Tuesday, 13 August 2013

“Help: my client’s gone bust!”

We all have a pretty good idea of what this phrase means, but what are the most common types of insolvency that you might meet among your clients? As someone who is owed money by a client who has ‘gone bust’, what does this mean for your business and what can you do?

Types of insolvency

There are a number of possible insolvency procedures that may apply if a business has ‘gone bust’. If your client is a company or a limited liability partnership (it has “Limited”, “Ltd”, “PLC” or “LLP” at the end of its name) the most likely occurrence is that it has entered administration,  liquidation or a company voluntary arrangement. If your client is a sole trader or partnership, the insolvency more commonly will be that of an individual, such as bankruptcy.

So many different terms for what can seem to be the same thing; but each procedure means something different for the business and its creditors. Depending on the first procedure entered into, it is possible that a business may move between insolvency procedures over time. Some common types of insolvency are:

  • Administration is a ‘rescue based’ procedure: the primary statutory purpose is to rescue the business as a going concern. This may be done by the administrator taking over the trading of the business and/ or by selling the valuable part of the business and its assets to a new owner to raise money for creditors. The administrator is under a duty to consider the interests of the all the creditors when making any decisions about the company or its assets.
  • Liquidation is a ‘terminal’ procedure: the business is being wound up, the assets realised for the best possible price and the proceeds distributed to creditors. A company may enter liquidation voluntarily upon the resolutions of its shareholders and creditors (company voluntary liquidation, “CVL”) or compulsorily by the order of the court upon a creditor’s petition (compulsory liquidation, “CL”). In CVL, these resolutions will include the appointment of a liquidator. The Official Receiver is often first appointed liquidator in CL but may later be replaced by an Insolvency Practitioner (“IP”) from a specialist firm. You may also come across a members’ voluntary liquidation (“MVL”), which whilst terminal is a solvent procedure.
  • A company voluntary arrangement (“CVA”) is a contractual arrangement between the company and its creditors for the payment of the company’s debts (or an agreed part) over an agreed period of time. A supervisor is appointed to monitor the company’s performance of the terms of the CVA.
  • Bankruptcy is the terminal procedure for individuals and, as for corporate entities, can be commenced voluntarily by the debtor or by order of the court on the application of the creditor. A trustee in bankruptcy, possibly or initially the Official Receiver, is appointed in respect of the bankrupt’s assets and affairs. Individuals may also agree individual voluntary arrangements with their creditors, as with companies this is a contractual commitment to pay debts over time.

Notification and next steps

You may first become aware that a client is in difficulty from the client itself. If this is the case, ask who the IP appointed is, in order that you can inform them of your interest as creditor. However, the administrator, liquidator or trustee will be examining the records of the business to identify creditors and will contact you on his appointment. This notification will tell you what type of insolvency procedure applies or is being proposed (for example a CVL or CVA) and what is your entitlement to vote.

If there is an intended insolvency and you have an entitlement to vote for or against it, the notification will include a proxy form for voting purposes and a proof of debt form. The value of your vote will reflect the amount of the debt you say you are owed. Be aware that there are strict deadlines for responding to these notices. You may also have the ability to vote at different stages during an insolvency process.

After any insolvency appointment, you will only be entitled to share in any money realised by the IP (a “dividend”) if you have submitted a proof debt form which then will be used to establish the amount of your claim. When you receive a notice of intended dividend, note again the specific deadlines for returning the requested information in order to have a share in the dividend.

Be aware that the interval between being notified of an insolvency procedure commencing and being notified of an intended dividend can be extensive. As a creditor you are entitled to regular periodic reports on the progress of the conduct of the procedure and the likelihood of any dividend.

Creditor claims

The primary concern when a client ‘goes bust’ is how are you going to get paid.

There are well established rules for the ordering of different types of creditor claims in an insolvency. Unsecured creditors, typically including suppliers such as you, rank lowest in the order of payment and will only share in a dividend after all other categories of creditor have been paid in full. Amongst all unsecured creditors, everyone will have the same proportion of debt paid; for example if the dividend is ‘5 pence in the pound’, you will receive 5 pence for every pound you are owed.

This dividend can be disappointing. Your recoveries may be enhanced if you have a guarantee in respect of the client’s payments that you can enforce; if you can set off any amounts you owe the client against the amount you are claiming, but note there are special rules relating to set off in insolvency or if you hold deposits that you can apply against outstanding payments. 

If a company is in administration, one thing you cannot do is start or continue legal proceedings for the payment of any debts.

Some further thoughts

Does your contract with the client continue in insolvency? Liquidation automatically terminates a contract, but look at what your contract provides in respect of other insolvency events.

If you are supplying staff who are crucial to the continuation of a business in administration you may find that the administrators are willing to continue paying for them during the administration, but not for the period before. If the administrators sell the business, you may be able to negotiate with the purchaser that they take over your contract with the client and whether they would be willing to pay for any arrears.

Do you have insurance for bad debts that you can claim under?

What happens to your contract with the worker? Are you still required to pay the worker or the worker’s tax or national insurance contributions even if you are not paid by the client? (Note that the Conduct of Employment Agencies and Employment Businesses Regulations 2003 (‘the Regulations’) prohibit you from withholding payment from temporary workers you supply to clients on the basis that your client has not paid you, so this option will only be available if the workers are entitled to and have ‘opted out’ of the Regulations.) Does the worker receive benefits such as on-site accommodation, if this is withdrawn, do you have any further responsibilities?

All IP’s conduct is governed by the laws of the relevant insolvency procedure and the rules of their regulatory body. If, however, you have any concerns about any IP’s conduct of a matter, as a creditor you may be able to require the conduct to be investigated.

Any questions?

If you have received notification that a client has ‘gone bust’ and are unsure what to do next or need any assistance with any claim against an insolvent business, please feel free to contact someone in Francis Wilks and Jones LLP’s insolvency team.