The Importance of a Shareholders’ Agreement

Year on year many small limited companies are successfully set up by family members, friends and former colleagues with great business ideas, yet for some such happy beginnings may not last. Disputes may arise shortly after the company’s birth or many years after, often as a result of changes in the strategy and management of the company.  Ranging from the differing or competing business interests of individual shareholders to the implementation of a contentious dividend policy creating an contentious salary disparity between shareholders, these disputes can have serious financial implications and can cause irrevocable damage to a small business.  Despite this fact, the drafting of a shareholders’ agreement, the pre-nup of the corporate variety, is often way down the to-do list when individuals decide to start-up a company.  Ironically, a well drafted and structured shareholders’ agreement can provide a company and its shareholders with the very protection and flexibility it needs to flourish and grow in a dispute free environment.

At FWJ, we are seeing an increasing number of boardroom disputes or disgruntled shareholders as businesses face ongoing difficult trading conditions.  These conflicts between directors and/or shareholders can seriously destabilise a business by distracting valuable management time away from the essentials of attracting customers, delivering the product and maintaining cashflow. We can, of course, assist parties in progressing a claim against a business partner, be it a co-director, another shareholder or as an investor against a single director or the entire board, or by helping parties arrive at a satisfactory settlement of any such dispute, but these actions can be slow, divisive and expensive.  As with your domestic arrangements, forward planning is the answer. So what is the best preventive treatment?

When setting up a new business, or becoming involved as a new director or shareholder-investor of an existing business it is always best practice to record in writing the internal agreements that will govern the relationship between you: how are the decision making powers divided between you?  How are they challenged?  How can you replace a director or shareholder?  How do you get your value out of the company in future? No-one wishes to appear to be uncommitted or planning for failure, but time and again, these questions, if not thought about and the parties’ agreements recorded, will have the capacity to cripple a business if they occur at a later stage.  As financial pressures on a company or its directors or members increase, so these issues become more prominent.  There is no need to wait until a problem actually occurs; would your company benefit from an interim health-check?  A full, open discussion between all the relevant parties may be difficult at the outset, but could result in a robust organisation containing committed and confident members who trust each other and are motivated to maintain their investment of time, money or skills for the greater benefit of the company and its trading counterparties.

If you are about to enter into a new or significant commercial relationship or, as a financier, you are looking at taking on a new client, or simply as part of your regular client audit, ask if they have adapted their articles to reflect how the business is intended to run in reality, rather than just adopting the statutory Model Articles or some company incorporation agent’s standard form that does not take into account this company’s specific circumstances or needs.  Is there an agreement between the shareholders governing the scope of shareholder influence and control of the distribution of the company assets either on an ongoing basis or on a sale or break up?  From a financier’s objective, would you be more attracted to a business where the owners and management demonstrated in their business plan and constitutional documents that they were well prepared and forward-looking in their housekeeping as well as their commercial thinking?

FWJ’s Shareholders and Directors Advice team can assist your company, or your client,
in developing structural documents such as modified articles of association or shareholder agreements suitable for your business needs. It is recognised that further capital outlay, at this difficult time, may not be attractive, but our experience of dealing with disputes where no prior agreements are in place indicates that there is merit in making this investment. Whilst having a shareholders’ agreement is not the complete inoculation against the problem, such an agreement, properly drafted, can help structure discussions between parties and assist in the effective negotiation of a pragmatic solution to enable the company to survive the difficult market conditions.

For more information on  the drafting or interpretation of shareholders’ agreements or any of above, please feel free to contact Andy Wilks  0207 841 0390.

Directors' Duties – The Basics and the Risks

Directors' duties were codified by Part 10 of the Companies Act 2006:

1. Chapter 1 of Part 10 (sections 154-169) sets out the laws relating to company Directors (appointment, register and removal).
2. Chapter 2 of Part 10 (sections 170-180) sets out the statutory duties on Directors.

The provisions of the Act extend to all Directors, including shadow Directors (being those who are not appointed Directors but whose decisions the company follows) and de facto Directors (those who act as Directors although they have not been formally registered as a Director at Companies House).

The main statutory duties of a Director under the Companies Act 2006 are as follows: 

1.         Section 171 – Duty to act within powers – Directors should not exceed the powers conferred on them by the company’s Articles of Association nor should the Company exceed (at the Director’s direction) what it is allowed to do in its Memorandum of Association.

2.         Section 172 – Duty to promote the success of the company – a Director must act in the best interests of the company and for the benefit of its Shareholders having regard to the likely consequences of any decision. This includes considering the interests of employees, business relationships with suppliers, customers and others, the impact on the community and environment, maintaining the reputation of the company and acting fairly between members of the company. 

