“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.

 

Background to Francis Wilks & Jones

Francis Wilks & Jones was founded in 2002 and is based in Central London. We specialise in providing legal services to a number of business sectors together with more bespoke advice to individuals. We count amongst our client base members of the Asset Based Lending Industry (we are an affiliate member of the ABFA), Insolvency Practitioners, Recruitment companies, brokers and accountants.

FWJ is primarily a commercial practice with a strong emphasis on commercial litigation, debt recovery, commercial finance and insolvency and restructuring work. We also offer property-related services to our clients.

The firm’s two founding partners, Andy Wilks and Tim Francis, gained much of their early expertise at former niche Receivables Finance law firm Wildes and then, after its takeover, at a leading London firm.

We employ a highly capable team of solicitors and support staff, all of whom are accessible to our clients. This ensures prompt and effective response times, coupled with cost effective solutions for our clients, something often unattainable for our larger competitors.

We also employ a full time Finance Director, David Coles, and retain the services of Paul Saunders as a consultant to the firm, bringing with him 34 years of experience at Lloyds TSB Commercial Finance Limited, much of it at director level and latterly specialising in the provision of cash-flow finance to the Recruitment industry.

Expert commercial litigation, debt recovery and fraud work

Our litigation solicitors are experts in all types of commercial litigation. The team has many years’ experience in all types of debt recovery claims, ranging from County Court claims to higher value High Court claim and multi million pound fraud cases. The litigation team also has exceptional experience in all types of alternative dispute resolution claims including high end mediation work.

Corporate Restructuring & Insolvency team

The insolvency team provides advice on a wide range of non-contentious insolvency matters and corporate rescue options. These include corporate administration, liquidation and corporate voluntary arrangements as well as providing advice on individual insolvency matters.

Commercial Advice

The insolvency team is complimented by the Business Law team who advise on all aspects of corporate restructuring, rescue finance and other commercial work.

Our solicitors have advised numerous high-profile clients, and the firm is an affiliate member of both the Asset Based Finance Association and R3 – the Association of Business Recovery Professionals.

Specialist director and shareholder advice

Francis Wilks and Jones have a highly respected team which can provide advice on a wide range of directorial and shareholder issues – ranging from specialist director disqualification advice both pre and post issue to issues arising from shareholder disputes and roles and director responsibilities

Cutting edge technology and links to other professionals.

Francis Wilks & Jones has always recognised the importance of having the latest technology to support our bespoke law service offering. For example we have invested heavily in a sophisticated case management system to help deliver our litigation services in the most efficient and cost effective manner possible. Not only do our clients benefit from the high level of legal advice offered by our lawyers profiles they are also supported by the best possible IT systems available.

In addition we recognise that our clients will from time to time require assistance from other professionals such as accountants and financiers with whom we have built close ties over the last decade of being in business. Our Links page demonstrates our full service offering in this respect.

High level of one to one contact

Our business practice includes a high level of one to one contact with our clients and we offer the complete package our clients are looking for, whatever the case and whatever their requirements.

We boast a broad range of links to other professional advisors forged over a decade of working together. We can therefore provide our clients a “total solution” with assistance from whichever experts and advisors are required.

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.

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[1] Insolvency Service statistics released on 2 November 2012

 [2] 146,000 zombie companies in the UK, around 8% of all businesses: R3

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.

Setting Up a Business - 8 Most Common Mistakes

Starting a new business is an exciting, busy and challenging time. But amid everything else you have to do,  it is all too easy to overlook some essential details which, if put in place at the early stages, will strengthen your business and can save time and money in the future, as easily preventable problems are avoided.

FWJ can help you avoid some common pitfalls and give your new business the best possible. start.

Contact us if you need help answering any of the following:

1. Am I choosing the wrong trading entity?

After deciding the nature of your business, perhaps the most fundamental decision (and one that it is easy to overlook in the rush to start trading) is type of entity you wish to use. You can run a business:

(a) As a sole trader: there is no formality to your business structure; you just set up and carry out your business independently.

(b) In partnership with one or more other people: a partnership will arise where two or more people are in business together with a view to making a profit. This can be an informal (or even unintended) relationship or properly documented by a partnership agreement or by using the limited liability partnership structure.

