Wednesday, May 27th, 2009
More than 65 firms a day went out of business last year, according to research by the information services company Experian.
Its insolvency statistics show that there were 23,879 business failures in 2008 – a rise of 30% compared with 2007.
The figures for the types of insolvency are also revealing. They show that there was a 143% increase in receiverships in 2008, indicating the increased sense of caution among banks and the fact that they are now quicker to call in debt.
However, Experian says that voluntary liquidations are still the most common type of business failure. Some 11,255 businesses were put into liquidation by their shareholders in 2008 – an increase of 24% on 2007.
The figures emphasise the need for firms to do their research before doing business with other companies. It is also important to remain vigilant and look out for any indications that a company may be heading into difficulties which might prevent them paying their debts.
Tony Pullen, Managing Director of Experian’s Business Information division, said: “Warning signs can include a major reduction in share capital and late filing of accounts through to adverse notices, such as County Court Judgements.
“We also advise clients to use payment performance data to identify companies’ payment patterns and worsening payment trends, which are strong indicators of reduced cashflow, which can then lead to possible insolvency. This level of insight will not only indicate whether a customer is likely to pay, but also when – a powerful tool in today’s climate.”
Once a potential problem has been identified it is important that firms seek legal advice so they can act quickly. Early intervention by a solicitor can help recover debts before it is too late.
Please contact Paul Slot if you would like more information.
Saturday, May 23rd, 2009
Two directors of a company in administration have been told they must honour a guarantee to pay their finance advisers – even though the advisers had not succeeded in meeting the company’s needs.
The company had engaged the advisers to help it raise finance to expand the business. The directors signed an agreement stating that they would guarantee that the company fulfilled its financial obligations to the advisers. The terms also stated that the engagement would automatically end if the company went into administration.
The advisers then began work but did not manage to attract the required funding from investors, although they did obtain a bank loan. The company subsequently went into administration. The advisers terminated the agreement and asked the directors to honour their guarantee to provide payment for the work carried out.
However, the directors refused to pay saying they had been misled when they entered into the agreement. They said the advisers had told them they were acting on a “no deal, no fee” basis. This meant they would not be entitled to payment unless they succeeded in helping the company obtain all the funding outlined in the terms of engagement.
They also argued that no one had told them they were taking on the liability of guaranteeing payment.
The advisers took legal action and the court has now ruled in their favour. The judge held that the advisers had not said anything to positively assert that there would be no charge unless complete success was achieved. Nor had they said anything to contradict the written terms about the minimum fee payable.
Consequently, the directors had not been induced to sign the agreement as a result of misrepresentation about the fees or the guarantee.
The case highlights the need for directors to ensure they fully understand the meaning of an agreement and all its implications before they sign. Mistakes can prove costly so it is advisable to get legal advice before committing to contracts.
Please contact Paul Slot if you would like more information.
Sunday, May 17th, 2009
The Court of Appeal has ruled that there is no reason in principle why a person who is a director and shareholder of a company could not also be one of its employees and benefit from the legal rights that go with being an employee.
The case is important because it means that such directors, even if they are a controlling shareholder, could qualify for compensation payments from the National Insurance Fund if their company becomes insolvent.
The case involved two director/shareholders from two separate companies. They each received salaries, paid tax and national insurance as an employed person and said they had an oral contract of employment with their companies.
They had both given personal guarantees relating to company business and one had made a personal loan to his company.
When their two companies became insolvent they were deemed by an employment tribunal not to be employees under Employment Rights Act 1996 and so were not entitled to redundancy payments or any other compensation from the National Insurance Fund.
They then took their case to the Employment Appeal Tribunal which ruled in their favour and said they could be classified as employees. The Secretary of State for Business, Enterprise and Regulatory Reform then took the two cases to the Court of Appeal so the law on the issue could be clarified.
The Appeal Court judges have now ruled that there is no reason in principle why a shareholder or even a controlling shareholder could not be an employee under a contract of employment.
The court gave some guidance to help determine whether or not a shareholder could also be classified as an employee. It would be necessary, for example, to determine whether the contract of employment was genuine or just a sham. Inquiries should be made as to what work had actually been done under the contract and whether the shareholder in question was actually an employee at the time of the insolvency.
The court also said that questions such as whether a person had a controlling interest in a company or the extent of his personal investment should not ordinarily be of any special relevance in deciding whether or not he had a valid contract of employment.
This is a very important ruling and will influence the way these issues are decided in future. There were in the region of 12,000 claims by directors to the National Insurance Fund in 2008 and as the recession deepens, that figure could be exceeded this year.
Please contact Paul Slot if you would like more information.
Monday, April 27th, 2009
People setting up a business together should put down in writing the basis of their relationship to reduce the risk of disputes in the future.
However, even when there is no written agreement, the law can still help to resolve differences as in the recent case of two builders’ merchants, Mr R and Mr D, who ended up disputing whether or not they were business partners.
The two men had bought a company from their former employer. They had no written agreement but they were joint signatories to the business bank account and they took equal shares of the profits.
