CreditFILE September 2008
In-House News
Brethertons’ World Wide Recoveries
You may think that our collections team is limited to pursuing cases in the UK- we are not.
For some years we have been acting for international clients recovering their debts from across the world.
In early August we were instructed to recover monies from a number of Spanish customers. Much to the team’s dismay, we have been prevented from packing our buckets and spades and flying out to Spain in person, as we have a huge network of international agents who can assist with such cases.
B- Sec for Company Secretarial Services
Brethertons LLP has launched a new commercial service called B-Sec, which is aimed at company directors / secretaries, business owners and managers who carry out a company secretary role.
B-Sec is a service to help manage the paperwork and processing of official company documentation with ease. The Brethertons system, B-Sec, allows automatic filing of documents at Companies House, electronic recording and reviewing of statutory books and commercial documents and helps keep you on top of company secretarial administration.
Team Commercial partner, Brian Auld, said of the launch:
“We are all extremely excited to launch the B-Sec service which is available from our Rugby and Banbury offices. This is a further addition to our supply of on-line legal services and it will help save a lot of time and effort for anybody carrying out company secretary duties as they often struggle to keep up-to-date with their documentation and overall business compliance.
The costs are very modest in comparison to the quality of the service and its benefit to the proper running of a business. As with our other web-based services the ability for clients to view their own records and documents on-line is extremely helpful and you don’t have to be an existing client of Brethertons to use the B-Sec service.”
If you would like to find out more about B-Sec, please contact Brian Auld on 01295 270999 brianauld@brethertons.co.uk
Special Report
Helping Directors Survive Change
Directors are increasingly exposing themselves to personal risk – being held liable for debts through wrongful trading, misfeasance, etc. and to disqualification from future directorship under the Company Directors Disqualification Act (“CDDA”).
Whilst being prevented from acting as a director in the future might not worry those with the attitude “once bitten, twice shy”, for those wanting to progress their careers up the directorial ladder the costs of defending themselves may deter them from doing so. Below are summaries of some of the more common issues directors need to be aware of.
Personal Liability for Debts
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Personal guarantees over company debts;
following a company failure to the extent that the company is unable to repay from its own resource, these guarantees are likely to be called in.
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Charges on personal property given to secure company debts;
the facts surrounding the granting of the charge may be all important. Where joint with a spouse, was independent legal advice sought? Was it suggested? What other representations were made by the lender at that time?
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Directors’ current/loan account balances;
overdrawn balances – the liquidator/administrator will generally be required to demand repayment of any balances due.
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Repayment of Directors’ loan accounts (e.g. rather than taking remuneration);
this might constitute a preference – the director may have paid him/herself while other creditors remain unpaid and so be required to pay it back.
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Was any remuneration taken but not taxed/properly recorded? (Regulations 42/49);
directors can be held liable for their tax liability where, for example, round sums have been taken by the director but not properly accounted for.
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Trading the company whilst it is insolvent;
this covers wrongful trading, fraudulent trading and disqualification proceedings (if wrongful/fraudulent trading is shown then disqualification can be automatic). The essence of wrongful trading is that directors (including shadow directors etc.) can be held personally liable for the debts incurred by the company after the time when they knew, or ought to have concluded that, there was no reasonable prospect of them avoiding insolvent liquidation.
Other Challengeable Transactions/Issues
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The company paid certain creditors in preference to others;
this is a “preference” and, subject to showing an “intention to prefer” (typically the directors themselves, family or friends), repayment can be demanded.
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Company assets disposed of at an undervalue;
this may be a “transaction at an undervalue”, requiring the director to put the position back to how it would have been. If it is determined to be a “transaction defrauding creditors”, this remedial provision has no time limit and no requirement for the company (or individual) to be insolvent “at the time or as a result” of the transaction. It can also be brought by anyone “prejudiced” by the transaction.
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The company is a “phoenix” and/or directors plan to continue the business using a similar name/style;
provisions within the Insolvency Act (S216) restrict the re-use of a company name (the same or similar) breach of which can lead to personal liability and disqualification.
