A common question directors of an insolvent company ask is along the lines of can I pay a particular creditor in full before the company is wound up?  Usually, that creditor is related or associated in some way to the director, or there may be a personal guarantee attached to the debt.

 

 

In short, the answer is invariably “No” as that may constitute a preference.  As a quick point, a preference is where, “The company does anything or suffers anything to be done” and that action puts the creditor in a better position than creditors as a whole.

 

The key principles surrounding a preference are:

 

1. Where the benefitting creditor is not associated in any way then it is for the liquidator to prove there was a desire to place a creditor in a better position.  If the party is connected in any manner, then desire is presumed, unless it can be rebutted.

 

2. Did the giving of the preference render the company insolvent or was the company already insolvent?

 

These key principles were tested in two separate court cases this year, with differing outcomes arising based upon the individual facts.

 

In the first of these, Carton-Kelly -v- Darty [2022] EWHC 2873 (Ch) the repayment of an intra-company debt of £115 million was deemed a preference.  The defence primarily swung on the argument the company was balance sheet solvent, mainly as a result of a material deferred tax asset.  However, the court disagreed as these allowances were only available if future profits were to arise and, given the company had ceased trading, that prospect was never going occur.

 

In upholding the liquidator’s claim the court cited, “the purpose of [the preference provisions] is to prevent a company defeating or undermining the pari passu principle.” [sic].  In other words, you must ensure creditors as a whole are treated fairly and equally.

 

The second case was Manolete Partners PLC -v- Coleman and Ors [2022] EWCH 2644 (Ch) where the court took a differing view.  Mr Coleman had repaid his loan account and argued a sale of the business had been agreed where the combination of sale proceeds and debtor receipts would have paid all known creditors.  Insolvent liquidation was never contemplated.  Indeed, the only criticism against his defence was the fact he paid himself in full immediately, whereas other creditors would need to wait until sufficient funds were received.

 

As it happens, liabilities were substantially higher than Mr Coleman understood to be the case and the company was insolvent.

 

In considering the facts, the court accepted Mr Coleman’s genuine belief all creditors would be paid in full and the presumption of “Desire” had been rebutted.  Accordingly, the case against him was dismissed.

 

The message we can take from these two cases is whether a transaction is a preference, or not, will very much depend on all surrounding facts at the time.

 

If you require any advice or assistance on any insolvency-related issue, then please contact PBC Business Recovery & Insolvency to discuss and advise on your situation on 01604 212150 or email to enquiries@pbcbusinessrecovery.co.uk.  Alternatively, visit www.pbcbusinessrecovery.co.uk for further information.

 

In our recent blog entitled “What is it you want to do?” (https://www.pbcbusinessrecovery.co.uk/what-is-it-you-want-to-do/), we outlined how PBC ensure anybody receiving advice is presented with all the options available to them.

 

In a recent case, PBC were approached by two directors who were being pursued by the liquidator of their company in relation to loans due from associated companies of £1.4million.  After taking time to understand the overall picture, we corresponded with the liquidator, making an informed  offer of £300,000 payable over three years with no personal guarantees or other security being needed.  This offer was accepted.

 

In another example, PBC acted for an individual who owned various properties, some of which had been sold, leaving a shortfall of over £200,000 owed to the mortgage company.  The individual also owned further mortgaged properties with  the same mortgagee and was he looking for a solution which avoided an insolvency outcome.  Following negotiations with the solicitors acting for the mortgagee, a settlement below £100,000 was agreed.

 

In both cases, formal insolvency procedures were avoided which secured mutually suitable outcomes.  The headwinds from the Courts are that mediation is a necessary process and indeed one which may become compulsory and as can be seen from the examples above, one which can provide successful resolution to matters.

 

If you require advice or assistance on any insolvency-related issue or with mediation, then please contact PBC Business Recovery & Insolvency to discuss and advise on your situation on 01604 212150 or email to enquiries@pbcbusinessrecovery.co.uk. Alternatively, visit www.pbcbusinessrecovery.co.uk for further information.

American General George Patton once said “Do not try to make circumstances fit your plans. Make plans that fit the circumstances.”

