With so many companies closing, it is important to assess what the implications are for directors. Directors do not necessarily escape all liabilities just because their company has entered administration. Some could be held personally responsible for money owed and there are legal implications to consider.
Directors are generally held personally liable where fraud has occurred, but it is important to look into the legal implications even when a failed company has been run in accordance with the law.
There are usually unpaid debts after a company enters administration. An administrator is placed in charge of the company as an interim director to make sure the process happens quickly and as many debts as possible are paid off. The administrator will also make sure the director(s) acted legally throughout the running of the company, and which issues led to its financial problems.
Relevant legislation includes the Insolvency Act 1986, the Company Directors’ Disqualification Act 1986 and the Companies Act 2006.
Under the Insolvency Act 1986, if a company is unlikely to be able to pay off its debts, it should stop trading immediately. Otherwise the director(s) will be held personally liable for debt accrued from further trading beyond this point. The safest option here would be to get advice from an accountant.
Some directors have fallen into the trap of giving personal guarantees, or borrowing money through their personal accounts. They are held personally liable for those debts, even though they were for business use. It is important that all loans, lines of credit and any financial agreement is done in the company name, and there is no personal link for directors, shareholders and members of the company.
If the director owns any shares in the company, the value of shares will be used to cover the cost of any debt accrued.
HMRC will attempt to claim back as much money as possible. If it believes there has been fraud or an attempt to ‘fiddle’ accounts, HMRC will hold the director personally responsible and issue a personal liability notice. HMRC uses the Social Security Administration Act 1992 to claim the money from a director, instead of the company, when it determines there was an attempt at defrauding the government.
When there are VAT liabilities, action taken will depend on whether a director has had previous issues with paying VAT due to company insolvency. A VAT security notice will be issued by HMRC when there is evidence that the director has left a previous company without paying the VAT due.
Fraud is more than just changing a few figures on the accounts or not declaring the full profit or loss. When a director knows that the business is suffering financially, and insolvency looks to be the only option, s/he may decide to take assets out to protect his or her own income or that of anyone else who invested in that business. Some directors choose to sell assets at a lower-than-value rate. Any of these actions could be deemed fraudulent.
When assets are sold at a lower rate than their actual value, courts can intervene. This in turn can lead to the person buying the assets suing for damages. Transactions that are completely legitimate may also become questionable during insolvency, so it is important to speak to a professional before doing anything.
Directors are usually kept separate from their company in cases of administration and bankruptcy, but there are times when there is a personal liability. It is important to consider the way that the business was run, as the administrator will look into that, and to case law, to determine whether there is a personal liability.
Alex Ingham writes many business related articles for Real Business Rescue.
For more on insolvency see http://www.lawdonut.co.uk/law/finance-and-strategy/dealing-with-insolvency/insolvency-20-faqs
A trademark is an identification sign which is used by a trader to distinguish his/her goods or services from the same or similar goods or services provided by other traders.
Trademarks protect the goodwill you have built-up or hope to accumulate. Trademarks provide an important and effective deterrent to infringement, and a sound basis for legal action if infringement occurs.
It is possible to register as trademarks, words, logos, 3D designs, sounds and some smells.
Here are 10 reasons why you should register your trademark.
There is more information available from the government Intellectual Property Office (IPO) www.ipo.gov.uk. It is possible to apply yourself but it may be best to use a trademark attorney as they are not expensive and will make sure you get the right protection without objections being raised by the IPO during the application process. Trademark attorneys may also be able to offer some initial free advice too.
Lewis Hands is a European Patent & Trademark Attorney at Handsome I.P. Ltd, www.handsomeip.com
There is an established, but growing, trend for wealthy private individuals (known as “angels”) investing in young and small private businesses in return for shares in the company. This is a form of equity finance, as opposed to the more usual debt finance provided by lenders.
After the heads of terms have been agreed, the investor’s lawyers will be asked to conduct legal due diligence on the target company. The extent of this will depend on the trading history of the target and the investor’s appetite for information about the target. The scope of due diligence usually covers the constitution and structure of the board and shareholders, employment contracts, existing financing arrangements, existing licence, research and development and other collaboration agreements, property arrangements and key commercial contracts.
Timings and documentation
The target company is likely to require shareholder approval as part of the investment process in order for new shares to be issued to the investor, new articles of association to be adopted, the subscription and shareholders agreement (also referred to as an investment agreement) executed, the appointment of the investor director approved and the existing rights of pre-emption in relation to the issue of shares waived. These shareholder resolutions can either be passed by convening a general meeting or by passing shareholders’ written resolutions remotely.
If the target company has existing equity or debt investors, their consent may also be required as a result of any right of veto they have in any existing investment or loan agreement. This will normally become evident from the due diligence exercise, although it is more expedient if the target company obtains letters of consent beforehand.