(c) Through a limited company: this is the most formal business structure, but it is quick and easy to set up a company through which you run your business.

FWJ can offer advice on which is the right business structure for your particular needs, one that takes into account your personal situation, e.g.: income and tax, assets and risk, management and control.

2. Am I taking on too much personal risk?

In today’s economic climate the issue of risk can never be far from the business owner’s) mind. Having decided to take the plunge, do not forget the potential impact of running your own business on you personally. The level of personal risk, including the risk to your personal or your family’s assets that you assume when running your own business can be directly affected by the business structure you have adopted.

The best way to separate your (and your family’s) assets from the obligations of the business will be to run your business through a limited liability company, which has its own legal personality and owns the assets of the company itself. As a shareholder of a company your liability (as the name implies) is limited to the value of your shareholding. However as a director, you will have numerous duties to comply with [see “Roles and Responsibilities of Directors”], some of which, if breached, could have serious consequences for you. You may need to evaluate the relative merits and drawbacks of being a company shareholder and/ or director.

As a partner or a sole trader the assets of the business are owned by you as an individual and you are fully liable for the debts of the business.  For this reason, these can be more risky business structures, but they may give you more flexibility and independence in running the business.

It is all too easy in the rush to get the business off the ground to overlook the question of who owns the assets and is responsible for the liabilities of the business. Don’t leave yourself exposed to unacceptable risks and make sure you understand your potential obligations.

FWJ can help with advice on how to minimise your exposure to risk.

3. Do I Understand what I have agreed with my business colleagues?

Unless you are running your business alone and funding it from your own resources, it is likely that you are setting up the business with friends, relations or a professional investor who specialises in providing capital for new or developing businesses. Whilst everyone is focusing on the start up and you are all caught up with the excitement of the new enterprise, it can seem obstructive or even over-pessimistic to insist on formal documentation to govern your relationship, such as a partnership or shareholders agreement. This common mistake can be one much regretted later on, if there is no record of financial contributions to be made, distribution of rewards, allocation of decision making powers or provisions for separating interests when circumstances change.

We would always recommend an agreement is drawn up between everyone involved in the business to regulate the management of the business

A professional investor will not overlook the need for an investment agreement, but do make sure you understand the terms and do not, in the rush to receive the crucial capital, sign anything you are not happy with. Points to look out for include: investor rights to appoint directors who may have the key influence over the business or terms which require repayment of the investment or sale of the business at the investor’s demand.

We can assist you in this very important area.

4. Have I chosen the right type of funding?

Funding for businesses can take a variety of different forms from a range of finance providers. To the inexperienced this can be baffling and, if the wrong selection is made, expensive. Do you need:-

·         A capital investment to get started?

·         A bank loan to buy a key asset?

·         A bank overdraft to smooth you through the trading cycle?

·         Cash-flow finance?

FWJ’s extensive network of brokers and long standing relationships with specialist financiers can help you find the right type of funding for your business. Once you have decided, we can guide you through the finance and any related security documents and ensure you sign the best deal for your business.

5. Do I have proper credit control procedures in place?

Getting paid for the work you do on time, or even at all, is one of the single biggest challenges for any business. Your customers may seek to improve their own cash flow position by leaving your bills unpaid whilst your own creditors put you under pressure to pay them before you have the funds, leaving you stretched and stressed. Not collecting your invoices promptly can cripple your business’s cashflow and so it is vital that you do not overlook the paperwork until it is too late. 

Some financiers offer facilities which can incorporate a full credit management service which might meet your needs and we would be happy to introduce you to someone who can help.

At FWJ we also have a team which specialises in debt recovery work and can help advise you on your credit control and recovery procedures together with taking action to collect money from slow payers.

6. Am I up to date with my record keeping?

Unless you are an office services provider it is unlikely you have set up your own business because you like filing and completing forms.  However a business can soon run into problems if the statutory obligations, such as tax and VAT returns (and payments) are not made, accounts not prepared or company registration formalities are not kept up to date. At their most extreme, these omissions can bring your business to an untimely end with some potentially serious consequences for you, even if you are making money.

