It’s a sad fact of business life, but from time to time companies with which members trade will fail. Often such failures leave large debts to creditors, so what do you need to know if you become a creditor to a failed company?
What will happen?
When a company is failing it will have a number of options. If the company is capable of being rescued, or there is a tangible benefit to creditors, then it may enter Administration. Here all debts are frozen and an independent expert appointed to run the company as a going concern, or to achieve the best possible outcome from creditors if this is not possible.
Alternatively the company will enter Liquidation. Here it is not possible to rescue the company and an independent expert will be appointed to wind it up.
In order to enter administration the company must either
· be insolvent, but still be able to achieve a specific test laid down by current insolvency legislation, or
· have significant creditor pressure so that entering into administration would prevent compulsory liquidation.
Once a company entered into administration an independent insolvency practitioner is appointed to run the business with an aim to preventing the company being liquidated. They will have 8 weeks from the date of administration to inform creditors, employees and Companies House what they intend to do. The options are
· negotiate a Company Voluntary Arrangement (CVA) in order to keep the company trading
· sell the business as a ‘going concern’ ensuring that the business can carry on
· Enter into an agreement with the company creditors to close the company as part of a creditors’ voluntary liquidation, sell company assets and pay any creditors from the money raised
· close the company and enter into liquidation if there’s nothing to sell
Do I have to pay them?
Yes. Any debts due will still be owed to the company. If the company is in administration, when it is restructured it will be sold and start again and any debts will be dealt with. If not, then once the liquidation has been finalised the company will cease to exist.
Will I get my money?
This will depend on your status. If the company enters Administration, then payment is possible once it is returned to a going concern. If the company enters into Liquidation, the company will collect all debts as part of the insolvency process. Once all debts are collected, the amount recovered will be distributed between the creditors. Any secured creditors will be paid first, and in full, in line with their securities. Once these are settled, any preferential creditors such as employees will be paid in full, followed by any remaining creditors who will be paid a percentage of their debt from the remaining funds .
Rarely do unsecured creditors get paid if the company enters Liquidation. Even if a payment is made, it is highly unlikely that a significant percentage of the debt will be recovered.
Am I a Secured Creditor?
It depends. You can gain a security over company assets in a number of ways.
The most likely will be a specific charge, either over an asset, similar to a mortgage or a more general floating charge. Most securities require a legal agreement between the parties. If you believe you hold such a security, you should review any written agreements as a matter of priority.
If there is no specific agreement, the most likely security held by a motor trader is a ‘Lien’ on the vehicle or goods held. Where you have carried out work that is more than maintenance, you may hold a ‘Lien’ on any vehicle or goods. If you are normally paid before you release the vehicle or goods to the owner and the company fails before you are paid but while you have the vehicle or goods, you may be able to withhold the vehicle or goods from the owner until you are paid. Furthermore you may be able to sell any vehicle or goods to settle your debt. This is complicated, so it is essential that advice is taken as soon as possible.
Offsetting your debts
Where you have supplied a product to the failed company, check your terms to see if legal ownership has transferred at the time of failure. If the goods remain your property, then it is essential that the rights of ownership are exercised immediately. Any goods may be recovered to you and their value used to reduce the money owed.
If you bought and sold products and services to each other, and any goods and services have already passed to the failed company, you may have ‘a history of mutual credits and debits’. In this case you can offset that money owed to the failed company against that money owed to you by them.
For example where the motor trader owes the failed company £1,000, and the failed company owes the motor trader £500 then the motor trader can withhold their £500 in order to reduce the amount they owe.
This right cannot be excluded under the contract. If there is the potential for such a relationship, it is essential that advice is taken as soon as possible.
Who is liable for any failures if the company entered liquidation?
This is a trickier question and, to a greater extent, will depend on the nature of the contract and services provided.
Where the failed company is a supplier of work. You will have a liability to the failed company in the event they are sued for a fault on your work. However, this is unlikely if they are in liquidation.
A much more difficult question is whether the ultimate customer can overreach your supplier and hold you responsible. Again statutory protections apply, but this is arguable where your contract with the failed company excluded the Contract (Rights of the Third Party Act) 1999. Again it is essential that advice is taken as soon as possible on this point.
What to do next
The effects of a company failure will depend on how much money you are owed, and prevention is much better then cure. Often the first sign of a problem will be difficulty in obtaining payment and an increase in the length of time taken to pay. You should maintain accurate records of the payment terms between you and your suppliers/customers and monitor these regularly. As this is a general guide only, any motor trader who is looking for more advice on this matter, or even assistance should us for more detailed position.
Don’t forget, this advice is general in nature and will need to be tailored to any one particular situation. As an RMI member you have access to the RMI Legal advice line, RMI template documents, including a disciplinary process, as well as a number of industry experts for your assistance.
Motor Industry Legal Services
Motor Industry Legal Services (MILS Legal Ltd) provides fully comprehensive legal advice and representation to UK motor retailers for one annual fee. It is the only law firm in the UK which specialises in motor law and motor trade law. MILS currently advises over 1,000 individual businesses within the sector as well as the Retail Motor Industry Federation (RMI) and its members.