Directors Disqualification (“CDDA” as above)
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Director “passive” or uninvolved in running the company;
everyone who is a director (last three years) is reported on – no-one should accept the title of “director” lightly.
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Acted as a shadow director, de facto director or non-executive director; as above.
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Other directors have been in breach of their duties;
if this is the case then the actions of the other directors will come under very close scrutiny. They may suffer as a result, especially if they looked the other way or took no timely remedial action.
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Previous involvement in an insolvent company;
to be involved in one failure is unfortunate, two is careless and three is likely to demand scrutiny. Whilst we have the “Enterprise Act” and there is a desire to promote “responsible risk taking”, the Government appears to be taking a “three strikes” approach.
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Directors have previously been subject to director disqualification proceedings;
if involved with another company whilst still subject to disqualification then personal liability (also applies to others who were aware of the situation) can result. If the involvement is post the expiry of the disqualification then there is a public interest issue and further action is likely.
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The company failed to supply goods paid for in advance/ keep deposits separate; the estate agency industry is having to get to grips with this issue, following recent changes in the law on their handling of deposit monies - arguably the whole of the commercial world should treat deposit monies as “trust monies” and keep them in a separate bank account. Until that day it remains a significant disqualification fact.
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Trading using Crown monies; the CDDA includes this as a particular offence – the Crown takes the view that they are an “unwilling creditor”, unlike trade creditors, and they don’t have the same leverage to secure repayment. Following the loss of Crown Preferential Creditor status they are taking recovery action more promptly than before.
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Accounting and statutory records not being kept up to date/filed on time; a simple question of fact that can lead to a simple disqualification.
The above is not a comprehensive review of all of the insolvency issues that present themselves to directors personally as they steer their companies through dangerous waters.
We are grateful to BRI Recovery, one of The Midlands’ leading independent insolvency experts, who have written this extremely useful article and have authorised its use in this edition of CreditFILE. Should any of our readers have any questions arising from the insolvency process they can contact Peter Windatt at BRI (UK) Ltd on (01295) 272121 pwindatt@briuk.co.uk www.briuk.co.uk
Court Warning for NEDs
A Scottish court has spelled out a warning for non-executive directors (NEDs) who are of the view that they are in some way different from ‘normal’ directors in the eyes of the law.
In the case in point, a NED was held to be in breach of his fiduciary duty to the company that employed him when he gave the benefit of an agreement to another company of which he was also a director by, in effect, diverting the company of which he was a NED from entering into a potentially profitable memorandum of understanding with another company. His argument – that his non-executive directorship was undertaken for tax purposes only and that he would not be expected as a NED to identify business opportunities for the company – was rejected by the court.
The Brethertons’ View:
A non-executive director is a director. A NED owes exactly the same responsibilities to the company as a full-time working director.
Construction Companies in Price Rigging Row
Following one of the largest ever investigations under the Competition Act 1998, the Office of Fair Trading (OFT) has issued a Statement of Objections (SO) against 112 firms in the construction sector in England that it alleges have engaged in bid rigging activities and, in particular, in ‘cover pricing’.
Cover pricing occurs when one or more of the parties bidding for a contract collude with a competitor during the tender process in order to obtain a price or prices which are intended to be too high to win the contract. The tendering authority, for example a local council or other customer, is left with a false impression of the level of competition and this may result in it paying inflated prices.
In addition, the SO formally alleges that a minority of the construction companies have entered into one or more arrangements whereby the successful tenderer would pay an agreed sum of money (known as a ‘compensation payment’) to the unsuccessful tenderer. This more serious form of bid rigging is usually facilitated by the issuing of false invoices.
The allegations cover a range of projects, including tenders for schools, universities and hospitals.
The 112 parties concerned now have the opportunity to make written and oral representations in response to the case set out by the OFT. These will be taken into account before a final decision is reached as to whether competition law has been broken and as to the appropriate amount of any penalties the OFT may decide to impose on each of the firms concerned.
