MORE BAD NEWS IF YOU’RE A COMPANY DIRECTOR OR CREDITOR – WHERE IT’S ALL GONE WRONG AND HOW TO AVOID PERSONAL BANKRUPTCY – PART 1.

The Times headline Saturday, 18th May 2024:

“Company Insolvencies rise by almost a fifth”.

And they start the report saying:

             Challenging economic conditions for businesses resulted in an 18 per cent rise in company insolvencies during April.

             Rising debt levels, higher interest rates and cuts to spending pushed company insolvencies to 2,177 during the month, up from 1,838 in March, according to data from Companies House.

             The rate of company insolvencies during the 12 months to the end of April was 57 per 10,000, up from 52.6 companies per 10,000 a year earlier.

             The level of company insolvencies continues to be much higher than during the pandemic and the period from 2014 and 2019. Yet the figures are much lower than the peak of 113.1 insolvencies per 10,000 companies reported during the recession between 2008 and 2009.

             Construction was the hardest-hit sector, experiencing 4,273 insolvencies in the 12 months to the end of March. About 17 per cent of all insolvencies during the period occurred in the construction industry, where companies were affected by inflation and rising labour costs.

Read the full report here: https://www.thetimes.co.uk/article/company-insolvencies-rise-by-almost-a-fifth-6bwqcqqgx

Is it really that bad and should you be worried if your company is about to fail?

The Cork Report

Once upon a time, a businessman wanting to avoid any personal liability for his bad business decisions might form a limited company. When it went wrong, he could turn his back on it and leave the Insolvency Service to pick up the pieces. Perhaps, even, start another company and trade on as if nothing went wrong. In those days, there was no organised or regulated Insolvency profession. The situation caused such a bad stink that in 1982, the government commissioned Sir Kenneth Cork to investigate and report.

The result, embodied in what has become known as The Cork Report, was the establishment of insolvency practice as a regulated profession. There came the Insolvency Act 1986 and, not coincidentally, the Companies Act 1986. Other statutory enactments at the time were the Directors Disqualification Act 1986, the Insolvency Rules 1986 and sundry other supporting legislation.

It was a brave new world. No more dodgy company directors guided by unqualified and unregulated insolvency practitioners. No more leaving empty handed the honest, hard-working creditors who had done business with the company in good faith. Now was the time for a new insolvency profession to take over, bring bad directors to book and get some money back for the long-suffering creditors.

Industrial Scale Pursuit of directors

As you might expect, it took the new Insolvency Practitioners Association some years to get itself established. Mostly, it’s been a success. As practitioners got used to their new regime, they weeded out the mavericks from the pre 1986 era and, these days, it’s a thorough and professional approach to the problem of company insolvency.

But are the creditors of a failed company any better off? Despite what has become an industrial scale pursuit of directors, the sad answer is: “no”.

Litigation funding has developed to the extent that publicly quoted litigation funding companies routinely solicit insolvency practitioners for opportunities to sue directors. For payment of a nominal sum, they take an assignment of a possible cause of action against the directors and split the proceeds with the liquidator.

Directors a soft target.

In most cases, they are pursuing a soft target. Who, faced with the resources of a PLC announcing it has bought the right to sue you, wouldn’t quail? So, 90% of claims get settled simply because the director, understandably, fears the cost and uncertainty of a court case.

The shame of it is that so little of money paid out this way ends up with creditors. The litigation funder’s solicitors fall over themselves to take a generous no-win no-fee deal and take a large slice. The funders themselves split what’s left with the insolvency practitioners. After the liquidators take their fees, there may be a dribble of cash into the insolvency account.

Who wins?

Who’s the winner here? Certainly not the creditors. Their only satisfaction is that they’ve seen a director made to pay. There may be some comfort in that, but it won’t affect their bottom line.

And were the directors really to blame? Their company may have failed because they, in turn, were let down. I acted for a director of a highly successful company that did business with Woolworths. He was honest and hardworking. But did that prevent liquidators coming after him when his company eventually failed in the aftermath of Woolworths collapse? It didn’t and he settled for a modest payment to avoid the pain and risk of a court case.

So what can directors do to protect themselves? How can creditors make sure the liquidator does a proper job to maximise benefits for them?

Read on in Part 2….

Philip

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