Seller beware? – The Corporate Insolvency and Governance Bill

CashflowAs a service provider or supplier, what is your first reaction when you hear your customer is entering into an insolvency process?  Anger, frustration, can I recover items supplied or, how do we make good the financial hole that bad debt will create?

It is an emotional event but, what if you were told your termination clause is no longer enforceable or you must continue to supply the insolvent customer?

On 4 June the Corporate Insolvency and Governance Bill (“The Bill”) received its second reading in Parliament and it is envisaged to become law by the end of June.  It will introduce some temporary provisions (to cover the COVID-19 lockdown) that will have retrospective effect and some permanent law, which is the focus of this editorial.

So, let us explore the four key provisions that are all aimed and restructuring and rescuing a company:

Restructuring scheme

This appears to modernise the current scheme of arrangement available under the Companies Act.  It is most likely a tool used for complex debt restructuring where there are several classes of creditors.  For example, a retail chain where there are suppliers, employees, landlords and financial institutions that are likely to be affected in differing ways.

The big reliance of this scheme is, what has been referred to as “Cross-class clam down”.  Try saying that quickly!  What this means is classes of creditors may out vote a dissenting class of creditor, provided the dissenting class of creditor will not be worse off than if an alternative insolvency procedure was used.  This does represent a shift in the balance of power in creditor voting

Moratorium

This is the largest part of the Bill and sets out a new provision designed to give an “Eligible company” the opportunity of a short holiday from creditors while it looks at ways to restructure its business.

Where a company is not subject to any insolvency proceedings the directors can file an application at court for a moratorium, without any notice to creditors.  The moratorium comes into force immediately upon the application being filed at court.

So, what does this mean?  A moratorium has very similar effects to administration whereby creditors cannot enforce any security held, landlords may not exercise their right of forfeiture or peaceable re-entry and any legal processes may not be commenced or continued.

The initial period will be 20 business days (this maybe increased to 30 business days for “Small companies”).  The directors may extend it for a further 20 business days, or with creditor consent it can be extended for up to 12 months.

While it needs an insolvency practitioner involved (to be called, “The Monitor”) their position is generally to monitor the company during this period, primarily based upon information provided by the directors.  It is envisaged a moratorium will be used as a form of protection while the company considers and/or proposes to enter into a company voluntary arrangement, although it could result in the outcome looking more terminal whereby liquidation may be the outcome.

Any supplier who supplies the company during the moratorium period must be paid (or payment provided for) otherwise the moratorium should be terminated.  Once terminated, any unpaid post moratorium creditors will enjoy a “Super priority” in the subsequent insolvency procedure.  However, that could be small consolation if there are no distributable assets!

Ipso facto clauses

Okay, most of us will ask what that means and does it apply to me?  In English, this is a clause within your terms and conditions of trade that state the contract shall terminate upon the customer entering into any form of insolvency.

A new section 233B is being inserted into the Insolvency Act whereby such termination clauses shall be considered void and no longer be enforceable.

Continuation of supply

The Insolvency (Protection of Essential Supplies) Order 2015 already prohibits suppliers from refusing to supply an insolvent company and/or seeking to vary the terms as a condition of continued supply.

However, the Bill takes this further and makes it clear it is unlawful to hold out for ransom payments (ie demanding pre-insolvency debts are paid as a condition of supply).  This could cause some practical difficulties, including if you have credit insurance, yet pre-insolvency you had reached the credit limit with the insolvent company.  The only protection it appears you have is being told your post insolvency debt shall be paid as an expense of the moratorium period or, failing that, holds “Super priority” in the subsequent insolvency.  Small comfort, I would suggest.

The key message for suppliers is to keep track of your customers (in terms of the warning signs leading to failure) and ensure they stay within credit limits you feel comfortable providing.

Should you have an insolvency-related issue or a corporate dispute then please contact Gary Pettit at PBC Business Recovery & Insolvency on (01604) 212150 (Northampton office) or (01234) 834886 (Bedford office). Alternatively, you may send an email to garypettit@pbcbusinessrecovery.co.uk or access our website at www.pbcbusinessrecovery.co.uk

Recession or is it something else?

Cashflow

What is the outlook for the UK economy post lockdown?  That is a question I have been asked many times, while others tell me how busy my profession will be.

The truth is, nobody can accurately predict what will happen.  Personally, I have heard views from, “It is going to be a tough time, but we will get through it,” to others predicting 800,000 – 1 million businesses will fail over the next 12-18 months.

