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Recover position
Page 40
Page 41
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What chance have you got of recovering your debts if one of your customers goes bust?
John Davies reports.
Is your insolvent debtor a limited company? This will affect the chance of getting your money back. The owners of a limited company are not personally liable for their company's debts. But in an unincorporated business (not a limited company) the owners do have personal liability.
When a business goes into formal insolvency. be it liquidation, company voluntary arrangement, bankruptcy or individual voluntary arrangement, you will be approached by the insolvency practitioner dealing with the case to 'prove' your debt. In other words, to register your claim.
Company rescue
Unfortunately, the nature of insolvency is such that the failed business will not have enough funds to repay all its creditors. But there is a difference between 'insolvency' procedures proper and what are often called 'company rescue' procedures.
In rescue procedures, such as company or individual voluntary arrangements or corn pany administrations, the business will not necessarily be beyond help but it will be in need of substantial restructuring.
So the business will propose a rescue plan which will require creditors to accept a reduction in their claims. business to continue to trade, thus enabling their customer/supplier relationship to continue, or whether they should petition for liquidation or bankruptcy.
A solvent company can choose to go into a'rriembers voluntary liquidation'. As it is solvent you should expect to see most if not all of your money.
But where a company goes into insolvent liquidation, or an individual becomes bankrupt, the debtor will invariably have few assets and trade creditors will have to write off their debts. Given this, the insolvency practitioner appointed to take charge in such cases has special powers to claw back funds from the directors or individuals concerned.
One of the most fruitful of these powers concerns phoenix companies. What is especially annoying to unpaid creditors is when they see the proprietors of a company which has gone bust starting up a new company more or less straight away, often at the same address, and carrying on the business of the insolvent company as if nothing had happened.
This is not illegal. The law recognises that each registered company is a separate entity with an existence of its own. So when a new company is formed it starts off with a clean slate and bears no automatic responsibility for any liabilities incurred by other companies in which the founder has been involved.
But phoenixism' can be illegal if a new company confuses customers and suppliers, whether intentionally or not, into thinking that a new company is the same as the one which was put into liquidation.
Dousing the phoenix
So if ABC Ltd is put into insolvent liquidation, anyone who had been a director of that company in the year leading up to the liquidation should not be a director or otherwise be involved with a company which is formed with the same or a substantially similar name as ABC Ltd. This restriction applies for five years.
Anyone who breaches this restriction commits a criminal offence and may be fined or imprisoned or both, Of perhaps more interest to creditors, they can also be made personally liable for the new company's debts.
Successful outcome
The chances of success of any action on these grounds will depend very largely on the degree of similarity between the names of the two companies concerned and their ownership and trading circumstances. But as a guide, a successful phoenix action was brought in 2003 in respect of two companies called MPJ Construction Ltd and MPJ Contractors Ltd.
If you suspect a company is trading under a name that it should not be using you can check its status on the Companies House website: www.companies-house.gov.uk. •