How secure is your company?

How secure is your company?

A few years ago I asked an audience, “How many of you are self-employed?”  I followed that by then asking, “How many of you set up in business and planned to fail?”

The fact remains we do not set up a business with a view it will fail sometime in the future.  So, why is it we do not take steps to protect our company from any unfortunate incident that may fall upon its leaders?  Possibly because the UK business person is universally recognised as the poorest when it comes to discussing incapacity, or worse.

Perhaps 99.9% of companies that are incorporated adopt the standard articles of association (“Articles”) which governs the company in terms of directorships, voting and all other specific areas of corporate governance as laid down by the Companies Act.

Recently, I was asked to advise where the company operated with a sole director and shareholder.  Unfortunately, that director was injured in an accident, incurring a serious head injury.  As a result, personal injury claims were being prepared, which included a doctor providing a report stating the director was suffering from mental incapacity.  The problem is the Articles state:

“A person ceases to be a director as soon as—

(d) a registered medical practitioner who is treating that person gives a written opinion to the company stating that that person has become physically or mentally incapable of acting as a director and may remain so for more than three months;”

Taking the above into account that particular company now has nobody with authority to operate the business and without  applying to court for the appointment of a personal representative (which can take several months) it is rapidly descending into a financial chasm, leading to its eventual demise.

The above should be a telling tale, if not a warning, for all those small, single director companies.  You should ensure there is a second director registered at Companies House.  This could be your spouse, although couples do have a tendency of travelling together so, try to consider a different person.  Alternatively (or simultaneously) consider a power of attorney whereby someone has the power to protect the company’s interests by (say) appointing a replacement director or being able to ensure trading can be sustained, thus protecting the share value, being a legacy you may wish to leave for your surviving family members.  It is also worth considering appropriate insurance protection as key personnel invariably need to be replaced if the business is to remain viable.

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

HMRC to be a preferential creditor once again

 

The 2018 Budget has seen the announcement that HMRC will regain their preferential creditor status, a position which they lost in 2002 under the Enterprise Act. Since then they have ranked alongside unsecured creditors (such as suppliers, landlords etc).

Chancellor Philip Hammond, speaking in Parliament said, “We will make HMRC a preferred creditor in business insolvencies…to ensure that tax which has been collected on behalf of HMRC, is actually paid to HMRC”.

Further detail announced by HM Treasury states, “Taxes paid by employees and customers do not always go to funding public services if the business temporarily holding them goes into insolvency before passing them on to HMRC. Instead, they often go towards paying off the company’s debts to other creditors.  From 6 April 2020, the government will change the rules so that when a business enters insolvency, more of the taxes paid in good faith by its employees and customers but held in trust by the business go to fund public services as intended, rather than being distributed to other creditors such as financial institutions”.

It is understood HMRC will become a “secondary preferential creditor”, ranking after current preferential creditors, which includes the Redundancy Payments Service and employees for certain elements of their employment rights. HMRC will only become preferential for debts collected by the company on behalf of HMRC, such as VAT, PAYE and employee’s NI contributions but will remain unsecured for Corporation Tax and employers’ NI contributions.

The Government believe this measure will result in an extra £185 million in taxes being recovered each year. However the policy will have other consequences such as:

  • Banks and other lenders may be unwilling to support companies, or charge higher interest rates on lending, as their risk will increase.
  • Other unsecured creditors, including small businesses, landlords, pension funds, suppliers and employees will see the amount they receive reduced.

The full release from HM Treasury is available here:

The budget also included confirmation of proposals whereby directors could be held liable for debts due to HMRC where there is a risk that the company may deliberately enter insolvency. Following Royal Assent of the Finance Bill 2019-20, directors and other persons involved in tax avoidance, evasion or phoenixism could be jointly and severally liable for company tax liabilities in certain cases.

Liquidators’ appointment valid despite breach of deemed consent procedure

The Insolvency (England & Wales) Rules 2016 came into effect in April 2017 and were aimed at enhancing creditor participation in the insolvency process while also consolidating the rules.