Before we look forward, let us look back.  I have worked through two major recessions, being 1990 and 2008.  The first of these saw UK officially enter recession at the end of the 4th quarter of 1990.  Corporate insolvencies were up 44% in 1990 (from 1989) with the level of failures increasing with 1991 being 60% higher than 1990.  A further increase was suffered with 1992 being 72% higher than 1991.  While numbers dropped in 1993 corporate failures still totalled 26,316 as compared to 18,720 in 1990.

You then compare that with the 2008 recession which was entered at the end of the 3rd quarter of 2008.  2007 had seen 15,774 corporate insolvencies, rising in 2008 to 21,082 (an increase of 34%). 2009 saw this figure further increase to 23,979.

What the 1990 and 2008 recessions told us is the peak of business failure may well arise a year or two after officially entering recession and levels remain high for a year or two after the peak.   However, this looming crisis is likely to be different to those past recessions.

While we may officially enter recession in the 3rd quarter, it is likely corporate failures will start to rise immediately as opposed to previous trends of corporate failures rising in the wake of a recovering economy.  The principal difficulty will be cash flow as most industries will find themselves back at pre-lockdown operational costs (including salaries as furlough ceases) but also, some will have the additional burden of servicing the bounce back and business interruption loans, as well as any deferred tax payments.  All this cost pressure will be challenging when it is anticipated “Normal” levels of turnover may not return for some time.

In saying the above, it would be remiss of me not to mention corporate insolvency numbers fell by 8.5% in the 1st quarter of 2020 (as compared to the corresponding quarter of 2019).  However, this maybe artificial as according to a well-known high court judge I spoke to recently, the working hours of the courts have been reduced with only 40% employment retained and winding up petitions have fallen by 85% principally as a result of HMRC ceasing enforcement action on standard unpaid tax matters.  Many other petitions have been adjourned under temporary COVID directives so there could be an explosion of activity once UK starts getting back to a semblance of normality.

This may all appear to come across as negative but overall the UK economy has the strength to recover and the services provided will continue to be in demand worldwide.  The key messages readers should take from this are:

  1. Continue to monitor your cash flow without a “Salesman” eye. Be critical and challenge the numbers.
  2. Review your overhead structure to see where reductions and removals are available.
  3. Take early advice from your accountant, solicitor and, where appropriate, an insolvency practitioner. Best anticipate a problem rather than have to deal with problem that has arisen.
  4. Should you have an insolvency-related issue or a corporate dispute then please contact Gary Pettit at PBC Business Recovery & Insolvency on (01604) 212150 (Northampton office) or (01234) 834886 (Bedford office). Alternatively, you may send an email to garypettit@pbcbusinessrecovery.co.uk or access our website at pbcbusinessrecovery.co.uk

 

£1190 Donated to Cynthia Spencer Hospice despite cancelled Quiz Night

 

March 2020 and we were preparing for the PBC Quiz night but alas Covid-19 and social distancing meant that we had to cancel the event which was to raise funds for Cynthia Spencer Hospice Charity

We contacted all the teams that had paid to enter the quiz asking whether they would be happy for us to donate the funds to the charity. I am pleased to say that many of the teams agreed to this and we were delighted to send £1190 to the charity. Great support in these difficult times

Along with Cynthia Spencer Hospice Charity, PBC Business Recovery & Insolvency would like to thanks those teams that kindly donated:

Tollers

Howes Percival Solicitors

Cottons Chartered Accountants

Cave & Sons

Wilson Browne Solicitors

RBS

Clifford Roberts Chartered Accountants

Hewitsons

Paul Green

Bibby Financial Services

Billingham & Co Accountants

#charity #hospice #quiznight

 

Am I Liable or Not?

Can a director be held personally liable for company debt?

The knee-jerk response to the above is, “No, that is what limited liability means.”  Indeed, the only obvious exceptions would be where a director has given a personal guarantee or, when a director is the named contracting party, which does happen occasionally, especially where leasehold property is concerned.

In a recent press release by the Insolvency Service two directors received custodial sentences and a Proceeds of Crime Receiver appointed to recover monies from the estate of both directors for the benefit of the company creditors.  This should be considered as the worst-case scenario in terms of penalties for errant directors, but it should also be considered a warning to those who feel they are “Above the law”.

There is a worrying upward trend in directors acting in a manner where they believe they can beat the system and fall short of meeting their duties as required by the Companies Act.  Both the Official Receiver and insolvency practitioners are being asked by creditors to investigate the conduct of directors and to seek restoration (compensation) by “Lifting the corporate veil” and demanding directors contribute towards the company losses.  Some of the principal areas of focus include unlawful dividends, debt avoidance and adverse loan accounts, where a director has (what HMRC describe as) taken disguised remuneration.

