As mentioned in last month’s article, it can take longer than anticipated to turn assets into cash. Then comes the challenge of the liquidator working out who is a valid creditor and hence, might be entitled to receive a dividend.

The term “might” is used because much may depend upon how a creditor is ranked i.e. who gets paid in what order. For example, certain former employee entitlements tend to rank first e.g. unpaid salary. Then comes a creditor with a floating charge, typically a Bank. Even if a floating charge exists, the liquidator will need to check that it is valid and when it was created because a charge created before September 2003 confers a higher dividend priority than one created after such date. If there is any cash left, ordinary creditors such as trade suppliers, utilities and HMRC ( although that is about to change ) receive a dividend pro-rata to the level of their claim. The last recipients of cash are shareholders.

Even when a pot of cash has accumulated and a dividend payment is in contemplation, the task of agreeing the value of each creditor’s claim can be fraught with difficulty. For example, a landlord may submit a claim for dilapidations and unpaid rent both before and after date of liquidation. If the lease has another 15 years to run, how does one calculate the claim if a dividend is to be paid now ?

Also, another creditor might have instigated court proceedings for a debt which includes damages and the liquidator will have to decide whether or not it is worth defending (and incurring costs) or allowing a claim to be established at a higher level than might be seen equitable to other creditors. HMRC may have commenced an investigation into a disguised remuneration plan or other tax planning scheme with the result that a substantial protective claim is in place, and the experienced liquidator will be well aware that dealing with such matter normally involves significant expense, speculation and delay.

What happens if a finance company repossesses an asset and appears to have sold it for under value, thereby creating a much larger claim than if the liquidator had sold the assets locally ?

Typically, HMRC will have issued assessments for unpaid taxes such as corporation tax, VAT, PAYE and NIC. After all, if HMRC have never been sent information by the company, how will they know how much to claim ? Depending upon the quality of accounting records available, the size of the HMRC claims and the level of potential dividend, the liquidator may seek to prepare accounts/returns up to date of liquidation which, of necessity will have to include estimates. The next task will be to seek agreement with HMRC on the tax liabilities, perhaps with a sense of commerciality rather than spend all of the available dividend cash producing “perfect” records.

As was mentioned in last month’s article, it is fortunate that every liquidation does not feature all of these challenges but the examples given are not uncommon. Accordingly, one can understand why agreeing all claims for dividend purposes is more than a five minute task.

As long as the liquidator keeps creditors advised of key developments, there should be understanding, albeit mixed with frustration, that matters are being progressed as best as possible.
The views in this article are those of Michael J M Reid, licensed insolvency practitioner and partner of Meston Reid & Co, chartered accountants, Aberdeen. They do not purport to represent those of the firm in general.

January 2020

When a company is subject to formal insolvency proceedings there tends to be initial media interest in terms of jobs lost, particularly if there is a local slant, and a few weeks later another article will often appear regarding the level of debts and lack of assets, accompanied by the general comment about how debts of such magnitude can be created and why it is unfair that dividend prospects are negligible. Such is an unfortunate aspect of commercial life.

A catchy headline may suffice for some, but spare a thought for the creditors who have little option but to remain part of the liquidation process. Whilst there are occasions where some small-value creditors rattle the cage and express extreme annoyance at losing money or complain about nasty directors, the reality is that it is the larger creditors who tend to take more of an active interest in the eventual outcome. Equally, one might contend that if a creditor has spent fruitless months trying all sorts of methods to recover money and then learns that a liquidator has been appointed, interest tends to wane unless there is specific knowledge about a director’s inappropriate actions or assets that might be ring-fenced for such creditor e.g. a valid claim for retention of title.

Recognising the creditor indifference that a liquidator can encounter, but conscious that the system needs to continue, new liquidation rules came into force earlier this month which give creditors an option to become more involved in the process and if they wish, to absent themselves from the process until something useful crops up e.g. the possibility of receiving a dividend.

A new process in Scotland known as “deemed consent” means that, upon initial appointment, the liquidator can send information to every creditor advising that unless he hears to the contrary within a set timeframe, he will continue to act as liquidator rather than incur the expense of convening a formal meeting of creditors. When doing so, the new rules require the liquidator to send an estimated statement of the company’s financial affairs, together with full details of each creditor. This is a welcome development because, rather than waiting until a meeting of creditors before disclosing information, creditors can make an informed assessment as to whether or not they wish to attend a meeting, or simply advise the liquidator of any concerns that they would like him to investigate. Saves time when there is little financial return in prospect.

