of business. Delay makes it harder to put together the supporting evidence to win your case – documents get lost, witnesses move and lose touch.
If you are facing a claim, avoid putting off responding to any letters of claim in the hope that they go away. If you ignore a formal demand or solicitor’s letter this is likely to result in formal proceedings being issued which will become far more expensive with the addition of legal cost and  interest. It is better to try and avoid this by responding and negotiating.

Not knowing if a Debtor is Good for the Money before Taking Action
In claims of any notable value, it always makes sense to work out in advance if the debtor is good for the money. Otherwise you might spend time and money obtaining a Judgment which is essentially worthless.
We can help you do this. We can arrange for wealth assessments to be carried out and if necessary, personal visits to the debtor’s address. Simple checks can often save you throwing good money after bad.

Not Understanding your Long-term Aim
Litigation can have short-term benefits but the long-term consequences must be considered.  For example, is it worth issuing proceedings against an established customer for recovery of a debt which might in turn lead to the loss of that commercial relationship?
Is there another way you can recover the money without damaging your longer term interests? Is it a matter of principle which if you took a deep breath, could be resolved without a legal fight?

Are you Suing the Right Party?
It might sound odd, but it is surprising how often people don’t know the correct legal entity they have contracted with. For example, mistakes are commonly made with trading styles.
Suing the wrong party can be very bad indeed. Not only will you have wasted costs issuing proceedings against the wrong party, you will almost certainly be responsible for paying the innocent parties costs as part of discontinuing the proceedings. You will also have lost time recovering your money from the actual party who owes it.  Make sure you look at the contractual documentation carefully before issuing.  If you have any doubts, we can assist you.

Not Choosing the Best Litigation Route
In the case of genuinely undisputed debts, there are other options available to a Claimant other than commencing a traditional county court or high court claim. These measures can be far quicker and more effective. They can also mean that you recover your legal costs in claims under £5,000 – which would normally be irrecoverable in the small claims court even if you are successful.
We can advise you of the most hard-hitting, cost effective and speedy route appropriate to your claims.

Believing that Litigation is Always Expensive
We do not deny that litigation can be expensive but the risk can be minimised with proper advice. Choosing the right litigation route is vital. Understanding what products are in the market place to reduce your risk further is also important. Have you considered for example After The Event Insurance and whether that could be available. ATE cover can mean that even if you lose a claim at trial, the other parties legal fees are not recoverable from you, but from your insurer.
We can assist you in reducing your costs exposure as much as possible.

Not Considering Alternative Dispute Resolution
Alternative dispute resolution (ADR) is the use of arbitration, mediation or out of court dispute resolution methods. Sometimes a contract may contain a clause whereby the parties are obliged to follow a prescribed dispute resolution route in the event of a dispute. Failure to adhere to this can be a costly mistake.
Even if there is no contractual obligation, in certain claims, ADR is appropriate – especially if the two parties to the claim are in very entrenched positions. Over 80% of cases referred to some form of Mediation settle either on the day or shortly afterwards.  Even in those cases which do not, the issues are often narrowed considerably.
We can advise you whether ADR is appropriate and if so, the correct option to take (and when).

Believing you will always always get your Costs back if Successful
The general rule is that the wining party’s costs are paid by the losing party. However, there are exceptions to this general rule. 1)  Only the costs incurred after legal proceedings are issued are recoverable. 2) In reality, the Court will only order the losing party to pay around 70% of the winning party’s costs. 3) If the claim is for less than £5000 then the matter will be heard in the small claims court which is a costs free environment. 4) Failure to adhere to the appropriate Pre Action Protocol prior to issue can result in reduced (or no) costs being awarded, even if you are successful.
Care needs to be taken to maximise your chances of recovering your costs.

Failing to Collate all the Evidence Needed for the Claim
Make sure you get together your evidence before you start your claim. Too often, people acting in person will commence a claim without thinking through what is needed to obtain a successful result. Do you have all the relevant documents in your possession?  If not – where are they? Do you know the names and whereabouts of the witnesses needed to give evidence on your behalf? Do you actually know what evidence the court will want to see in order to win your claim?
If you don’t prepare properly in advance, you increase your chances of losing the claim and paying the costs of the other party.

Acting as a Litigant in Person
Whilst it is possible to run smaller claims to trial as a litigant in person, in claims over £5,000 which are outside the small claims court, the implications getting it wrong are far more serious – especially as you will be at risk of paying the other side’s costs in the event you are unsuccessful.  Equally, if your opponent does have a lawyer, they can take advantage of a lack of knowledge and experience of the legal system.  We appreciate that no one really wants to spend money on lawyers, but in litigation cases, it is often worth the investment.

For more information on any of the above, please feel free to contact Andy Wilks Partner, on 0207 841 0390.