What insolvency means

31st Oct 2017

For any company or director, no matter what the size of the business, making the decision to begin the insolvency process is always going to be a difficult one. It may be that longstanding creditors are left being owed money, but the need to protect the company against the insolvency of a supplier or debtor, could be key to safeguarding a business. You also need to safeguard yourself as a director from various claims that might be paid by a Liquidator, creditors, HMRC and from Disqualification proceedings. Whether you are the Company facing insolvency, a director or creditor, we can assist.

Employee Fraud

Procedures for Insolvency

The procedures are primarily designed to protect the assets of the insolvent business for the benefit of all creditors. The three most common insolvency procedures for a company are:

  • A Company Voluntary Arrangement (CVA) – creditors agree to accept a proportion of their debt rather than full payment
  • Administration – an administrator is appointed who will initially attempt to rescue the business if they can. When a company goes into administration no action can be taken against the company without the permission of the administrator or a court
  • Liquidation – a liquidator collates any assets and will sell them, so they can be distributed to creditors in a strict order of priority.


Practicalities

A creditor should receive notice of any CVA proposal, this may not occur if the company goes into either administration or liquidation until after it has happened. A contract may be terminated in the event of a company becoming insolvent, but not in every case. If a company is a major or important supplier, the administrators may consider continuing payment to ensure continuity to make sure that the right to cancel the contract isn’t invoked. Should this happen it could lead to the recovery of more money than if the contact was cancelled and another supplier sought. A robust retention of title (ROT) clause may give you a right to recover what you have supplied if you have yet to be paid, though if they are poorly worded they are of little use. Most of the claims tend to fail because terms are not correctly incorporated or maybe the goods can’t be identified.

Administrators review ROT claims very early on in the process – so notifying the administrators quickly, prior to them disposing of any items, will give a better chance of goods being returned. This illustrates that a signed set of terms and conditions for each contract will be of real benefit and help protect a company if things were to go wrong.

The existence of a lien in your terms and conditions, giving the right to retain goods until the services provided have been paid for, will go some way to providing additional protection, especially if the terms also give the right to sell the goods if they are not collected and paid for.

If a lien is in place then it is best to use it as soon as possible if a debt is overdue, as it could be the best means of being paid. It is a complex area as to whether a lien can be used when a company enters administration – once an asset is realised the lien ceases, so if one is being used, make sure colleagues know what is going on.

Some complex issues can be created with contracts for storage, especially if the goods can be mixed with others, such as oil or wheat.


Claims against Directors

Whilst it is true that Directors of limited companies normally benefit from a limited liability status, there are circumstances where that protection can be removed and Directors may become subject to personal claims against them – either following the insolvency of a company or arising from general breaches of their duties.


Conclusion

Companies are never immune from the effects of an insolvency, but it is certainly possible to mitigate the risks involved. Having a robust and rigorous credit control system in place together with strong record keeping and accurate, detailed contract terms will help protect a company.

Insolvency can be an anxious and stressful time for all the parties involved in the process, it is surprising how few companies take the time and effort to put systems and contracts in place at the outset of trading relationships, we can assist with this.

For directors, you need advice very early own to ensure you do not face potential claims against you personally.

Should you have any concerns or issues relating to insolvency you can contact me on ph@rogers-norton.co.uk or 01603 675639.