UK Insolvency Blog

07 September

An Insolvency Practitioner's view on the downturn

Many people hope the current Credit Crunch will only be temporary. They would like to see the financial markets return to a time when liquidity was never a problem, in fact obtaining credit was so easy whole economies were buoyed up by debt.

Personally, I think the Credit Crunch and, in many parts of the economy, a recession will be with us for several years. I also believe that as things will get far worse before they get any better, and those areas of our economy that are in any way related to property or retail, and those people and companies that have over committed themselves, will suffer most during that time. I expect house prices and house sales volumes to continue to fall for at least a year as prices and demand to buy starts to reflect the reduced sums of mortgages and loans available. Attitudes to home buying are alteady changing, many are putting off buying until later on when they expect to buy properties cheaper - after all had it not been for the all too easy availability of 100% mortgages prices and the expectation for prices to continue rising prices would not have gone so high.

The real problem is the underlying financial system for the supply of cash into the economy. It only really works well when lending is all full steam ahead - when lenders in an attempt to continue to outpace their competitors in terms of markets share and profits, adopt what I believe are lax lending practices that are unsustainable in the long term. At the moment many lenders are sitting on their hands, they say they are open for business for the right deals, but in reality they are not - very few deals are being done and those that are being done are for far less than previously - many mortgage lenders have pulled back to loan to value ratios of 75% even for prime business - in other words they expect property prices, at least in a recovery scenario, to fall by about a fifth. Realistically, such low advance rates will stifle the market from the very bottom upwards. And the typical Jo and Joanne Public cannot save a 25% plus all associated costs of moving in quickly. Thei family cannot help as they too are stymied by often already high LTVs on their own mortgage and an unwillingness by lenders to lend. It's happened in Italy, where many 'children' are forced to stay in the family home until they are in their late 20s, why would it be different here?

There are several other problems with the financial systems:

1) Many banks are hoarding cash, rather than lending it out, in the hope of buying other banks or financial institutions cheaply, and thus increasing their market share. For some banks, the crunch will enable them to grow to where they would ideally want to be quicker and cheaper. This makes the crunch self perpetuating;

2) The Bank of England and other central banks are virtually powerless, bystanders watching as the markets unravel. No one fully understands the complex financial systems that have evolved over the last 20 years, nor has the introduction of huge amounts of cash into the systems by the central banks made one jot of difference overall. With many banks operating globally, the systems are truly global - why should the Bank of England lend vast sums of cash to support a bank with UK operations when abroad it is sitting on huge sums of money - just look at Barclays, they went cap in hand to the US Central Bank yet a few months later had enough cash in the UK to make a huge acquisition. Abbey are paying a huge, 9%, interst rate on monies investors pay into it - what is happening to that cash, I don't see it being loaned out here in the UK, is it going to its parent Santander, and if it is, what is Santander doing with it? The Central Banks have little or no control over the systems - even if they were to act together, the market is too big for them - and acting together and putting more huge sums in is both risky - putting a stickig plaster over a gaping wound will not make any difference.

3) Banks do not trust each other. They bought and sold huge amounts of packaged debt, virtually blind, only to find that poorly rated debt was missold as good triple rated debt. That mistrust of each other, not knowing what is in each other's balance sheets, is parasitic - they wil not readily lend to each other in the short term until the full extent of the misstatement of assets in each's balance sheet is known - and that will take some years. A week hardly goes by without some bank or other, having previously said that it had a full handle on its loan book, revisiting its provisions and making further huge bad debt provisions and asking the markets for more cash - and we are only part way into the Crunch! And the banks are already looking for innovative ways of shifting problem books off their balance sheet without creating huge write offs - it was such off balance sheet transactions that enabled the system to go into overdrive in the first place, which bank will trust any other with this going on?

4) So where did the cash that is all written off in sub-prime loans come from? It did not appear out of mid-air! I have not been able to form a definitive view on where all that cash came from, but suspect that much of it is not real, it was sitting in banks' balance sheets as debts owed by or to several other banks, rather than say bank A having spent all its £ x billion cash. If this is so, this would mean that the Crunch effects all banks far and wide, not just the few directly exposed. So prcisely which banks are exposed and to what amount, and when that exposure will eventually come home to roost, is unclear - it will take some time to do so.

