Haven Credit Union Final Administrator’s Report

To download a copy of my final progress report as administrator in the administration of Haven Credit Union, issued soon after the credit union went into liquidation, please click on the following link…

Final Progress Report of the Administrator of Haven Credit Union

If you have any problems downloading the report – give it some time to download as it is a large document! – email me at paul@midlandsbusinessrecovery.co.uk or call me on 01902 672323.

Regards

Paul Brindley

Liquidator of Haven Credit Union Limited

 

Haven Credit Union Final Administrator's Report

To download a copy of my final progress report as administrator in the administration of Haven Credit Union, issued soon after the credit union went into liquidation, please click on the following link…

Final Progress Report of the Administrator of Haven Credit Union

If you have any problems downloading the report – give it some time to download as it is a large document! – email me at paul@midlandsbusinessrecovery.co.uk or call me on 01902 672323.

Regards

Paul Brindley

Liquidator of Haven Credit Union Limited

 

Customer deposits and insolvency

As a licensed insolvency practitioner I am often asked to advise directors who are in a very dark place – whose company is on the brink of liquidation. I guess you might be in such a place?

 

Insolvency law requires that when a company is insolvent, and even when its solvency is in doubt, its directors have a duty to place the interests of creditors above those of themselves and the shareholders. The law looks at it this way – you’ve been given the privilege of limited liability; a cost of that privilege is that you have to do the right thing at the right time for those innocent third parties you might hurt by your actions.  Pretty much common sense, but can be difficult to implement in the real world.

If you don’t place the interests of the creditors above yours or the company’s, you as a director expose yourself to being disqualified for 7-10 years, and could see you personally paying compensation for your ‘wrongdoing’.  You could even be forced into personal bankruptcy.  And in the most severe cases, where a lot of the public’s money is lost and you continue to take money long after a judge thinks you should have known you would not be able to supply the goods or services that have been paid for, you could even go to prison.

The penalties for getting it wrong are severe so it’s vital, if you normally take deposits or payment for goods or services up front, especially from the public, that you get advice from an insolvency expert.  Take that advice at the earliest possible opportunity.  And then follow it. Be aware that turning a blind eye or ignorance is no excuse, this is something you’d be a fool not to address.

When I get involved with companies in this position the first thing I have to do is explore with the directors whether they should allow the company to continue to trade at all or whether they shut simply shut up shop.  This may sound harsh to you, especially as it’s your business and you have sunk so much time, money and effort into it, but all the other questions that follow on depend on it.  If you have come to me for advice early and you have forecasts showing that things are likely to get better, the answer is often that you can allow the company to continue trading. Often though the forecasts show a worsening position or are not certain to be achieved – in either case you should think seriously about protecting customer deposits, ring-fencing them so the customer gets their money back if things don’t go to plan.

The safest way to do this is either to stop accepting deposits.  The next safest is pay them into a trust bank account and only release the cash into your company’s own account as and when the goods or service are delivered. Both of these options make an already tight cash position worse and could make your turnaround plans unworkable.   Either way you have to manage your cash position.   If you choose not to do either of these and continue to accept deposits, you need hard evidence supporting that decision. And you should continue to revise that information and monitor the decision. This is an area where you might need my help.

How important is it you take and follow professional advice?

It’s vital. You see taking customer deposits can expose you to a wrongful trading and/or a fraudulent trading action – the first civil, the second civil and criminal action.  Case law has determined that ignorance, a lack of knowledge, skill or experience, and a failure to take all possible steps to minimise deposit creditors’ losses once the company is past the point of no return is no excuse. And that’s why you need my help.

Let’s now look into a real life case … a few years ago but the principles remain true today…

Uno plc and its subsidiary World of Leather were large retailers of furniture to the public. Furniture was bought in from manufacturers after a customer order had been placed. Customers paid a deposit when they placed the order and paid the balance on delivery.

They got into financial difficulties. Their directors allowed the companies to continue to trade for four months while investigating options for restructuring the businesses. During this time they held discussions with venture capitalists and competitors, none of which were successful and the companies were placed into administration. By then, the deposit creditors were owed £26 million. Unsecured creditors would receive nothing.

