In the third and final article in his insolvency series, Peter Windatt looks at issues
which may arise following insolvency proceedings, by providing a narrative view
in order to illustrate some of the events that can follow a formal insolvency.
It is the morning after the month before
and yesterday was the creditors meeting of
the company of which you had been the sole
director for over 10 years. You had been so
focused on the build up to the creditors
meeting you had not remotely considered
the events following it.
It had been your baby. Its lifeblood had
coursed through your veins. You protected it
through its early years of growth, watched it
take its first shaky steps and then grow strong.
Very strong. It had provided you with a decent
living and through it the employees – some
40 at its peak – had put bread on tables,
paid mortgages, rent, and been a credit to
you and your team.
Only 12 were still with you at the end.
Like you they too were gutted. What was to
become of them? The forms they had been
given meant they would be able to claim from the DTI for some recompense; but how long
before that came through? When would the
liquidation end? When could you breathe out
again? The company’s life was coming to an
end – how quickly it had come.
And now, today, after weeks of worry,
months of what seemed like mayhem, it has
finally happened. You don’t have the keys to
the factory any more, an agent has them and
is negotiating with the landlord over holding
a sale from the premises, you are no-one’s
boss and you don’t know what you will do
tomorrow, next week or beyond.
Questions still abound. How are you
going to service your own debts? What is the
bank going to do? As soon as the proposed
liquidator had called the bank they had
written to you at your home and made formal
demand on you for all of the loans and
overdraft under your personal guarantee. But what does that mean in reality? Why had they
written to your wife too? Are there any pieces
that can be picked up? Is there something
that can be salvaged from the wreckage?
In no particular order, here are some of
the points for consideration following the
hiatus period and the commencement of the
liquidation proper.
Company Directors Disqualification
Act (CDDA)
In most forms of insolvency there will be a
review carried out by the insolvency
practitioner and/or official receiver into the
conduct of all persons who were directors of
the company (including shadow directors)
and who were directors in the three years
leading up to the insolvency.
Where there is evidence that a director
has not acted properly, there is the possibilitythat the Insolvency Service will commence
disqualification proceedings. Any proceedings
must be started within a period of two years
following commencement of the insolvency
and experience shows that if they are to be
commenced it won’t happen much before
the end of that two years.
The difficulty for directors regarding these
proceedings is three-fold. They are usually, by
this time, engaged in other activities which,
not surprisingly, occupy much of their time.
Additionally they are usually unable to
remember with a high degree of accuracy
what did lead up to the insolvency and the
precise order in which events unfolded.
This is why, in my first article, I advised
directors to keep a simple contemporaneous
record of significant happenings within a
distressed company to serve to support a
defence and show that, in light of what was
known at the time, actions taken were entirely
reasonable. Finally, any money that they may
have had available to mount a robust defence
of disqualification proceedings may have
been exhausted funding settlement of
personal guarantees, living expenses etc.
Disqualification need not be too lengthy
or expensive a process. Periods of
disqualification are generally from 2–15
years depending upon the seriousness of the
offences alleged. Details of those offences are
supplied at the time of notification of action.
Nowadays the DTI generally gives an option
of consenting to disqualification rather than
going to the cost of defending proceedings
and, if unsuccessful, possibly incurring the
DTI’s costs as well as your own. Where
disqualification would not present a real
issue for an individual or looked inevitable
this option may be worth considering.
personal guarantee liabilities
It is not that surprising that the benefit of
trading through the mechanism of a limited
liability company is often significantly eroded
by directors (and often others, especially
directors’ partners) in giving guarantees to
banks, factoring companies, landlords and
hire-purchase companies.
When liquidation subsequently transpires,
these assets, carried in balance sheets at
decent values and which cost so much
initially, invariably cannot be realised for
anything approaching these values. Guarantees
given to banks more than six years ago may
have been given safe in the knowledge that ‘you have nothing to worry about – we only
take guarantees to show your commitment is
real – look at the value of the debtor book
which stands between us and any exposure
you might have under your guarantee’.
However, since Brumark and Spectrum (New
Zealand and UK cases respectively) which
called into question and then overturned the
long-held view that banks could have a fixed
charge over book debt balances, this is no
longer the case. Add to this the fact that,
upon insolvency, every debtor opens the big
book of excuses anyway and finds every
reason under the sun not to pay what is due,
and then multiply this by a factor of 100 if
you are in the construction industry.