The business had an overdraft facility which was secured by a legal charge on Mr D’s property. However, both men were liable for the debt and correspondence from the bank was issued to both of them as joint account holders.
The relationship later broke down and Mr R decided he wanted to either dissolve the partnership or sell his 50% stake to Mr D. Mr D refused to accept that there was a partnership. He said they were not business partners but simply working partners and Mr R had merely been a salaried employee.
The court decided in favour of Mr R saying the fact that the overdraft had been supplied by Mr D was not enough to say they were not partners. He had never informed Mr R that he thought of him as just a salaried employee.
The bank account was in both their names and it was unlikely that an employee would be allowed to draw as much money as the owner of the business. It was clear that the operation of the business matched the definition of a partnership as found in the Partnership Act 1890.
Therefore, there had been a partnership which had been dissolved when Mr R wrote to Mr D informing him of his intentions.
Contact Steven Kinch for advice on all business disputes.
Wednesday, April 22nd, 2009
The fact that a supplier makes some mistakes on its invoices is not a good enough reason for a customer who doesn’t settle the account on time to avoid late payment interest.
That was the ruling handed down by the Court of Appeal in a case that will give encouragement to all businesses facing cash flow problems because of late payments.
The case involved a company called Ruttle Plant Hire Ltd and the Department for Environment, Food and Rural Affairs (DEFRA). Ruttle had carried out some work for DEFRA but the contract had been arranged in a hurry and the terms of business had not been clearly defined.
When the invoices were not paid on time, Ruttle claimed it was entitled to charge interest under the Late Payment of Commercial Debt (Interest) Act 1998. However, the judge ruled against Ruttle because there were mistakes on some invoices which were calculated using the wrong rates for plant hire.
Ruttle then took the case to the Court of Appeal. Lord Justice Jacob said the issue was whether or not the “notice of the amount of the debt” required that the invoice should be correct before the provisions of the Act would apply.
DEFRA submitted that any error, regardless of how small, would be enough to prevent the Act applying and interest being payable. The Appeal Court judges rejected this argument saying there was no reason to interpret the requirements of the Act as meaning that the amount stated on the invoices should be “the true amount, the whole true amount and nothing but the true amount”.
He said it would make no sense to suggest that the Act required the invoice to be perfect before interest could be charged. If that were the case then a customer might start looking for the smallest detail of error in an invoice so he could avoid being charged interest if he failed to pay on time and so the purpose of the Act would be frustrated.
It would be acceptable for a company to withhold payment for sums which were in doubt but that right could not be extended to paying nothing at all and then expecting to escape the high rates of interest chargeable under the Act.
For advice on all company disputes contact Steven Kinch.
Friday, April 17th, 2009
Two sisters who were directors at the same company must pay more than £75m in compensation because they failed to take action to stop their brother’s dishonest behaviour.
The brother and two sisters were directors at a large finance company. He was responsible for the dishonest misappropriation of nearly £60m over a four-year period using a fictitious directors’ loan account, false facility letters and other methods. He had forwarded some of the misappropriated funds to the sisters.
The company, which is now in administration, sought orders that the two sisters should pay equitable compensation for the losses because they knew that their brother had been convicted of dishonesty offences in the past and should have known that some of his business dealings needed to be explained in a convincing manner.
The company submitted that as the brother had not provided such an explanation, the sisters should have notified other directors and the company auditors so the dishonesty could have been identified and prevented.
There were other directors who were not part of the family and who knew nothing about the previous dishonesty offences.
The company was successful in obtaining judgment establishing the sisters’ accessory liability. It believed that one sister was liable to pay almost £34m and the other was liable for £41.5m.
The court found that the sisters had breached their fiduciary and common law duties of care to the company through their failure to take action against their brother while they were directors. However, the judge also held that they were only liable for the sums the brother had paid to them and that their inactivity as directors was not responsible for the company’s losses.
His reasoning for this was based on the fact that the brother was a “persuasive, sophisticated, charming and highly intelligent bully” and so even if the sisters had asked more questions they would have been “fobbed off” by his lies.
However, that ruling has now been overturned by the Court of Appeal which held that absolving the sisters of responsibility for the misappropriation of funds could not be justified. They knew of their brother’s previous offences and should have known that some of his dealings required explanation. It was part of their duty as directors to be on guard and to ask “searching questions”.
The sisters should have asked those questions and then informed other directors and the auditors of their concerns. Their failure to do so meant they were liable to pay the sums claimed, nearly £34m for one sister and £41.5m for the other.
The sums involved in this case may be enormous but the legal principles involved apply across all companies of all sizes. Directors must take action if they suspect other directors of dishonest or irregular behaviour. Failure to do so can render them liable for subsequent losses.
Please contact Steven Kinch for more information on all company disputes.
Monday, April 13th, 2009
A furniture company which lost orders after one of its agents upset a major customer has been awarded compensation for the loss of business.
The court heard that the agent had breached its duty not to use confidential information obtained while working for the furniture company. It had also breached it fiduciary duty - that is, its legal responsibility to act in the best interests of its client.
The actions of the agent meant that one of the company’s longstanding customers had stopped placing orders resulting in a substantial loss of business.