What is probably more disturbing is the “Blame culture” as an increasing number of directors are seeking to point the finger of culpability toward their professional advisors by suggesting a defence of merely following independent advice.  This is seeing advisors being caught up in litigation or demands to deliver up their client files, or both.  It is a trend that advisors have probably noticed but what can be done to minimise the risk?

On 13 May PBC are holding a free to attend seminar at the Kettering Park Hotel where Gary Pettit and myself will be discussing the issues that are generally leading to personal liability and what professional advisors ought to consider.  Should you be interested then please contact Lisa Parker on lisaparker@pbcbusinessrecovery.co.uk in order to book one of the limited spaces available.

 

A Business Adviser? Come to our free seminar on Personal Liability

To be held at Kettering Park Hotel on May 13th.

Looking at the hot topics that could affect you and your clients including

  • Re-use of prohibitive name
  • HMRC hot potatoes
  • Dividends
  • The Warning Signs

Plus we are looking to cover topics arising from The Budget

RSVP: lisaparker@pbcbusinessrecovery.co.uk

 

DUE TO THE COVID-19 CRISIS THE SEMINAR HAS BEEN POSTPONED AND WILL BE REVISITED IN SEPTEMBER DEPENDING UPON GOVERNMENT GUIDELINES

Legal Claims Against Directors following Liquidation – What you need to know. – Guest blog post from Steven Mather Solicitor

This is a guest blog post from Steven Mather Solicitor – The Right Lawyer for You and Your Business™

 

Firstly, thanks to Gary and Jamie and everyone at PBC for inviting me to guest blog on their website. I’ve worked with them a number of times and I’m impressed by how well they know their stuff, but also the commercial and pragmatic approach they take.

I’m a commercial solicitor based in Leicester and over the last 10+ years I’ve acted on both sides of insolvency disputes – acting for insolvency practitioners like PBC as well as acting for Directors personally trying to defend the claims.

When I talk about insolvency claims, the main ones that I see frequently are:

  • Misfeasance
  • Antecedent transactions
  • Directors Loan account recovery

Misfeasance claims are quite rare, but in them an Insolvency Practitioner (IP) will seek to recover funds from directors personally where they have committed some serious misfeasance which has harmed or damaged the business.

One thing I’ve realised in all the cases I’ve dealt with is that in many small businesses, the director is the shareholder and so they think they can do what they please when they please. I mean, that’s a benefit of being self-employed, right?! Anyway, what most directors do not realise is that the Company is its own living breathing (almost) legal entity and that as director they have duties (called ‘fiduciary’ duties) many of which are also set down in statute, which they owe to the Company. When a company goes into liquidation, it is the IP who then make the decisions on behalf of the Company, and so if the Company has suffered loss, the Company doesn’t care that you, the director, was “a good mate and we go back years”. The company is entitled to take action against the director to recover its loss.

Unlawful and Wrongful Trading are two other types of claims that can be brought against Directors and is aimed at pinning liability on directors where they ought to have known the business was insolvent.

Antecedent Transactions are very common.  These claims seek the reversal of payments made/received by the Company prior to the liquidation which were either:

  • At an undervalue – e.g. selling a Lorry for £1000 when it was worth £65,000
  • A Preference – paying a mate or director before making payments to other creditors.

Both types of claims are quite easy to succeed on acting for IP’s. All that needs to be showed is that the payments were made/received and there was a detriment to the Company/Creditors.

If you’re a director, knowing your back is against the wall, your best bet is not to try to bail out but speak to experts like PBC to get solid advice on the best steps for the Company.

 

Directors Loan Account claims

Most businesses operate directors loan accounts. If the director has to put some money in to support the business, their DLA will be in credit and that’s not a problem.

However, they are also used to extract money out of a business in a way which is not payroll/salary or dividends. Sometimes, it might even be unwittingly used, as accountants allocate certain expenditure of the business to the director’s loan account. Most of the time though, having an overdrawn loan account is because the directors kept taking money out of the business when there was not enough profit properly to declare a dividend at the end of the year.

The result is an overdrawn loan account. If you enter liquidation with an overdrawn loan account, you can rest assured that the IP will be asking you to repay it.

So what, as a director, should you do if you are faced with a claim in relation to your directors’ loan account? There’s actually very little you can do to dispute it. As they generally feature in the company’s accounts, which the directors sign, the Courts will say that “ignorance” of how its made up is not a defence. You might be able to argue that some of the debits against the DLA were not personal expenses and were legitimate business expenses or expenses incurred in your carrying out your role as director, but that requires a more forensic analysis of the account entries.

In short, your best option is to speak frankly with the IP and seek to reach an agreement on a repayment figure and potential repayment plan. Most IP’s are savvy enough to realise that many directors are broke by the time their company goes into liquidation, so doing what you can financially will usually make them go away.