The rules also introduce the option, which has been available in England for some time, of a virtual meeting i.e. creditors can be advised of a date/time to join a meeting by either telephone or video link. The idea is to encourage creditor engagement by not forcing them to travel to a meeting, thereby making it easier to provide their feedback from the comfort of their own home/office.
Conscious of the possibility that a single yet vociferous creditor might demand a meeting, either in person or electronically, and create costs that could be avoided, the rules introduce the “10:10:10” concept which means that if a liquidator proposes that deemed consent will apply, it is only if 10% in value of creditors, 10 in number of creditors or at least 10 creditors reject such proposal that a meeting must be held. This is a welcome development but still allows creditor engagement if sufficient interest is shown.

For many years, administrators in Scotland have been able to provide a website portal for creditors to use in order to access information about a formal insolvency process. Happily, the new rules now extend this to liquidations. Accordingly, all information regarding an entire liquidation process can be made available online to creditors and, if creditors agree, all communication can be electronic.

Sensibly, the rules also allow a creditor to opt out of future communication which makes sense because who wants to keep receiving letters from a liquidator saying that no dividend will be paid. Indeed, creditors have been known to return small dividend cheques for, say, £5 with pointed comments about the liquidator earning a large fee and paying a derisory dividend to those who had been involved with the company for many years. Of course, the unfortunate reality is that a company is liquidated because there are insufficient assets and hence, it is a question of what level of dividend might be received rather than expect full recovery.
Creditors : are you interested or are you not?

Finally, the rules acknowledge that statutory interest of 15% is wholly unreasonable in the current economic climate. It has been reduced to 8%, which is the same as the current judicial rate of interest when a court decree is awarded.

Whether or not the new rules will encourage creditors to become more involved is open to question. On balance, one suspects that there will be little change to the overall attitude of “the company is bust and, as a creditor, I will simply wait for future communication from the liquidator in the hope that he might be able to send me some money”. Time will tell.

The views in this article are those of Michael J M Reid, licensed insolvency practitioner and partner of Meston Reid & Co, chartered accountants, Aberdeen. They do not purport to represent those of the firm in general.

April 2019

As has been reported widely in the press, the effects of the collapse of Kirkcaldy-based Havelock Europa plc in the first week of July were softened to an extent by the immediate pre-pack sale of the business to a venture capital firm in London, thereby saving 320 jobs : at least temporarily. A similar situation arose when House of Fraser was bought from the administrator and Mike Ashley indicated that his current proposal is to retain store outlets/jobs.

Before a company enters administration, discussions take place with the prospective administrator about how best to preserve value for all stakeholder groups. Clearly, some groups will be unhappy when a company fails e.g. creditors when they realise that their accounts will not be settled in full, but there is a duty on the selling company/administrator to look at the bigger picture and take a view on what will produce the best result overall.

In November 2015 the government introduced the pre-pack pool “ the pool “. The pool comprises a group of experienced people, currently 19 according to  the pool’s website, who can provide an independent view on the proposed sale of a company’s business/assets to a connected party. It is not known if the pool was called into action in either the Havelock or House of Fraser cases.

When called upon, a member of the pool is requested to provide a view immediately prior to date of administration in order that that the administrator can act quickly when appointed, thereby introducing certainty of outcome. Turnaround time is targeted at 48 hours given the general urgency that exists in such a situation. A key aspect of creating a pool was in response to creditor concern that a company could be sold to a connected party too quickly and without adequate third party review. Supporting the process of seeking a pool view about a prospective sale to a connected party are the insolvency guidelines that require an administrator to advise all creditors why a connected party sale was the best outcome in the circumstances.

When requested, the pool report is designed to offer one of three opinions :

1. That the case for a pre-pack sale is not unreasonable.
2. That the case for a pre-pack sale is not unreasonable subject to more information being provided.
3. A suitable case has not been presented for a pre-pack sale to proceed.

The pool’s annual review was published in May 2018 and reminds readers that the responsibility for a referral to the pool is that of the connected party purchaser i.e. not the administrator-elect, nor the selling company. The use of the pool is not mandatory when a connected party sale occurs and may explain why about 25% of such sales were referred to the pool in 2016, and only around 10% in 2017. Perhaps surprisingly low when one considers that when the government introduced the pool arrangement, they also gave themselves the somewhat draconian power to ban or regulate all connected party sales when administration incepts ( at any time up to 2020 ).