The company sued and has now been awarded compensation. The judge considered the past history of orders and the profit margins realised. He then considered the likelihood of new orders and the profit margins that could be achieved on those orders. In awarding compensation, he held that the customer would have placed orders for 850 units and the company would have achieved a gross profit margin of 20.68%.
Those figures have now been upheld by the Court of Appeal.
For advice on all business matters contact Paul Slot.
Friday, April 10th, 2009
A recent case in the Court of Appeal highlights the need for landlords to make sure they follow the provisions of the lease when making service charges.
Failure to do so has cost Leonora Investments Co Ltd £263,117. Leonora was the landlord of an office block in Croydon. In 2000 it let four floors to engineering consultancy Mott MacDonald.
The leases contained specific provisions for the payment of service charges. The Schedule of Services stated: “The Landlord will (unless prevented by causes beyond its control) prepare and send to the Tenant a statement of actual Service Costs and Service Charge for each Service Charge Year as soon as practicable after the end of such year and in the event of the Service Charge for the Premises exceeding the aggregate amount paid by the Tenant for such year the Tenant will pay the balance due to the Landlord within 14 days of demand and in the event of the aggregate amount being greater the excess will be credited by the Landlord by way of a set-off against the next instalment of Service Charge due from the Tenant.”
This set out a clear method of payment. However, the landlord then set about some substantial renovations to all four floors which it regarded as outside the normal service costs so it decided to send separate invoices outside the provisions laid down in the schedule.
The tenant refused to pay so the landlord sued.
The Court of Appeal has now ruled in favour of the tenant. In giving his judgment Lord Justice Tuckey said the issue boiled down to a simple question: what does the Lease say has to happen before the Tenant is obliged to pay Service Charge?” He said the answer was in paragraphs 1 to 3 of the Schedule dealing with Service Charges. “They prescribe the contractual route down which the Landlord must travel to be entitled to payment”.
This meant the landlord should have followed the provisions of the lease. In failing to do so it had lost the right to charge for the work.
The ruling may seem harsh but with so much at stake it is essential that landlords take legal advice before deviating from the exact terms of the lease.
For proactive advice on all lease matters contact Paul Slot now.
Wednesday, April 8th, 2009
The number of businesses taking legal action to recover debts from customers and clients rose by nearly a quarter in 2008.
There were 73,000 County Court Judgments against companies in the UK last year – a rise of 23% over the previous year. The total value of the judgments rose by 26% to £408m compared with £324m in 2007.
The research was carried out the Credit Management Research Centre (CMRC) at Leeds University and shows that companies are less willing to see debts mount up before they take action to protect their business.
The need for such action is all the more urgent as the CMRC is now predicting that about 40,000 companies will be declared insolvent this year – that’s 35% more than last year.
Professor Nick Wilson, who heads the CMRC, said: “Of course the fall in interest rates and the reduction in the value of sterling have alleviated the pressure on some companies but these potential benefits are offset by falling operating profits in a highly leveraged corporate sector.
“In 2007 we correctly predicted a 20% increase in insolvencies for 2008. It appeared then that insolvencies would peak in December 2009 and then start to fall. Our revised forecast shows a persistently high failure rate into 2010.”
Further CMRC research shows that about one in four insolvencies are caused late payments. With struggling companies taking longer and longer to pay their bills it is hardly surprising that more and more creditors are taking legal action.
No one wants to be dragged under by late payments so it is important to respond as soon as problems arise. Early action also reduces the risk of losing out if a customer who owes you money becomes insolvent before they pay you. If this happens, you may receive little or none of the money owed and find you are facing insolvency yourself.
The other danger of holding back is that your invoices may go to the back of the queue while the struggling firm settles with other creditors who are quicker in taking action. This should not happen but it does and is perhaps inevitable. Faced with not having enough money to pay everyone, many firms will often pay whoever is putting them most under pressure.
It can be a case where politely holding back and giving people time can backfire and put your business at risk.
It looks as though the situation is going to get worse before it gets better so when faced with late payments it is vital to get legal advice as soon as possible so the necessary action can be taken in good time.
For more information or advice contact Steven Kinch now.
Thursday, April 2nd, 2009
A factory owner who was willing to lose some of his right to light to accommodate a new development but then objected when the loss was much greater than agreed has won his case in the Court of Appeal.
The owner had entered into an agreement with the developer in which he accepted that a new development would have an adverse effect on his right to light but he would not take any action to enforce that right.
Once the development had been completed, however, the developers then began work on another building. They registered a light obstruction notice against the factory on the basis that it would be affected by a wall that might be built close by.
The factory owner began legal proceedings to protect his right to light on the basis that the new proposal would cause far more of an obstruction than the one that had been originally agreed.
The case went all the way to the Court of Appeal which has now ruled in favour of the factory owner. It held that on a fair reading of the agreement, the owner had only consented to a development that would cause some loss of light. He had not consented to a completely
separate development that would block out all light.
In entering into the original agreement, the factory owner had not abandoned his right to light nor lost his entitlement to enforce that right.
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