 

Where companies are concerned it is often overlooked that behind a company and title of director is a human, with feelings, concerns and often, a family to support.  That company is their source of domestic income or, more deeply, it is their “Baby”, their life or a family generational entity where personal emotions often prevail.

 

A question we at PBC always ask directors and individuals surrounds what their ideal solution to the challenges they are facing is.  Often the reaction is one of surprise as they have either assumed the options are limited or they have simply not thought beyond the traumas they are experiencing at the time.

 

At PBC we cannot think of anything worse than someone adopting one option, only to find there was a better alternative that suited the circumstances.  Should I look at an individual voluntary arrangement or go bankrupt?  Should I place my company into liquidation when one of the restructuring and turnaround options are available?  Questions we help you to determine the answers to.

 

It is accepted, circumstances can dictate/restrict the options available.  One of those is simply one of not taking advice at an early stage.  Equally, a director could say they have simply had enough of running the business and want to get out in the quickest manner.  Regardless of the circumstances, we are of the opinion following your ideal path (where possible) is far more appropriate than simply looking at the perceived way forward.  In other words, you make your plans to fit the circumstances.

 

If you require advice or assistance on any insolvency-related issue or with mediation, then please contact PBC Business Recovery & Insolvency to discuss and advise on your situation on 01604 212150 or email to enquiries@pbcbusinessrecovery.co.uk.  Alternatively, visit www.pbcbusinessrecovery.co.uk for further information.

Last week we reported on, what was termed by the Supreme Court as, “A Momentous decision,” that laid down the duties of directors. However, coming quietly behind it was another decision that could also have huge implications for directors.

 

When a company goes into an insolvent liquidation, its name becomes prohibited and there are various restrictions surrounding using a name (or brand) that is so similar that it may cause confusion to the public.  For example, if a company was known as “Big Ruined Industry Limited,” any director setting up a successor company and calling it (say) “Big Ruined Industry (2022) Limited” would be in breach of using a prohibited name.

 

What directors are all too often unaware of is a breach of the prohibited name provisions is a criminal offence and a director could be held personally liable for the debts of the company.  This is what has happened in the recent Court of Appeal decision of PSV 1982 Limited -v- Langdon [2022] EWCA Civ 1319.

 

In this case, Mr Langdon was director of Discovery Yachts Limited (“DYL”) and Discovery Yachts Group Limited (“Group”).  A customer commenced legal proceedings against both companies, resulting in DYL going into liquidation.  Some two years later, Group went into administration and then subsequently into liquidation.  The customer claimed Mr Langdon was in breach of using a prohibited name and, as a consequence, was personally liable for their claim.

 

The principal ground of defence was that it is unjust for someone (Langdon) to be bound by a judgment in proceedings (that were against DYL and Group) in which he had not been heard, or able to mount a defence.  In dismissing this argument, the Court of Appeal said the criminal sanctions imposed by breaching the provisions of re-using a prohibited name prevailed and so, it followed, any award must do likewise.

 

Mr Langdon now finds himself personally liable for some £1.6 million with his right to appeal being rejected.

 

Legislation does provide for certain exceptions that enable the re-use of a prohibited name and, with the number of “Phoenix” liquidations steadily rising, directors should ensure they follow set procedures to ensure they do not fall into the same trap as Mr Langdon.  The courts view is those set procedures are so straight-forward, there is no room for excuse if they are not followed correctly.

 

If you require any advice or assistance on any insolvency-related issue, then please contact PBC Business Recovery & Insolvency to discuss and advise on your situation on 01604 212150 or email to enquiries@pbcbusinessrecovery.co.uk.  Alternatively, visit www.pbcbusinessrecovery.co.uk for further information.

 

As a director, do you owe your company any money and, if so, do you know the potential consequences for not repaying the amount?

 

Since the availability of bounce back loans and CBILs, a common feature in companies we are asked to advise upon is the presence of an adverse director loan account (“DLA”) where a director has drawn funds above and beyond their remuneration package in order to address personal commitments or just to acquire luxury items.  This creates a debt, which is repayable to the company.

