If you get lost and ask for directions, the suggestion that “you don’t want to start from here” is rarely, if ever, helpful.
So it is with advice about bad debts and customers failing owing significant sums. Provided the debt isn’t going to cause a “domino effect” failure lessons need to be learned from each painful loss. A sale is never a sale until it is paid for and it is wise to ensure that you only reward your team based on sales that are actually paid for. If not, you should at least have a clawback clause in employment contracts.
When a business you have been dealing with fails and you find yourself dealing with the liquidator, administrator, official receiver, or trustee in bankruptcy etc. you need to take active steps to protect your position.
The removal of the Crown’s preferential status and the introduction of “the prescribed part” (a ring-fenced fund that must be made available to unsecured creditors in a liquidation or administration) was an attempt to better apply a fair distribution. Sadly, too many prescribed part payments amount to only fractions of a penny in the pound and serve only to annoy creditors whose fingers have been burned.
Action plan
No list of actionable steps will ever be complete, but avenues to pursue include taking good advice quickly, especially if the sums involved are significant, and checking that the company in insolvency is the one that you supplied and whether you can recover any goods supplied under retention of title. If so, act promptly. Similarly, if you have a ransom/leverage position to secure payment consider using it.
Ask questions about what happened to stock you supplied. Did it go straight to someone else? Has it created a debtor? Where is that balance now showing as due? Were any of your supplies made via inter-group transfers to associated, group or successor companies which have resulted in you being put in a worse position? Are they challengeable?
And then there is what you were told to secure the supply. Was any of this an exaggeration or false? It’s entirely possible that Theft Act or other offences have been committed. Also consider if sales were made on the introduction of a third party. Could there be any recourse to them?
Don’t disregard anything you’ve heard on the grapevine that may be of assistance as contracts may have gone off to a director’s new company or employer for example. Can any of this information assist the insolvency practitioner to prosecute or disqualify the directors and shadow directors? This could aid recovery of funds or go some way to prevent a repeat performance.
Lastly, claim any VAT bad debt relief, and in terms of dealing with the insolvency practitioner, submit your proof of debt and vote for who you want appointed as soon as possible.
Don’t ignore ROT
Retention or Reservation of Title (ROT) clauses are attempts to amend the Sale of Goods Act so that suppliers of goods are able, where they have satisfied all of the legal requirements, to get their goods back when a customer isn’t able to pay them.
ROT clauses are no silver bullet. They are of limited use in certain markets – suppliers of services or perishable goods in particular. Hauliers, for example, claiming ROT over freight they’ve moved will find the process doesn’t work.
The purchaser must still have possession of the goods. Whilst the ROT clause may be effective against the original buyer it will not work against a third party acquiring the goods “in good faith” and without notice of the clause. Trying to trace into sale proceeds is unlikely to succeed. Generally, the goods supplied will have to be in an “as delivered” condition – for example, leather is as it was delivered not how it has become when made into seat covers for a classic car. Where a component has been bolted into an engine and it may be unbolted then it is “economically separable” and recoverable, as might panels that have been bolted into place. But panels welded on or a resprayed panel won’t be. There have been arguments over petrol put into a petrol tank – are you taking out only the petrol you supplied or are you also taking petrol that was already in the tank?
Clearly it is easier to argue over goods that are on a shelf that can be identified as having been supplied by you and have not been paid for. This last point doesn’t matter so much where there is an “all monies clause” as with this anything you’ve supplied may be claimed provided there has always been a debt outstanding. That said, once the balance is cleared to zero title on all previous deliveries is likely to have passed to the customer.
Exercising your rights must be balanced against the costs of collecting your goods, re-stocking them in the warehouse and the probability of being able to re-sell them (especially if they were bespoke/made to order).
When there is an insolvency ROT may give you some leverage – especially if your goods are key to the company finishing work in progress. You should incorporate your ROT clause into your contracts (before the supply of goods and this means going well beyond just having terms and conditions on the back of invoices, referred to elsewhere or on your website).
But when you sell goods on credit you need to keep your ear to the ground, be proactive and act quickly when things start going wrong with one of your debtors. Prevention is always better than cure.
Insolvency and employees
It’s a sad fact that employees also lose out when their employer fails. The Employment Rights Act 1996 (ERA) provides employees of an insolvent business with the right to make claims against the National Insurance Fund (NIF) through the Redundancy Payments Office. This accelerates payments to employees (usually 6-8 weeks from the date of insolvency) and so negates some of the impact on them. The NIF then claims in the insolvency “standing in the shoes” of employees for sums paid.
Under current rules, an employee will be able to claim for arrears of pay; all accrued holiday pay; unpaid contributions to an occupational pension scheme; any protective award made by an employment tribunal; pay in lieu of notice, damages for wrongful dismissal or unfair dismissal; and redundancy.
The amounts paid out to employees by the NIF are currently limited to £508 (effective from 6 April 2018) per week per employee (for each of the entitlements above). Therefore, if an employee earns above £508 per week, the excess will be treated as an unsecured claim and will only be paid if anything is paid through the insolvency to unsecured creditors.
Sub-contractors are not considered employees which means that they are unable to claim against the NIF. Any amounts due to a sub-contractor for work done will be treated as an unsecured claim in the insolvency.
In terms of other types of claims, such as expenses for items that include mileage or travelling, these cannot be claimed against the NIF. However, the employee can submit a claim in the insolvency as an unsecured creditor for any of these.
As for directors, the ERA defines an employee as an individual who has entered into or works under a contract of employment. A contract of employment is defined as a contract of service … whether express or implied, and … whether oral or in writing.
It is fair to say that claims by a director as an employee are subject to greater scrutiny than the claim of an employee. Unfortunately, some of the decisions made by directors in order to improve the financial position of a company could adversely affect their ability to make a successful claim to the NIF for any of the entitlements listed earlier.
Some of the more common factors taken into account by the NIF in deciding whether to accept a director’s claim as an employee involve whether the director received a regular monthly/weekly salary; if they’d made any PAYE and Class 1 National Insurance Contributions; whether they had a signed contract of employment (dated prior to the insolvency); and whether the director took holiday.
If the answer to any of the above questions is no then, in an insolvency, a director’s claim as an employee may be rejected by the NIF.
However, case law provides that no single factor is conclusive and that all factors must be weighed up to decide whether a director is also an employee.
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