One of the new provisions enables an insolvency practitioner (“IP”) to serve creditors with a notice of deemed consent; meaning if the IP does not receive any objections by a given date then, by deemed consent, that IP is appointed liquidator of the company in question. However, what happens if you are a creditor but do not receive a copy of the notice?  You may have burning issues or a preference on the IP who should be appointed.

These were some of the issues arising in the case of Cash Generator Ltd v Fortune and others [2018] EWHC 674 (Ch) which is understood to be the first case to challenge the new insolvency rules.

Background

The companies operated, as franchisees, in pawn-broking and ‘payday’ loans.

The first and second respondents were nominated by the companies as their joint liquidators and, when fewer than 10% of the creditors objected, they were duly appointed under the deemed consent procedure.

Before the liquidations began, the companies assigned their leasehold interests in their business premises to a third party.  Once appointed, the first and second respondents sold the stock and other assets.

The Companies Court decision was that non-compliance with the statutory provisions for the appointment of liquidators did not invalidate the first and second respondents’ appointments as joint liquidators of the three companies. There was also no cause for their removal to enable an independent investigation into the assignment of the companies’ leasehold interests in the business premises and the sale of the stock and assets.

The application

The applicant was a franchisor and claimed to be a creditor. They sought declarations from the court that:

  • the appointment of the first and second respondents as liquidators was invalid as the correct procedure had not been followed.
  • the first and second respondents should be removed from office.
  • the first and second respondents should be replaced by the Applicant’s own nominees or those appointed by the court.

What did the court decide?

The court determined there were two distinct issues to consider, namely the invalidity (or otherwise) of the appointment and whether the respondents ought to be removed from office.

Invalidity

The applicant argued that as they (and other creditors they were aware of) had not been given notice of the respondents’ nomination, the statutory requirements for nomination under the deemed consent procedure had not been complied with.  Consequently, the appointment was fatally flawed.

It was conceded by the Applicant that a company could nominate a person to be liquidator at a company meeting at which the liquidation commenced.  However, the insolvency rules require directors to seek nomination from the creditors whose choice of liquidator shall prevail. In those circumstances, the court had to intervene and either order removal or the appointment of new liquidators.

The judge considered these arguments in the light of section 100(1B) Insolvency Act 1986, which provides,

“The directors of the company must in accordance with the rules seek nomination of a person to be a liquidator from the company’s creditors”.

The court also reviewed the deemed consent provisions in the insolvency legislation and highlighted notice can be taken of the fact information made available to those assisting the directors frequently contained errors, such as a mistake, oversight, or a failure to keep proper books and records. It did not escape the court’s view that omissions may even be down to a deliberate decision not to provide correct information.

Notwithstanding the possibility for error or omissions the court felt the Government had intended for the new rules to achieve a speedy appointment of an insolvency practitioner nominated by creditors and not to cause uncertainty, delay or additional costs. It was also noted the deemed consent procedure was intended to encourage creditor involvement rather than to assure maximum number participation. The court further argued the Government would have anticipated there was a prospect of one or more creditors not being given notice from time to time. Accordingly, it was reasonable to conclude that, in the absence of an express provision, the Government did not intend invalidity in these circumstances, otherwise it opened every appointment up for challenge where creditors failed to receive notice, hence the loss of opportunity to vote.

It was also pointed out by the court the applicant had other remedies open to it. For instance, to requisition a meeting of creditors or even an application for directions under section 112. of the Insolvency Act 1986.

Removal

It was argued there was a need for an investigation into the conduct of the respondents, particularly the issues surrounding the pre-liquidation lease assignments and the post-liquidation sale of stock. As those investigations concerned the liquidators conduct, new office holders should be appointed in their place.