The companies had continued to accept customer deposits during that four-month period. Those deposits were not placed in a separate trust account, even though the directors knew that the company was having problems. In fact during that four-month period, the company actively sought to take more cash deposits from customers as part of a strategy to increase the money in the companies to prevent them from going under. Unsuspecting customers were encouraged to pay in full for their furniture in order to qualify for a substantial discount or early delivery.

Were the directors liable to repay those deposits?   Were the directors unfit to be involved in the management of a company?

In their defence, the directors argued two things:

• While they were investigating options for restructuring there was a reasonable prospect that the companies could avoid insolvent liquidation and
• After they became aware that the company had no such prospects, they took every step to minimise potential losses to creditors.

In particular, they claimed that by continuing to accept customer deposits— in fact, increasing them—they improved the cash flows of the business in line with a viable rescue plan that, if successful, would have enabled the companies to avoid liquidation.

The directors produced evidence of their plan which was based on accurate, timely financial information. They also showed that they had taken, and acted in accordance with, appropriate professional insolvency advice throughout.   In summary, they had made informed decisions.

The court decided that the directors were not guilty of wrongful trading and should not be disqualified. The judge explained that a director is not unfit and will not disqualified merely because he knowingly allowed a company to trade and take customer deposits while insolvent.

Key to the case were the following:

1. The directors had continued access to reliable financial information as to the existing financial position and forecasts demonstrating the proposed rescue plan.
2. The directors obtained and followed full legal and professional advice in allowing the companies to continue to trade and take deposits.
3. There was a huge amount of documentation and written evidence that supported and evidenced the directors’ decisions.
4. The directors not only kept their major creditors informed of the companies’ situation, they told them of their strategy to restructure the business, and got them to buy in to the plan. The point is they were not just trusting to luck. Not every business can do this – it’s particularly difficult for a small business to do.
5. The judge said that company directors have no duty to segregate customer deposits once a company gets in financial difficulty. Continuing to pay monies into the general company account is not on its own a reason to disqualify a director, it is not irrefutable evidence of improper or dishonest conduct, a lack of probity or incompetence.
6. Based on the legal and professional advice they received, the directors formed a reasonable belief that there was a reasonable prospect of finding a satisfactory outcome for the creditors. They held this belief properly and honestly based on hard written evidence and professional advice.
7. The directors made no effort to shirk their responsibilities, no one resigned. They were just trying to work their way through a very difficult position.

The case gives some useful guidance on what you as a director need to do to avoid personal liability. The directors weren’t flying blind. No one ran away. A proper comparison was made of the effect on creditors of closing down and continuing the business. The figures justified their restructuring plan and decision to carry on accepting deposits and paying them into the companies’ normal bank accounts. The decisions were made on the basis of prudent management, accurate financial information, and legal and professional advice. A professional analysis of the situation and comprehensive reporting are vital. Evidence is key – minute all decisions, retain all the financial documents. Get independent professional advice from the right insolvency specialist.

Here are some questions for you to ask yourself:

1. Is the company insolvent or at risk of insolvency?
2. Should you continue to accept customer deposits?
3. What do you tell major creditors, if anything?
4. What steps should you take to protect your personal position?
5. Can you resign if you don’t like what is going on?
6. Do you have all the evidence you need to justify your decisions?
7. Are you taking the right professional advice?

Who pays business rates after a liquidator has disclaimed a lease?

What was thought to be the situation has recently been confirmed in the High Court, when a landlord was told to pay up £0.6m to Birmingham Council for business rates accruing after a tenant went into liquidation and disclaimed the lease – click here to read the judgement.

Thus any uncertainty there was that payment of business rates post disclaimer was the landlord’s problem has now evaporated.

This is a mixture of good and bad news…

Good for local authorities …

Bad for landlords who now know that unless they have the benefit of a strong covenant or strong Authorised Guarantee Agreement could end up with a big rates bill at a time when a property is earning no income …

Good for prospective tenants of empty properties as they could be in a better negotiating position when it comes to rent free periods or other ‘perks’…

Good for tenants of tertiary properties who could go to the wall unless they can renegotiate leases and rent payment dates with the landlord.

In fact it’s good news for everyone but landlords and people who’ve signed an authorised guarantee agreement!