5) Inflation is not helping, people have less spare cash, demand for products and services is falling, the downturn in the economy is real. And lower demand = lower prices all round = lower company profits = lower pension fund values and tax revenues = lower personal and government spending.

So far most of the true pain has been felt by smaller companies - the larger companies with which they deal have used their commercial muscle by delaying paying debts and reducing prices, such that more and more smaller businesses are going to the wall, more often than not with few realisable assets. The economy is, however, in such a hole that the bigger businesses will not be able to avoid going into insolvency themselves by merely not paying their smaller suppliers: they will suffer some time down the line, I suspect 6 - 9 months time will see an increase in larger businesses going bust.

All in all, I am sorry, but I think the Crunch / downturn is here to stay for some time yet.

05:11 GMT | Read comments(0)

08 May

Talking about Personal liability on the re-use of company names

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Personal liability on the re-use of company names

You may have read from my website that funders of creditors of new companies are taking a major interest in 'phoenix' businesses which fail, firstly assessing whether in their view the veil of incorporation can be lifted, and then taking the directors through the courts to make them personally liable for newco's debts, including their debt, for having breached the detailed provisions of s216 of the Insolvency Act.

Here's one recent case - the Classic Conservatories case - where this has happened. In this case, on the application of a company which bought the debt owed to a creditor of newco, the director of the phoenix, Mr Mountford, was made personally liable for the debts of the new company because the court ruled that the name used by newco was sufficiently close to trigger off the re-use provisions of the Insolvency Act and that he had failed to follow the relevant procedures.

There are several points to note from this case:

Ignorance of the rules, and when they do and don't apply, is no excuse;

The purchaser of the debt had bought it 'at a deep discount'. This suggests to me that the purchaser bought it after newco's liquidation. If that is right, then there are finance companies out there actively looking for opportunities to make a profit out of directors' ignorance. Directors of phoenixes are at much greater risk of being attacked than they may think they are because such funders have far deeper pockets and have much more experience and are much more willing to pursue directors who fail to follow the procedures than normal unsecured trade creditors;

'Company names' can be anything from abbreviations used, through to such things as MacDonalds' Golden 'M' should it ever (which seems most unlikely) have problems.

Ignore the rules at your peril!

22:08 GMT | Read comments(0)

24 March

Another director made personally liable for his actions

It is commonly known that Liquidators can cause directors to make personal contributions into the company post liquidation where there has been wrongful trading, fraudulent trading, misfeasance, and several other 'wrongdoings'. In recent years the courts have been increasingly stripping away the veil of incorporation to make directors personally liable for their actions in running the company in an attempt to make directors more accountable, 'moving the bar up' in terms of the standard expected of directors.

Directors can often become quite desperate to keep their company alive, willing to sign almost anything to bring in that delivery of goods needed to continue trading. But could a promise that the company would pay for the goods, which agreement was signed by a director, cause that director to be personally liable if the company defaulted? You would have thought not, would you?

In the case Contex Drouzhba Limited v Wiseman, the director entered into an agreement with a supplier which contained a promise that his company would pay for certain goods 30 days after shipment. The director, Mr Wiseman, knew the company was insolvent when he signed the agreement, and knew there was no chance of any injection of cash from elsewhere.

The court decided that while not every contract signed by a company contained an implied representation from the director personally, here, where the director promised terms of payment he had made an 'implied representation' that the company would meet the payments. And the director knew that representation to be untrue, because the company was insolvent and unlikely to raise any further capital. The court decided that the director had made a fraudulent representation in writing as to the creditworthiness of the company, which under the laws regarding 'deceit' made him personally liable for the debt.

Another case of just because you have done something through a limited company does not mean that you are not personally liable!

23:39 GMT | Read comments(0)

12 March

Future debts taken into account when deciding whether a company is insolvent now under S123 IA 1986

In a recent case, Cheyne Finance, the court decided that debts that become due in the future can sometimes be taken into account when deciding whether a company is insolvent under S123(1) Insolvency Act 1986. This, the cash based insolvency test under s123, is an important test that directors and their advisers have to be aware of because once at or beyond the 'point of insolvency' directors' actions come under far greater scrutiny, the effects of which could include causing them to become personally liable for new debts incurred under the wrongful trading provisions of the Act.