Under the Enterprise Act 2002 it is a criminal offence for an individual to dishonestly engage in cartel agreements. Recently, three businessmen were sent to prison after the first ever criminal prosecution for price-rigging.
Dealing with Data Loss
The loss of personal data is a regrettably common occurrence. Any organisation which knowingly suffers a loss of data on its customers, suppliers or members (e.g. employees) needs to consider carefully what action to take.
The Information Commissioners Office (ICO) has recently issued guidance for organisations that lose personal data, having reported that it has been notified of nearly 100 such incidents to date.
One of the less intuitively obvious suggestions is to think carefully about whether all the potentially affected people need to be notified. For example, notifying all your customers about a security glitch which in reality affects only a small proportion of them may produce a flood of enquiries and requests for further information from unaffected people, as well as possibly undermining their confidence in your organisation.
What is advisable is to obtain an accurate understanding as soon as possible of the scale of the loss and the potential impact on the people whose personal information has been lost. For example, if the information is such as to make identity fraud a possibility, it is likely to be more important to notify the people concerned than if the lost information is simply a list of names and addresses (which could be obtained easily from other sources).
The ICO advises that there are four important elements to consider when creating a breach management plan. These are
1. Containment and recovery
2. Assessment of ongoing risk
3. Notification of breach; and
4. Evaluation and response.
The guidance is recommended reading for any organisation which holds personal data and should be considered as part of your data risk management strategy. It can be found at:
http://www.ico.gov.uk/upload/documents/library/data_protection/practical_application/guidance_on_data_security_breach_management.pdf.
Reference should also be made to the ICO’s good practice guides on data security management at:
http://www.ico.gov.uk/Home/what_we_cover/data_protection/guidance/good_practice_notes.aspx.
In April, the Financial Services Authority published its report on data security in financial services. The report contains much useful information and advice on the maintenance of good data security. See: http://www.fsa.gov.uk/pubs/other/data_security.pdf.
Data security is an important but widely neglected issue for many organisations. Failure to follow adequate data protection procedures can have severe consequences, not only from the point of view of fines, but also damage to reputation and possible claims for losses suffered by those whose data has been compromised.
Guidance on Letters of Intent
Letters of intent are widely used in the building trade, because it is normal for both developer and contractor to wish to make progress on a building project without having to wait until the formal contractual arrangements have been fully agreed. However, letters of intent are fraught with possible pitfalls and have led to a procession of cases coming before the courts. The best way to ensure their successful use is to take advice to ensure the drafting of any documentation is as tight as possible.
Following yet another recent case dealing with a dispute (this time involving more than £1 million) over work done under letters of intent, the court has issued guidance over their use.
The recommendations are that any letter should:
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state clearly whether it is intended to be binding or non-binding
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state what the rights of the respective parties are in the event that a formal agreement is not subsequently reached. In particular, care should be taken to ensure that the method of dealing with any dispute and the effects of termination are clearly set out
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set out whether it is intended to constitute a contract under the Construction Act (and if it is not so intended, care should be taken that the wording does not unintentionally create such a contract); and
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set out any financial, time or other limits which apply to the work done by the contractor under the letter of intent.
We can assist you in making sure that your letters of intent create only the rights and obligations that you intend.
Insolvency – Directors Have Benefit of Doubt
The Insolvency Act 1986 requires that the books and records of an insolvent company must be handed over by the company’s officers to the insolvency practitioner appointed to deal with the insolvent company’s affairs. Failure to do so is an offence, but there is a statutory defence to the charge, which is available when there is no intent to defraud the creditors. Failure on the part of a director to deliver up to the liquidator all documents belonging to the company that he is required by law to produce can lead to a fine or imprisonment.
Recently, the court considered the question of on whom the burden of proof was placed when the statutory defence was claimed. In the view of the court, the company’s officers were likely to have a better knowledge of the circumstances that led to their non-compliance with the demand for the records than did the prosecution. The presumption of innocence therefore applied and the prosecution had to prove its case on the balance of probabilities.