Upon insolvency the assets may be
recovered, sold at an auction, subject to costs of uplift, storage and sale, and then the
finance/lease creditor claims are subject to
increase thanks to early termination penalties
etc. Consequently, asset values plummet, claims
soar and guarantors haemorrhage cash.
vexatious creditors
There is often one. Not in all cases but in
many. One creditor who will not let go or,
sometimes worse still, who sells their claim
to someone else who won’t let go. They have
a view of the law, of wrongful/fraudulent
trading etc. and make an already miserable life
altogether more miserable in the hope of
extorting some level of payment out of you.
Clearly if they have a valid legal claim
against you, usually under a guarantee,
under previous contractual arrangements
pre-dating incorporation or for a similar
reason, then payment might be appropriate.
Otherwise, politely but firmly advise them to
get in line with the other creditors, claim
through the insolvency proceedings and
review or reconsider their credit/guarantee/reservation of title policy(ies). An action for
civil recovery will usually only be brought by
an insolvency practitioner.
directors buying assets from the liquidator
‘Phoenix’ companies, rising out of the ashes
of failed companies, are nothing new. A
company may well die, but the business of
the company might easily be taken on by the
former directors into a new vehicle and traded
on. ‘The king is dead – long live the king.’
This is what the Enterprise Act, in part,
aimed at achieving – making it easier for
struggling businesses to keep afloat. But what
potential investor is going to throw good money
after bad? Why pay off historic creditors when
new money could be used to help future trading?
Better to keep the target company talking until
it falls over and then pick it up out of
insolvency without the historic debt burden.
But what is an insolvency practitioner to
do when selling assets? Directors are often
likely to be the ones making the best offer for
the assets of a company in trouble – they
know which machines work and what the various wrinkles are associated with them – and the allied workarounds. In addition, if
the directors have guaranteed the lease they
may be keen to recommence some sort of
trading from the premises in order to mitigate
their exposure to future rent etc.
Other prospective purchasers of the assets
are, inevitably, taking a bit of a punt – their
offers will reflect the bigger risk they might be
taking buying assets that they have no working
knowledge of. They may have to think about
removal and storage issues too – while they
might like the idea of buying the assets they
might not be well placed to do so – the timing
may be out for them.
directors re-using the company name
Sections 216/7 of the Insolvency Act are
there to counter cases of ‘phoenix-ism’. In
essence anyone who is a director of a company
within 12 months of its liquidation cannot,
for five years following, except with the leave
of the court, be directly or indirectly concerned
in the promotion, formation or management
of a company or take part in carrying on a
business under a name by which the
liquidated company was known at any time
in that 12 month period or in a name which
is so similar to it as to suggest an association.
Where there is no culpable behaviour the
courts may grant leave and where all or
substantially all of the assets – goodwill etc.– are acquired by a successor company leave
is not usually required, or where a similarly
named company had traded for the 12
months prior to the date of failing company’s
liquidation (subject to the rules).
However, contravention by a director risks
personal liability for debts. Such persons
become jointly and severally liable with the
company. Accordingly expert advice should
always be sought in this area.
employee claims
No responsible director of a company wants
to let anyone down, least of all the employees.
Directors won’t usually be able to successfully
claim payments through the DTI. However,
subject to all amounts being to a maximum£290 per week (from 1 February 2006 –
increased annually), employees will be paid
arrears of wages/salary – up to eight weeks’
pre-insolvency; holiday pay – up to six weeks’
pre-insolvency (restricted to a maximum one
year’s entitlement); pay in lieu of notice and
redundancy – statutory entitlement only.
Contributions will also be made in respect
of arrears to occupational pension schemes.
Payment through this scheme usually takes
some 6–10 weeks post insolvency.
The above has been prepared as
background information for the general
professional adviser and is not a
comprehensive statement of the law – I
recommend that expert advice be taken on
specific issues arising in practice. Clearly, if
you have, as previously suggested, by now
formed a relationship with a qualified
insolvency practitioner who you now know
and trust he/she will be able to assist you.
Peter Windatt is a licensed insolvency practitioner
and director of BRI Business Recovery and Insolvency.
Peter is a former ACCA Council member and now
serves ACCA as President of the Bedford, Luton
and Northampton Members’ Network and as a
director of the Joint Insolvency Examination Board
and by sitting on various allied committees. |