The court followed the approach set out by Warren J in Sisu Capital Fund Ltd v Tucker [2005] EWHC 2321 (Ch), [2006] 1 All ER 167, being:

  • removal should be ordered where an independent review cannot be carried out because of conflict
  • the court should consider the views and wishes of the majority of creditors
  • removal should not be ordered merely because conduct has fallen short of the ideal
  • the court should remember that removal can impact upon professional standing and reputation

The court found no evidence had been put forward to suggest the respondents would not carry out investigations that they considered appropriate. Indeed, it was observed the early sale of stock had been based upon expert valuation advice and, as there was no business to sell, a ‘fire sale’ had been justified. Furthermore, the respondents had been advised on both the validity of the assignments and value of the leases.

In noting the above, the court also mentioned HMRC had not supported the application and, presumably was content for the respondents to remain in office. Based upon the facts before the court, there was no cause to remove the respondents as liquidators.

What are the practical implications?

Gary Pettit said, “It was interesting to note the presiding judge issued a plea for the Rules Committee to consider whether the rules needed to be consolidated as those rules the judge had been referred to in this case were in a variety of places and featured numerous requirements. This echoes the common view of insolvency practitioners.”

Gary continued, “Ultimately, though, what this judgment means is company nominated liquidators need not worry about the validity of their appointment under the deemed consent procedure if a creditor is not sent notice of their nomination and a statement of affairs, in accordance with the rules.”

Comment

Creditors are often omitted from the initial notice of an insolvency, primarily due to the pace of information gathering causing an oversight in identifying all potential creditors. The Court appear to have acknowledged this practical difficulty when reaching their decision.

Unfortunately, while the new insolvency rules require for virtual meetings to be advertised in the London Gazette this is not a requirement for the deemed consent procedure. It remains to be seen whether this advertising requirement will be amended for proposed deemed consent appointments following this latest court decision.

Restoration of Company Results in Dividend to Creditors

PBC are pleased to report that a dividend of 66.40 pence in the pound was paid to unsecured creditors in a liquidation that, at first, appeared to have no distributable assets.

The company was placed into creditors’ voluntary liquidation in June 2012 and following closure of the liquidation the company was dissolved. PBC were subsequently approached to restore the company to the register and act as liquidators to realise a refund of fees from the company’s former bankers.

With the assistance of Katie Summers, a partner at Howes Percival LLP, a successful application was made to restore the company to enable the fees to be recovered and subsequently a payment to be made to creditors.

PBC ANNOUNCE DIVIDEND TO CREDITORS IN LIQUIDATION

PBC are pleased to declare a dividend of 26.82 pence in the pound to the unsecured creditors of Silver Sovereign Limited.

The company’s major asset was an adverse directors’ loan of approximately £57,000. This has been recovered in full which has allowed a payment to creditors to be made.

Joint liquidator, Gavin Bates, said, “Whilst it has taken some time to collect the payments from the directors in respect of their loan, the approach taken has resulted in a significant return to creditors. It is always good to make payments to creditors”.

Insolvency back in the headlines

News broke early this morning of the liquidation of Carillion, the second largest construction company in the UK with 20,000 UK based employees and responsible for providing public services from sectors such as prisons, hospitals, transport and schools.

For clarity, the companies subject to winding up are:

  • Carillion Plc, company number 03782379
  • Carillion Construction Ltd, company number 00594581
  • Carillion Services Ltd, company number 02684154
  • Planned Maintenance Engineering Ltd, company number 00737307
  • Carillion Integrated Services Ltd, company number 03679838
  • Carillion Services 2006 Ltd, company number 03011791

This news will no doubt cause concern for the company’s employees, suppliers, sub-contractors and any other owed money by the company. The government have released advice about the situation for anyone affected which can be found here.

To assist the Insolvency Services administer the affairs of the above companies, insolvency practitioners from PwC were appointed as special managers. A special manager is appointed by the court on the application of a liquidator and the court lay down their powers such as an ability to trade or sell the business as a whole or in part.  The special managers have also set up a website that provides some guidance.

Should any creditor, including sub-contractors, after visiting the above sites wish to receive advice about their position, both on their rights as a result of the liquidation of Carillion or their financial position, please contact PBC on 01604 212150 or view our creditor services page.