inbrief Insolvency FAQs Inside Trading with a company in administration Attending creditors’ meetings Directors’ responsibilities Employees of an insolvent company inbrief Introduction What’s the difference between a allow you to terminate your contract and refuse In the current economic climate liquidator and an administrator? further supply. There may be options to terminate many of our clients are experiencing either for insolvency (contractual provision) or Liquidators and administrators are qualified situations they’ve never had to for fundamental breach (or renunciation). There insolvency practitioners who preside over a can be a significant difference in the damages deal with. We’ve put together the particular form of insolvent scheme set down by available depending on the basis chosen. following guide to help answer the statute. most frequently asked questions we If you choose to supply goods or services to an Typically, an administrator will be running the receive. administrator who continues to trade the business business (at least temporarily) before selling it whilst in administration, the cost of those goods as a going concern. Conversely, a liquidator will or services will be classed as an expense of the usually not be trading – he will instead be selling administration. This is significant as you will be assets and closing the business down before paid from the company’s assets first, in priority to making distributions to the various creditors. It pre-existing debts (and the administrator’s own is not unusual for a company to transition from fees). administration to liquidation and for the same insolvency practitioner to change hats and stay in For this reason it is quite common to continue office. supplying/dealing with a company after it has gone into administration. Nonetheless, it is always What does ROT stand for? wise to seek payment from the administrator on ROT stands for retention of title. ROT clauses or before delivery. are often found in supply contracts. They aim to allow a supplier to retain title to (or ownership If you have been paid for services or goods (i.e. the of) goods until they are paid for. customer has fulfilled their side of the contract), a refusal to abide with your part of the agreement ROT clauses require careful drafting to be usually amounts to a breach of contract, effective. Problems may arise if a clause depending on its terms. In these circumstances it is attempts to entitle a seller to the proceeds of quite likely that the administrator will, on behalf of onward sales. This is because the clause may be the company, seek to enforce the agreement. This construed as having created a floating charge may result in proceedings being issued against - which would be void if the contract is not you. registered at Companies House. When should I stop trading if I A well drafted clause will ensure that goods think that my company’s finances will not be part of the buyer’s assets until fully or cashflow have deteriorated? paid for. This means that if the buyer goes into insolvency before paying for the goods, This is often a finely balanced call. it may be possible to recover the goods from If a director of a company continues to trade a the insolvent buyer’s premises. However, there company and incur debt/liability in the company’s remain practical hurdles such as being able to name when he knows or ought to have concluded identify the relevant goods and ensuring they that there is no reasonable prospect of the are not mixed with other identical goods. company avoiding insolvent liquidation, this may amount to wrongful trading. This brings a risk of Should I carry on supplying to a personal liability for creditor losses. company in administration – will I Historically, only liquidators had the power to still get paid? bring proceedings for wrongful trading but An administrator will not be responsible for the administrators now also have the same power debts incurred by the insolvent company prior to where the relevant dealings arose on or after 1 his appointment. These are debts you will need October 2015. to claim for as an unsecured creditor during the The way to minimise the risk of a wrongful trading administration process. A refusal to pay debt may claim is to show you have taken every step with inbrief a view to minimising loss to creditors. Depending Creditors meetings are an opportunity to obtain transaction. Note that this last requirement on the circumstances, this may involve ceasing to information from the office-holder and voice is not necessary where the parties are trade. You should be aware that simply resigning objections to the conduct of the insolvency connected. as a director will not, by itself, get you off the process. In addition to this risk, an administrator or a hook. liquidator might also challenge the grant of In a liquidation the first creditors’ meeting is security as a preference. In outline, a preference usually to approve the appointment of the I’m a director – do I have personal may arise where a company acts in a way which liquidator and to agree his or her terms of liability for company debts? benefits a creditor, surety or guarantor by putting remuneration. As a general principle, directors of a company it into a better position than it would have are not personally liable for a company’s debts. been in the event that the company becomes Since liquidators have duties to the creditors as However, if a director has given a guarantee in insolvent and, in acting as it did, the company a whole and the level of their remuneration is respect of company liabilities, he or she may have was influenced by a desire to produce that regulated, often there may be little to be gained in to make a payment under the guarantee in the outcome. Where there is a connection between requesting a physical meeting. In an administration event of the company’s insolvency. the parties, it will be presumed that there was you may have questions about how long the such a desire. The office holder is able to look process will take, whether the administrator is A director may also be liable for “wrongful back at transactions which took place 6 months interested in selling all or part of the business to trading” (see above). If this is the case, a court before the onset of insolvency (rising to two years you or whether he has had specific interest from may order them to make a payment to the where the parties are connected) but he will need others, or where certain assets have gone. A company, quantified by reference to the additional to establish that the company was insolvent at the physical meeting may represent a good chance losses suffered by creditors over the period of the time of the transaction (or became so as a result to meet the office holder personally, and press wrongful trading. Court action may be followed of it). for information. In that sense it can be a good by separate proceedings seeking to disqualify the opportunity to obtain more complete information director from acting as a company director for a or to put requests for particular investigations Under the terms of my contract, period of between 2 and 15 years. regarding company assets on the record. copyright doesn’t pass to the client until it has paid me. I haven’t been In extreme circumstances, a director may be liable I’m owed money by a distressed for the criminal offence of “fraudulent trading” if paid so can I stop the client using he or she carries on business with the intention of company – can’t I just protect the work we supplied – if so how? defrauding the company’s creditors. This has the myself by obtaining security? Yes – you can stop them using the work you same penalties as wrongful trading and may also If you are owed money by a company supplied. result in an unlimited fine and/or imprisonment for experiencing financial difficulties, it may be too You can get your legal advisors to write to them, up to 7 years. late to get valid security. putting them on notice of your rights in the work and of the fact that they have no rights to use the In recent years there has been a notable If the company has already granted security to work (and are, in fact, infringing your copyright development in this area. Wrongful trading claims its bank, the bank will need to consent to new by using the work), until they have paid all and fraudulent trading claims (or the proceeds of security and it may be unwilling to do this. Even outstanding amounts in full. those claims) can now be assigned by a liquidator if you are granted security by the company, that security is vulnerable to being set aside by the or administrator. This may be significant because You may wish to consider threatening to issue court on a later application from liquidators or the particular assignees (who may be creditors or legal proceedings:- shareholders for example) may be better resourced administrators if it was granted in exchange for (a) for breach of contract for failure to pay monies and/or have a greater appetite to pursue claims in “prior consideration”. More particularly, a floating owed; and satisfaction of sums they have lost. charge on the company’s property may be set aside as invalid if it is: (b) for copyright infringement if they use your Should I request a physical • given in exchange for “prior consideration”; work without permission.