The Brethertons’ View:
Although the penalties under the Act for non-compliant officers (a term that includes shadow directors) are severe, this case illustrates the point that proceedings against the officers of an insolvent company can be successfully defended when the circumstances are appropriate. This will come as a relief to directors of companies facing insolvency. If you are an officer of an insolvent company – or an advisor to such a company and are likely to be regarded as a shadow director – it is important to take professional advice as early as possible when insolvency is anticipated.
A Partnership can be Prosecuted in its Own Name
A recent decision by the Court of Appeal has established that a partnership can be held liable in criminal proceedings as a separate entity from its individual partners. The individual partners’ assets are protected unless complicity or negligence can be shown.
The case concerned W Stevenson & Sons, a partnership involved in fish auctions, which was convicted at Truro Crown Court on various counts under the Sea Fishing (Enforcement of Community Control Measures) Order 2000. W Stevenson & Sons, along with the eight partners, sought leave to appeal against the conviction and were refused.
In reaching its decision the Court of Appeal held that as business activities were conducted in the name of the partnership and the partnership had identifiable assets that were distinct from the personal assets of each partner, there was no reason why the partnership should not be treated for the purposes of criminal law as a separate entity from the individuals making it up.
Given that the 2000 Order draws a clear distinction between a partnership and an individual partner, the view of the Court was that partnerships can be liable as independent entities. It followed that, where a partnership alone was indicted, any fine imposed could only be levied against the assets of the partnership.
The Court further held that only the convicted party could seek leave to appeal and, since the individual partners were joined with the partnership in the appeal application, they were not defendants and therefore not entitled to appeal. The partnership had not shown any arguable ground for appealing against the conviction so the application was refused.
The Brethertons’ View:
Whilst the decision meant that the partners’ personal assets could not be confiscated, those of the partnership could. The decision could have wide implications for how partnerships hold their assets.
2008 Free Credit Control Webinar Programme
All webinars (seminars over the web) commence at 12.30pm, a convenient time to get your team to attend during their lunch breaks
12.30 pm - 5th September
Overpayment of Salaries - The Right To Recover
As all Payroll Managers know, recovering money from ex-employees who have left a business can be fraught with problems and assistance is often sought from the credit control team, well, help is at hand.
Overpayments can include salaries, benefits, reclaiming holiday pay and employee loans.
Brethertons solicitors has a specialist team of collections staff who have many years of experience in these types of recoveries.
Subjects which will be covered include:-
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How problems occur and how they can be avoided.
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Christmas and holiday periods - safeguards employers can make.
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Contractual terms of employment – what your contracts should contain.
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Genuine errors or mistakes of law – what’s the difference?
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Court action.
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Defences.
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Remedies.
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Situations when the employees have spent the money.
Why Should You Participate?
Who Should Participate?
12.30pm - 11th September: Terms & Conditions In A Nutshell –
Why you should have them and how you should use them?.All business should have Terms and Conditions of Trading, as failure to do so could mean that it is left to the Court to decide on what terms businesses have entered into contracts. Who in there right mind will want a Judge deciding the terms on which you should do business?
This Webinar will include:-
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Why have them?
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The principal clauses to use
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The clauses to avoid
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How to use T&C’s to your advantage
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How to win the battle of the forms.
12.30pm - 13th November: Small Claims Court Procedures In A Nutshell- How to maximise your chances of successfully recovering your cash if you have to go to a court hearing.
If your debts remain unpaid you may find yourself attending a hearing before a District Judge in the Small Claims Court. This Webinar will cover the following subjects:-
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How to avoid bad debts in the first place
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Smalls County Court proceedings
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Preparation of cases
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Conducts at hearings
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Enforcement proceedings and recovering expenses.
12.30pm – 4th December: Effective Letter Writing –
How to write letters which will grab a debtor’s attention.