If you’re a tenant who has massive problems because of their rent bill, and you’d like some help renegotiating it, call me on 01902 672323.

BEWARE! – What you’re not told could be more important than what you’re being told!

Before I go on, I’ll apologise now, this is going to be a rant!  … about some of my fellow insolvency practitioners…

What is it that has upset me so much?

It’s licensed insolvency practitioners telling people they need work doing by them when they don’t.

Here’s an example, it’s one I see often…

You’ve a small limited company – you’re both director and its sole shareholder – it’s got little or no assets, it’s ceased to trade, but it’s got some debts it can’t hope to pay.  The people it owes money to include a handful of trade suppliers, the government for vat, and a bank.  The debts total £25,000.  You’ve guaranteed the bank, who are owed £5,000, you’re going to have to pay that off.  You’ve already put £10,000 of your money into the company, you can’t afford to put any more money into it, it’s clear the business has nowhere to go, the project simply hasn’t worked.  You’ve lost all you can afford to lose and still you have to pay off the bank.

So you go to see an insolvency practitioner.  He advises you that the company should go into liquidation, a process called a ‘Creditors’ Voluntary Liquidation’ because it’s the cheapest and simplest way to shut the company down. He tells you it’s your duty as a director, or shareholder, to close the company down in this way. And because it has no assets you’ll have to pay for the process, it’ll cost £5,000 thank you.  You pay some money up front, he’ll accept the rest over time, you’ve signed a personal guarantee.

The problem is what he has told you is rubbish… pure and unadulterated rubbish…in fact it’s worse than that, it’s downright negligent advice.

You see, there’s nothing in the law to say that you, either as a director or shareholder, have to put the company into liquidation, nor that you have to fund that liquidation.  The reality is that as a director, your obligation is to ensure the creditors’ position does not get any worse.  And you can achieve that most times simply by stopping trading.  As a shareholder, you have no obligation whatsoever, the duties that exist lie with the directors not you as a shareholder – look at it this way, you’ve got shares in Barclays, what obligation does that give you for either the way its run or for putting it into liquidation should it ever become insolvent? – that’s right, none – and the same principles apply to small limited companies as listed ones.

So why did you just throw good money after bad paying for an insolvency process you have no obligation of paying for?  Especially when (1) you’ve probably also lost your only source of income; (2) You have a string of other personal and personally guaranteed company debts you are struggling paying; and (3) You’re trying to set up a new business to earn some dosh?

Do you know what I do under these circumstances?… that still enables you to comply with your duties as a director?  … that costs just £10 plus the cost of a stamp to write to each of your creditors?

Well, I give you – free of charge – a copy of what I call my ‘no assets letter’ – a letter that you send to the company’s creditors, telling them the company has ceased trading, explaining the company’s financial position, inviting them to put the company into an alternative process called a compulsory liquidation and advising that unless they do so within the next three months, you’ll apply to have the company struck off.

The point is a compulsory liquidation is a process that is started at the creditors’ cost and continued at the government’s cost It costs you nothing.

And in 3 months time if creditors haven’t started off that process, you simply fill in the appropriate Companies House form (DS01 – here’s a link to it) and send it, together with a cheque for just £10 to the Registrar of Companies, who should then strike the company off.  You’ve saved yourself £5,000…and you have still complied with your duties as a director.

And that’s why I say that sometimes the most important things are those which you’re not told…

The question you need to ask is why this is happening?  Sometimes it’s ignorance – the IP or his staff are simply incompetent – yes there are a lot of incompetent insolvency practitioners and their staff out there!  But as I am seeing this happen more and more as sales volumes in the insolvency profession come under pressure, I think it’s down to far more than mere ignorance.  It’s fee hungry insolvency practitioners compromisiong the quality of the advice they give purposely to earn themselves a fee.  And that is a country mile away from providing their clients with best advice.  What makes it worse is that their clients are paying for such poor advice, even though in many instances they can’t really afford to do so.

In my next blog I’ll talk to you about what those salesmen of Individual Voluntary Arrangements don’t tell you, and give you an opportunity to obtain ‘my little book of bankruptcy’, a book that explodes some of the myths about bankruptcy.