Insolvency Claims are complex though and my best advice would be for any director facing any type of claim to speak to an independent and experienced insolvency litigation solicitor.

 

 

About the Author

Steven Mather is a Commercial & Business Solicitor based in Leicester. He has helped thousands of clients with legal issues worth millions of pounds. He is experienced, approachable and recommended. You can check out his website at https://www.stevenmather.co.uk

Close companies: Loans to participators: Members Voluntary Liquidations (MVL)

Close companies: Loans to participators: Members Voluntary Liquidations (MVL)

These are solvent liquidations. From the date of the liquidation the shareholders are entitled to receive the value of the net assets of the company (i.e the company owes them the relevant value). At the same time the shareholders owe the company the amount of their overdrawn loan accounts.

The shareholders could therefore repay the company the full amount that they owe, in which case they will be entitled to receive the full amount of the value of the net assets as a capital distribution.

Otherwise, they can set off the value of the assets due to them against their debt (the balance of the loan account) and only withdraw, in cash, the net amount.

Where the two debts (company debt to shareholder and shareholder debt to company) are set off in this way, this will constitute a repayment of the loan account for the purposes of relief under CTA10/S458. This is because where a creditor accepts something of equal value, the debt is discharged by satisfaction not by release. There is therefore no question of ITTOIA05/S415 applying.

It is well-established that where a sum is owed by one party to a second party and another sum is owed by the second party to the first, both debts may be cleared by means of a set-off and that is exactly the same as if both sums had actually been paid/repaid.

Example

A participator owed the company £1,425,000 by 30 May 2017. The company went into Members Voluntary Liquidation on 1 June 2017. The net assets, including the overdrawn loan account totalled £5,300,000.

On 1 June 2017 the liquidators declared an interim distribution in the liquidation of £1,425,000 per £1 ordinary share, giving a total distribution at that date of £1,425,000. This was not paid out in cash to the shareholder but was credited to his loan account. It would be a capital distribution within TCGA92/S122. This is not a release of the loan, it is a repayment of the loan. There can be no charge under ITTOIA05/S415.

Likewise any further distributions in the liquidation up to the total balance of the net assets will also be capital distributions.

Mediation – Listen to their story

People Sitting around a table discussing

 

I want to tell you my story

Hands up if you have been in an argument.  What usually happens?  They raise their voice so you raise yours and so on until it becomes a shouting match and the cause of the debate gets pushed aside while other issues come to the fore.  Sound familiar?

Common claims parties say to me in the run up for a mediation include:

  • The matter is complicated; or
  • Although willing, I am not sure how this can be settled; or
  • The other side have been doing something untoward/fraudulent etc.

One of the problems is the longer a dispute is allowed to run the more the core reason for that dispute pales into the background and claims and counterclaims are thrown back and forth.  In shareholder disputes it can get worse as disputing shareholders make allegations of misconduct, then act on those beliefs, forgetting their own statutory duties owed to the company.

So, with the above in mind, how is it that more often than not disputes reach a settlement in mediation?  I read something recently that said,

“The question is not how to avoid conflict but how to do it well.”

As I was once told, we have two ears and one mouth; we have been designed like that for a reason.  All too often in a dispute scenario we forget the core basics of listening and talking by resorting to raising our voices, hoping the one that shouts loudest will win the day.  Unfortunately, all it generally achieves is a steadily increasing legal bill, court intervention and an unwanted distraction to your business.

A mediator re-introduces the core communication attributes back into the forum and it is surprising how getting each party to listen to the story of their opponent extracts the facts, which ultimately leads to reaching a common position.  This usually leads to settlement as the parties get to understand the facts behind the cause of the dispute from their opponents’ point of view.

Refusal to mediate or, simply agree to mediation so you can “Tick the alternative dispute resolution box” can be dangerous territory.  If a court take the view you could have avoided court intervention by settling through mediation you may be at serious risk to an adverse costs order as many have already discovered to their cost.  Therefore, if there appears to be a chance of settling a dispute you should consider mediation at the earliest practicable date.

Should you have an insolvency-related issue or a corporate dispute then please contact Gary Pettit at PBC Business Recovery & Insolvency on (01604) 212150 (Northampton office) or (01234) 834886 (Bedford office). Alternatively, you may send an email to garypettit@pbcbusinessrecovery.co.uk or access our website at www.pbcbusinessrecovery.co.uk

PBC Festive Season Closing

The staff of PBC Business Insolvency & Recovery Ltd would like to thank you and your continued support in 2019 and would like to take this opportunity to wish you a very Merry Christmas and Happy New Year.

Our offices will be closed at 12.00pm on Tuesday 24th December 2019 and re-open at 9.00am on Thursday 2nd January 2020