The judge pointed out that each case rests on its own merits - sometimes future debts should be taken into account, sometimes not. As the question of whether a company was insolvent at a given point in time is often only considered by the courts once the company has gone into, say, liquidation - that is the final chapter of the book has been read and the outcome known - the importance of cash flows covering the period and taking (and following) appropriate advice at all the right times cannot be over emphasised, if the directors are to protect themselves from personal attack.

Take for example the situation where the directors of a company know that a Corporation Tax or VAT liability of a known, and considerable, size has to be paid a few months down the line, and only if certain (good) things happen in the business between now and then will the company have the cash to pay it. The company may have no immediate cash problems. Are the directors allowing the company to trade wrongfully now when there is some uncertainty over whether the company will be able to pay the debt in the future, and if not insolvent now, when will the point of insolvency be reached?

It is essential that the directors take on board the likely date that a court could say that the point of insolvency has been reached, so that they understand when and to what extent they are personally exposed, and take the right actions at the right time to reduce, if not eliminate, the risk they are facing. This is exactly what happened in a fairly substantial case that I got heavily involved in a few years back - I advised the directors that I could get the company to a particular point some four months down the line, but once a particularly large debt became due, if alternative funding sources could not be secured in the meantime (which seemed unlikely), then formal insolvency was inevitable - it was this knowledge that dictated how the business was managed in the meantime, how we liased with the major creditors and the Stock Exchange, what insolvency routes we pursued and when (an Administration leading to a possible CVA was agreed in principle with the major creditors). Although the Administration/CVA route fell apart sometime down the line (for reasons completely out of the directors' and my control), my close working together with the directors and the pursuit of appropriate strategies prevented the directors from being attacked by the IP who was appointed sometime down the line - the directors houses/personal assets were safe. In that case the directors, with whom I am now good friends, saw their working with me as an IP as a form of insurance, protecting all they had worked so hard for and avoiding the DTI taking disqualification proceedings.

The lack of cases that have passed through the courts on this issue is not helpful - I suspect that we will see more going through in coming years as major creditors, including the banks, asset based financiers, major trade creditors and the government departments, consider their options for 'stripping the veil of incorporation' and attacking the directors' personal assets. In the meantime, the importance of taking advice from an insolvency specialist and at the earliest possible opportunity cannot be over-emphasised.

22:55 GMT | Read comments(0)

23 February

Illegal Dividends

The court has, in making a decision in a recent case, stopped an apparent attempt to find a loophole in the law regarding potentially illegal dividends.

Logic Alliance Limited and Logic Alliance International Limited went into insolvent liquidation in 2003. Their Liquidators took action against two of the companies' directors, a Mr Taylor and a Mr Puresevic, for the return of dividends which the Liquidators believed to have been paid illegally, at a time when the companies were insolvent.

Mr Taylor and Mr Pursevic, who were the only shareholders in the company, argued that the 'relevant accounts' on which the question of the legality of the dividends should be based were those which were filed for the year to November 2000, which accounts showed the company to be solvent. They sought to argue that, in their position as shareholders, they could dispense with the laying of accounts before the shareholders in general meeting, and therefore the fact that another year end had passed was irrelevant, the 2000 accounts could be properly used for the purpose of ascertaining whether there were distributable reserves or not.

The court saw this as a potential abuse of the Companies Act, which if it decided in the directors' favour, could expose creditors to significant losses where, say, following a good year, the directors simply ignored subsequent poor results and continued to extract high dividends, even though the company was insolvent.

The court, probably quite naturally, found in the Liquidators' favour. The court distinguished the position in Re Duomatic Limited on the basis that while certain procedural aspects were not compulsory, the filing of accounts in accordance with the Companies Act was.

00:45 GMT | Read comments(0)

Licensed Insolvency Practitioner in Northampton and the West Midlands

Paul Brindley ACA MABRP