 

However, what about the other potential issues arising?  These include:

 

• HM Revenue & Customs can determine a DLA as income and assess a tax liability based upon the unpaid balance, in accordance with section 455 Corporation Tax Act 2010. This assessed tax liability can be held against a director

 

• The Redundancy Payments Service will look at this as grounds to reject your claims for entitlements as an employee of an insolvent company. While the basis of their refusal to entertain director claims is wrong, in law, until it is challenged they will use a DLA as sound reasoning for not paying a director.  This could amount to several thousand pounds in many cases that a director loses.

 

 

So, what can you do when confronted with this situation, particularly if there is an insolvent situation looming?

 

1. First, ensure the balance is correct. All too often a DLA becomes a “Dumping” ground for unallocated accounting entries.  Make sure you have an agreed balance.

 

2. Does the company owe you money? If you have paid for goods or services using your own funds or credit card, have these been posted to the DLA?  This may also include your employee entitlements, in terms of wages and accrued holiday pay.

 

3. If you can, repay the agreed balance, which in turn prevents the Redundancy Payments Service from using an adverse loan from rejecting your employee entitlements.

 

4. Offer to repay the agreed balance to an appointed liquidator by way of instalments.

 

5. Alternatively, offer a one-off payment in full and final settlement.

 

Settlements (either by way of instalments or otherwise) are always open to negotiation but can make repaying a DLA more manageable or, in the case of a lump sum settlement, remove that burden from a directors’ mind.

 

The exposure risk of a settlement that is lower than the agreed balance is HMRC could look at a section 455 assessment against the unpaid residue of the loan.  It is not a certainty, but it remains a risk nonetheless.

 

The key message is where a DLA exists, take advice and be prepared before taking that next step.

 

If you require any advice or assistance on any insolvency-related issue, then please contact PBC Business Recovery & Insolvency to discuss and advise on your situation on 01604 212150 or email to enquiries@pbcbusinessrecovery.co.uk.  Alternatively, visit www.pbcbusinessrecovery.co.uk for further information.

Those of you old enough to remember will recall the days of queuing to get into the local cinema to watch the likes of the latest Bond movie, the original Star Wars perhaps, or even Grease.  There were no reserved seats and it was a case of first come, first served.

 

The cinema industry has moved on from those halcyon days, but the key ingredient has remained the same; a good film to attract the audience.

 

And here lies a problem.  Due to the pandemic, many of those blockbuster films were suspended and even to this day are yet to be released.  The first ingredient to the business model is suddenly missing.

 

The world’s second largest cinema chain is Cineworld who operate 751 sites across 10 countries (102 of which are in the UK).  Cineworld recently announced they were consulting with solicitors after reporting suffering a £429 million loss in the last financial year.  It was also reported the group had liabilities of a staggering £4 billion.

 

In those “Good old days” there were no videos, DVDs or live streaming, so if you wanted to see the latest blockbuster movie you had to visit the cinema, or wait 2-3 years for its release on television, normally around Christmas.

 

In modern society, these films become readily available shortly after their release.  Indeed, this has been an issue with many scheduled film releases being delayed.  A statement from Cineworld about their current plight said,

 

“Despite a gradual recovery of demand since reopening in April 2021, recent admission levels have been below expectations.”  This is as a result of few films being available to attract the audience.

 

It is now being muted that Cineworld may enter into Chapter 11 (in the USA) and some form of restructuring vehicle in the UK.

 

At Cineworld, film releases are its raw materials, whereas admissions equate to their income.  At PBC we are seeing many businesses that are suffering a similar fate, only film release is replaced by materials, for example and admissions are similarly replaced with customers who, for one reason or another, are suspending or even cancelling orders.  Both of these issues have an adverse impact on cashflow and, in some cases, jeopardise the viability of the company itself.  “Cash is king” we are all led to believe, yet if a business cannot secure the supplies or is prevented from continuing with a contract then it is at serious risk of failure.

 

If you require any advice or assistance on mediation or any insolvency-related issue, then please contact PBC Business Recovery & Insolvency to discuss and advise on your situation on 01604 212150 or email to enquiries@pbcbusinessrecovery.co.uk.  Alternatively, visit www.pbcbusinessrecovery.co.uk for further information.