3.         Section 173 – Duty to exercise independent judgement – As the company is a completely separate entity, its Directors must consider all decisions independently from their own interests, any professional advice received or any third party influences.  Directors have a duty to personally consider whether each decision taken is in the company’s best interests, rather than just relying on third party advice or influence as authority for their subsequent decisions. 

4.         Section 174 – Duty to exercise reasonable skill and care and diligence – Directors should act in a manner that any reasonably skilled Director would generally act in their particular area of management.  Directors should attend board meetings (or as many as reasonably possible) to ensure good corporate governance and supervision of their fellow Directors and to ensure the correct management of the company’s affairs.   Ignorance of decisions taken and lack of participation is often the catalyst for Director disqualification proceedings where Directors fail to act on information they ought reasonably to have been aware. 

5.         Section 175 – Duty to avoid conflicts of interest - Directors must avoid situations where they have or could have a direct or indirect interest that conflicts or may conflict with the interests of the company.  Where a conflict of interest may exist, the Director must ensure that the company’s interests prevail and a common way to avoid issues over conflicts is to disclose all matters to the board of Directors so that the company (acting through its Directors) can make a decision with all the facts in front of them (see Section 177 below).  This may mean that conflicted Directors do not participate in decisions where their conflict of interest exists.   

6.         Section 176 – Duty not to accept benefits from third parties – This section extends Section 175 as Directors must not prioritise their own interests above that of the company's when dealing with company business and property and must not, for example, make a secret profit from any undisclosed and unauthorised transaction or divert work away from the company for their own benefit. Any benefits obtained in this way may have to be accounted for to the company.  Furthermore, Directors should not accept loans or the benefit of guarantees from the company.  This duty can quite often overlap with a Director’s duty to promote the success of the company (Section 172 above). 

7.         Section 177 – Duty to declare the nature and extent of any interest in a proposed transaction or arrangement – Directors must disclose all interests in relation to all transactions (eg property, information, shares held etc) irrespective of whether or not the company could take advantage of it.  Directors should again obtain board and Shareholders approval, where required, before steps are taken.  Again, this extends the other duties in Sections 171 to 176.

8.         Insolvency - Whilst a Director is generally under a duty to act in the best interests of the company and its Shareholders, the moment the company is deemed to be insolvent, they are under a legal duty to protect the interests of the creditors instead of the Shareholders and the company must then function for the primary purpose of getting the best return for creditors. 

Risks Faced by Directors for Breach of their Fiduciary Duties

We list below the main claims for personal liability faced by Directors.

1.         Wrongful Trading - This is when a Director continues to trade or enter into contracts after he/she knew or ought to have known that there was no reasonable prospect of the company avoiding insolvent liquidation.

2.         Fraudulent Trading - This is when the Director carries on business with the intention to defraud creditors or for any other fraudulent purpose, eg taking deposits for orders they know the company cannot fulfil or entering into contracts when the Director knows there are insufficient funds to conclude the contract.

3.         Misfeasance - This is a breach of the fiduciary duties of care owed by a Director, as detailed above, e.g. wrongly taking out money from the company, using company money for matters not associated with company business or directing payment to associated parties.  Such a claim is normally issued to seek recovery of the losses arising from the misfeasance from the Director(s).

4.         Preferences – This applies where Directors make payments or transfer assets to one creditor (or a group of creditors) in preference to the remaining creditors.  Whilst such a claim would be issued against the Director personally, a liquidator or administrator can seek to reclaim such monies as a preference transaction from the recipient directly (together with their legal costs, if necessary).

5.         Transactions at an undervalue - Where the company transfers assets for significantly less than their market value, the undervalue amount can be reclaimed by a liquidator or administrator in a similar manner to a preference transaction. 

6.         Voidable transactions – This is another antecedent transaction (i.e. one occurring pre-insolvency) which allows the reclamation or setting aside of any transaction carried out between the date of the presentation of a winding-up petition and the final winding-up order.  This includes share transfers. 

7.         Transactions defrauding creditors – This provision applies to both companies and individuals where a transaction at an undervalue has occurred where it can be demonstrated to have occurred with the intention of putting such assets beyond the reach of creditors.  Directors can be liable under this section where they transfer company assets, either to a third party or for their own benefit.  This provision enables the Court to set aside the transaction, make a compensatory award or any other order deemed appropriate to protect the interests of the prejudiced creditor(s).

8.         Director Disqualification – A Director can be disqualified from acting in the promotion, formation or management of a limited company where it can be established that the Director’s conduct evidences them to be unfit to act as a Director.  The grounds of disqualification are very wide and unrestricted, in a similar manner to claims for misfeasance (see above).  It should be noted that, following disqualification, there is a statutory provision enabling disqualified Directors to seek leave to act as a Director of a specified company(s).

For more information, please feel free to contact Partner Andy Wilks Shareholder Disputes team on 0207 841 0390.

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

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.

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.

Facts

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.

Decision

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.

Conclusion

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.

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.

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.