Through our long standing connections with accountants and tax advisors, we can introduce to you the right person to handle your tax affairs. If your arrears are such that HMRC has issued a winding up petition against your company or you are facing bankruptcy proceedings, FWJ can put you in touch with insolvency practitioners and business turnaround specialists who can advise you on how to proceed. We can also help if you company has been dissolved by Companies House for the non-filing of statutory returns whilst you are still active.

If you a company director where the record keeping is found to be so poor that steps are being taken to disqualify you from acting as a director or being involved in any other way in the management of any business in future, speak to FWJ’s experienced Director Disqualification  team who can help you improve your position.

7. Are there any terms of business?

One of the most common oversights we see, usually when trying to resolve a dispute, is the complete lack of any terms of business. Every time you perform a service or supply goods to a customer, you need to specify the terms on which you are acting: what are the goods or services required, what quantity, when, what price, where? There are many other questions: when are you to be paid, can the goods or payment be refused, what other liabilities are attached, is the work warranted?

You can make great savings of both time and money by investing in the preparation of standard terms and conditions on which you then conduct your business; make sure you have terms that meet your needs rather than find you have inadvertently agreed to operate on someone else’s terms (which are not to your advantage) or that there is no formal agreement and you find yourself embroiled in protracted (and expensive) correspondence or even litigation to protect your business.

We can draft these for you.

8. Have I sorted out our premises and employees?

There are many hidden pitfalls relating to the premises you operate from and your responsibilities towards anyone who works with you. Falling into any of these traps could cause unexpected problems for your business, for example:

Premises:

·     If you plan to work from home, do the terms of your lease or mortgage prohibit the use of the property for a business? Are you covered for liability to any visitors to the premises in connection with the business?

·     If you are leasing premises, do they have the necessary user authorisations, do they meet all relevant health and safety and environmental regulations? Are there any restrictions in the terms of the lease that may inhibit the conduct of your business? What are your obligations as a tenant?

             Employees:

·     If you intend that anyone working with you is “self-employed”, be aware that the courts will imply a contract of employment unless the strict criteria for self employment are met, bringing with them additional responsibilities for you, including payment of tax and national insurance for employees.

·     If the company’s directors are working in the business, are they also employees? Do you have service contracts in place?

If you would like our help in making a successful start and avoiding these common mistakes, please contact us.   And we wish you good luck in your new venture.

Successful claimant ordered to pay majority of defendant's costs

Getting costs right.

In the words of Coulson J in the recent case of Brit Inns Ltd and another v BDW Trading Ltd (No 2) [2012] EWHC 2489(TCC) “when civil litigation goes wrong, costs become the critical issue”. 

The case concerns two separate actions, a subrogated insurers’ claim whereby the insurers were able to step into the shoes of their client/ the claimant and retain any benefits or remedies awarded to it and a distinct uninsured claim by the Claimant directly. 

In its subrogated action the Claimant had made two Part 36 offers, which were held to be unrealistic and unreasonable as to costs under CPR44.3.  Conversely, the Defendant made one Part 36 offer, which, although it failed to improve upon the offer at trial, was held to be more realistic and reflected the relevant conduct for the purposes of CPR44.3. Subsequently the Claimant went on to be successful at trial and, although in keeping with the general rule of CPR44.3, Coulson J ordered the Defendant to pay 60% of the Claimant’s reasonable and proportionate costs. The significant reduction of 40% was a result of the Claimant’s failure to adopt the same detailed approach as the Defendant, which could have resulted in settlement at a much earlier stage.

More notably, in respect of the uninsured claim, the Claimant was ordered to pay 90% of the Defendant’s costs primarily owing to the Claimant’s decision to have two separate actions and two separate legal teams inevitably duplicating costs and it was this decision that was held to be unreasonable in respect of costs. 

In reaching these conclusions, Coulson J provides us with a useful summary of relevant principles when dealing with costs where the claim is exaggerated and the Defendant has been unable to make an effective Part 36 offer.  This case undoubtedly serves as a reminder to parties to take a much more realistic and cooperative view of the value of a claim when faced with the harsh realities of recovery and costs in litigation.

For advice or further comment on the above, please contact Partner Andy Wilks on 020 7841 0390.