COURTROOM ALERT
August 2008
Economic Downturn? Do not
let business to business debts
pull you down!
Cash flow is the life blood of all
businesses and many businesses fail
as a result of late or non-payment of
debts. Recently established and
smaller businesses are particularly
vulnerable to this problem. In hard
times clients or customers may wish
to hang on to their money for as long
as possible.
Getting paid
The problems associated with
business to business debts was
recognised by the government
and resulted in an Act of Parliament
– The Late Payment of Commercial
Debts (Interest) Act 1998 (“the
Act”).
- An important point to note is that
the Act only applies to business
to business debts.
The aim of the Act is to encourage
businesses which owe money to pay
on time by giving businesses owed
money the right to claim an
enhanced rate of interest and
compensation. This is designed to
compensate for not being able to use
the money and to reflect the
increased risk caused by late
payment.
Interest
Without the benefit of the Act,
in the absence of an agreed rate
of interest in the contract,
if a business were to sue for a debt,
the Courts will typically add interest
on the unpaid debt at the rate of 8%
per annum. For contracts concluded
after 7 August 2002, the Act
significantly increased this rate to 8%
above the Bank of England’s base
rate. Therefore, at the time of
writing this article, Court
proceedings commenced under the
Act would attract interest at 10%.
Compensation
Save for very limited circumstances,
the Courts will usually only require
debts to be paid together with
interest and legal costs. The Act
however introduces a punitive
element by providing compensation,
which effectively amounts to a fine,
for each debt owed to the innocent
party. The amount of compensation
varies from £40 for debts up to £1000, to £100 for debts over £10,000.
Where there are a number of
individual debts due, the statutory
compensation alone could amount to
a significant sum and may act as an
added incentive to payment.
Tactical considerations
In order to take full advantage
of the Act’s compensation provisions,
it is advantageous to bill little and
often.
A further obvious advantage of
regular (small) bills is that clients and
customers are more likely to be
willing to pay regular bills of smaller
amounts than larger bills which can
come as a shock and which, for cash
flow reasons, cannot be paid
immediately or in full. Regular billing
is also more likely to highlight any
probems with payment sooner so that
appropriate measures can be taken
to recover outstanding amounts
before they escalate.
Terms and Conditions/Commercial Sense
Whilst the provisions of the Act do
not need to be expressly
incorporated into contracts,
incorporating specific reference to the Act in your terms and conditions can act as an
effective tool to discourage customers from defaulting.
However, for all its benefits, it may not always be
commercially sensible to rely upon the Act. As
effective as its provisions can be, longer term
considerations, such as the preservation of commercial
relationships may need to be considered.
That said, debtors are less likely to object to reliance
on the Act if there is transparency within the
commercial relationship.
By reason of the general applicability of the interest
and compensation provisions in the Act, the same
steps to recover debts can be taken by your suppliers. However, careful drafting within your terms and
conditions can go some way to effectively excluding
the Act’s interest provisions, although unfortunately,
the Act’s compensation provisions cannot be excluded.
Other options – Statutory Demands and Insolvency
An alternative to the issue of Court proceedings to
obtain payment is to issue a statutory demand. This is
a formal demand requiring a debtor to pay within 21
days failing which either a bankruptcy or winding up
petition can be issued. Often the prospect of
insolvency can result in speedy payment. However,
statutory demands can only be issued if the debt is
greater than £750 and undisputed.
A further consideration associated with this route is the
risk that the debtor has other creditors who, if the
debtor is rendered insolvent, will inevitably share any
spoils. This situation will be further aggravated if
other creditors (notably secured creditors such as
banks) are entitled to recover before you.
Revised Directors Duties
Prior to the Companies Act 2006 (“the Act”), the duties
owed by directors to companies were based upon a
patchwork of common law and equitable principles
built up by the Courts over many years. The Act was
introduced in an effort to reorganise and clarify this
area of the law by clearly setting out some general
duties which directors must observe. As an example,
the Act states that directors must:
- act within their powers;
- exercise independent judgment;
- exercise reasonable care and skill; and
- promote the success of the company.
These statements of general duties are not revolutionary in themselves, but the Act has introduced
some key changes to the law at the same time. This
article looks at two of the more important changes.
Enlightened shareholder value
Embedded within the duty to “promote the success of
the company” is a break from the previous philosophy
of running a company “bona fide in the interests of the
members as a whole” in favour of the more modern
idea of “enlightened shareholder value” which
promotes the view that a wider range of interests
should be taken into account when directors make
decisions. As a result directors are required under the
Act to consider the following (non-exhaustive) criteria
when taking business decisions:
- the likely long term consequences of their
decisions;
- the interests of the company’s employees;
- the need to foster business relationships with
suppliers and customers;
- the impact of the company’s activities upon the
community and the environment;
- the desirability of maintaining a reputation for
high standards of business conduct; and
- the need to act fairly as between members
of the company.
While directors must still focus on the age old goal of
running their businesses in order to benefit their
shareholders, in meeting that objective they must now
exercise increased corporate social responsibility by
taking much greater account in their decision making
of wider factors such as the effect upon the
environment and upon their customers and suppliers.
It is too early to tell how the Courts will tackle
complaints raised against directors for failing to give
due consideration to the wider criteria listed above. While we wait for judicial guidance it would of course
be prudent for directors to take steps to ensure that
they are able to demonstrate that they have had regard to the wider criteria when, for example, taking
key decisions at board meetings so that any potential
criticism can be easily disposed of.