The pool’s report also discloses that of the 1,289 administrations in 2017, only 356 were subject to a pre-pack sale and, of these, less than 60% were to a connected party. Quite a small number although it is acknowledged that some of the cases have been high-profile names which have perhaps attracted a disproportionate level of attention.

One view is that, in general terms, insolvency practitioners find that the level of creditor engagement is low i.e. most creditors are content to rely on the tight regulation of every insolvency practitioner to act correctly and ensure full disclosure of everything that has happened surrounding the formal insolvency and decision to sell assets. An independent review which helps to endorse the administrator’s decision to sell assets in a certain way is often comforting but, perhaps unsurprisingly, any immediate sale upon appointment tends to have been discussed/reviewed/negotiated in great detail by numerous advisers before it happens. One might take the view that the level of scrutiny  by several parties means that any sale process offers sufficient checks that the sale is at fair value and in the interests of all stakeholder groups generally.

It is understood that the government are reviewing the effectiveness/worth of the pool system and it remains to be seen how it will operate in the future, and with what power.

The views expressed in this article are those of Michael J M Reid, licensed insolvency practitioner and partner of Meston Reid & Co, chartered accountants, Aberdeen. They do not purport  to represent the views of the firm in general.

It is an accepted part of the corporate landscape that some companies experience insurmountable financial challenges and fail, although the Meston Reid & Co experience is that when directors seek advice at an early stage and have the courage to make the appropriate operational/financial adjustments, the chances of corporate survival are enhanced considerably.  A company may become leaner and fitter, and thus better equipped to deal with today’s business challenges.  The Meston Reid & Co insolvency team are consulted regularly by directors of financially challenged companies, large and small, and certain questions nearly always feature during the first meeting.

Some people feel awkward about asking difficult questions, perhaps because they feel embarrassed, feel they should know the answer anyway, or worry that they expose themselves to an accusation of poor business judgement. However, if one does not ask a licensed insolvency practitioner  for advice when corporate financial challenges emerge and prefers to rely upon “ my mate in the pub”, it is not surprising that many decisions are based upon incorrect information at a time when it is vital to have a clear focus.

Will I be made bankrupt if my company is liquidated?

Unlikely, and certainly not an automatic outcome. A company is a separate legal entity and corporate failure does not necessarily mean that personal insolvency will follow.  If you have signed a personal guarantee that cannot be settled when called upon by a bank, or have an overdrawn loan account which cannot be repaid when the liquidator asks, the spectre of personal insolvency might arise.  In such examples, careful thought is required about how to deal with the personal financial impact of the company collapsing, including how you will generate income in the short term until another job is found.

Can I be a director of another limited liability company in future?

Likely. Unless you have court permission ( which is an infrequent occurrence ), section 216 of the Insolvency Act 1986 prohibits you from being a director of a limited liability company with the same name/brand for the 5 year period from date of liquidation if you have been a director of the company at any time in the last 12 months.  Subject to this, and assuming that The Insolvency Service does not instigate action to have you disqualified as a company director, there is nothing to stop you being a director of another limited liability company in the UK.

You may care to note that if you have been a director of XYZ(1) Limited and XYZ(2) Limited which have both traded in the public domain for the last 12 months, and XYZ(1) Limited is liquidated, you can remain a director of XYZ(2) Limited.

If the company is subject to administration rather than liquidation, these restrictions don’t apply unless the administrator converts the process into a liquidation as part of the exit strategy from the insolvency process. This means that careful planning/understanding is required at the outset.

Will I lose my pension entitlement within the company scheme if liquidation occurs?

Probably not.  A pension scheme is a separate entity from the company whose assets are administered by trustees.  Unless the liquidator can show that unrealistically large contributions have been made to the pension scheme shortly prior to inception of formal insolvency proceedings e.g. to line your pocket rather than pay creditors, the monies are ring-fenced and not available to company creditors.When a company faces financial uncertainty many questions arise and if a director feels under pressure, clear and concise information is required such that executive decisions can be made.

The views expressed in this article are those of Michael J M Reid, licensed insolvency practitioner and partner of Meston Reid & Co, chartered accountants, Aberdeen.  They do not purport to represent the views of the firm in general.