Avoidance of conflicts of interest
Directors owe fiduciary duties to their companies and
as a result they have always been subject to
restrictions upon their ability to profit from their
office. In this area too the Act has sought to codify the
obligations upon directors and also introduced a new
feature.
The Act states that:
- A director of a company must avoid a situation
in which he has, or can have, a direct or indirect
interest that conflicts, or possibly may conflict,
with the interests of the company; and
- This applies in particular to the exploitation of any
property, information or opportunity (and it is
immaterial whether the company could take
advantage of the property, information or
opportunity).
Crucially, the Act introduces for the first time a
relaxation of the previous “no-conflict” regime by
confirming that the duty to avoid conflicts will not be
infringed if:
1. the situation cannot reasonably be regarded as likely
to give rise to a conflict of interest; or
2. in the case of a PLC, authorisation has been given by
those directors of the company who are truly
independent and the company’s articles expressly
permit such authorisation; or
3. in the case of a private company, authorisation has
been given by truly independent directors and the
company’s articles do not expressly prevent such
authorisation. See PDF for guidance
The new rules on avoidance of conflicts of interest
came into force on 1 October this year. As a result
directors should consider if any necessary
authorisations need to be given to them as well as
considering if any necessary changes are needed to
their company’s articles. This will be of particular
concern to those directors with more than one
directorship as well as in the case of companies which
share numerous directors as part of a group structure– thought will be needed to ensure that any required
changes to articles of association are properly
implemented.
From Boom to Bust -
A Guide to Insolvency Procedure
In the present climate it is important for companies to
be aware of the options available to them should they
find themselves facing financial difficulty. As a
potential creditor of a company at risk of insolvency, it
is also useful to be familiar with the various outcomes
which may ensue. It does not automatically follow that
a company has to cease trading and there are several
alternative options which may be available.
These can be summarised as follows:-
Administration
The purpose of this procedure is to save the company
as a going concern or alternatively to secure a better
deal for creditors than if the company were to be
wound up. Administrators take control of the business
in order to trade the company and/or realise the
company’s assets. The process of administration can
be initiated either through the appointment of an
Administrator by the Court or through an alternative
route by which the administration will take effect upon
the filing of certain prescribed forms at Court.
An Administrator’s appointment lasts for twelve months
but may be extended. If the Administrator is able to
rescue the company as a going concern then at some
stage in the future the administration will be brought
to an end and the company will be able to continue
trading under the control of its directors. However, if
it is not possible for the company to be salvaged as a
going concern then the Administrator will take steps to
sell off the business or its assets. The company may
then be wound up or dissolved.
Liquidation
This is a procedure which is most appropriate for a
company which is unlikely to survive and which no
longer has any active business. A Liquidator’s job is to
realise the assets of the company and then distribute
any available proceeds to creditors and then members.
All creditors in a liquidation have to establish their
claims against the company and if sufficient assets are
available, they may receive a distribution.
There are different forms of liquidation:
- Compulsory Liquidation – This is where the company is placed into
liquidation by order of the Court usually (but not always) upon the
application of one of its creditors following service of a Statutory Demand.
- Creditors’ Voluntary Liquidation - This is a procedure whereby the
directors of the company conclude that the company is insolvent and that
trading is no longer appropriate. The Directors pass a Resolution stating
that the company is insolvent and a meeting of shareholders and creditors
will be called to wind up the company. No Court Order is necessary.
- Members’ Voluntary Liquidation – This is where the shareholders of the
company decide to go into liquidation but there are sufficient assets to
pay the company’s debts. The directors of the company have to make a
Statutory Declaration that the company is solvent and that its creditors
will be paid in full (with interest) within 12 months. Any sums that are
surplus once the creditors have been paid are distributed amongst the
shareholders. This process is only appropriate where the directors of the
company have reasonable grounds to believe that the company is in a
position to meet its liability to creditors. The process usually requires, in
the first instance, an investigation of the company’s liabilities to its
creditors to ensure that these can be met.
Receivership
- Administrative Receivership
This has been abolished as a result of the Enterprise Act 2002 in all but a
few exceptions. Administrative receiverships are no longer available for
floating charges created on or after 15 September 2003.
Voluntary Arrangements
A company Voluntary Arrangement (“CVA”) is a binding agreement formed
between the company and its creditors. The company does not have to be
insolvent and so may continue to trade through the period. The process
involves creditors agreeing to accept repayment over a period of time at
usually an amount less than they are owed. Consent to the arrangement must
be obtained but any secured or preferential creditors will be unaffected unless
they have given their consent to the company’s proposals. It should be noted
that a proposal for a CVA only provides protection once it has been voted on
and accepted.
Each of the above procedures has advantages and disadvantages. The
appropriateness of each would need to be considered very carefully. However
what is clear from the above is that the winding up/liquidation of a company
is not the immediate and only option available to a company in financial
difficulty. If a business is to be saved, then it is important that advice is
sought at the earliest stage.
If you would like any further information about the issues raised in this newsletter, or any other aspect of litigation law, please contact a member of Goodman Derrick LLP's .
This guide is for general
information and interest
only and should not be
relied upon as providing
specific legal advice. |
download