If the incoming investor subscribes for more than 50 per cent of the share capital of the company, the share issue may result in the target company breaching any change of control clauses in its commercial contracts. If this is the case, the target company will need to seek consent to the investment round from the relevant third party before completion.
The legal advisers involved will need to agree that all conditions have been satisfied and decide on the precise mechanism for completion and the sequence of events. In practice, the execution pages are normally circulated by email and exchange will be agreed on the basis of electronic signatures, before funds are transferred.
The issue of workplace bullying has hit the headlines again with allegations about the Prime Minister. As is so often the case, people’s reactions tend to be shaped by their own views. Labour loyalists are quick to describe Gordon Brown as passionate – but not a bully – while political opponents try to stir things up. That’s not an unusual response.
If an employee at work complains of bullying, there’s a tendency to make a judgement based on what we think of the individuals involved. Unfortunately, that’s completely the wrong approach. Even if you are absolutely certain that someone is not a bully, you must investigate any allegations. Doing so helps show the employee that you take their concerns seriously. It also gives you a chance to identify where things have gone wrong and smooth over any misunderstandings.
Perhaps more importantly, failing to investigate properly lays you open to the risk that the employee makes a claim to the Employment Tribunal. The Prime Minister’s case also raises the question of how you handle things if you too are a ‘passionate’ boss. What are employees expected to do if they think you are bullying them – and at the same time, you are the person they are expected to take their grievance to?
Make sure your business has proper disciplinary and grievance procedures. They could save everyone involved a lot of aggravation.
Are we set for a winter of discontent? News that airline workers are to vote for their traditional festive go-slow in December comes this week as early holiday greetings to us all. BA workers are not alone – bus drivers are currently staging their eighth strike in almost as many months. But what should you do if you’re faced with a legal dispute at work? As a small business, it is unlikely you will ever have to handle an all-out strike, but commercial disputes are all too common. For instance, cases of bad debts have increased by nearly ten per cent this year alone. If a rubber cheque or endlessly delayed payment has seriously damaged your business, you may well be tempted to sue – with vigour. The trouble is that going to court can be costly and time-consuming. Before you go down that road, make sure you:
Remember there’s no point wasting time and money chasing someone who cannot pay. Be prepared to compromise and whatever you do, don’t ignore the risks of losing any legal action you undertake. For more advice on how to handle disputes visit www.lawdonut.co.uk.
With most small businesses being family firms, it’s a surprise that divorce isn’t mentioned more often as something of a business risk. What would happen to you and the company if your marriage broke up? Following the recent trend of courts handing out huge payoffs to housewives and husbands alike, could you lose your livelihood as well as your love life?
English courts used to leave family businesses out of the equation when totting up the assets of failed marriages – not any more. Now they try to keep the business in the family if it produces enough income to keep two households reasonably comfortable. But if it doesn't – or a warring husband or wife objects – the business will be included amongst the assets to be divided between them.
The courts take the view that, where one partner in a marriage builds up a business, and the other maintains their home, the home-maker's support may be equivalent or “nearly equivalent” in value. Even where judges are not prepared to go that far, they are likely to value the home-maker's efforts much more highly than his (or, more likely, her) partner does. And in that case, even if the stay-at-home wife/husband had zero involvement with the “family firm”, he or she can still effectively force its sale.
Circumstances that make selling the business more likely include:
However, some marital events make a sale less likely:
If you are faced with a split, you can take precautions to get the settlement right and fair. Start by valuing the assets you brought into the marriage – professionally, if you think they are substantial. If you are an employer, that includes your business. If you are a one-man band and expect to stay that way, don't bother. What you gain on the roundabout you’ll lose on the swings. The longer the marriage goes on, the less useful the valuation will be – but it might be handy for a sudden break-up.
While you are arranging this valuation, try to reach agreement on how the business will be valued thereafter, and reach an agreement on the business value with your spouse, which should at least remove one source of argument. Do not lie about how much the business is worth; your spouse, or even the Court, will see it as a duplicitous attempt to short-change, and take a hard line.
Try to build up assets outside the business during the course of the marriage – you can sell them if needs be, rather than lose the business. Consider holding a substantial part of the business's assets in cash or other easy-to-reach ways; again, if necessary they can be released to fund the settlement. There are other, though less straightforward, alternatives; seek advice.
In any relationship there is always the chance of things going sour. In business relationships, you really need to be prepared for the worst to ensure that you are not at unreasonable risk financially if it doesn't all work out. In practical terms, this means that you need to think about dispute resolution before you actually need to use it!
One of the first things you should think about when putting together a new agreement with a supplier, partner, client, or any other business for that matter, is how to deal with the relationship if it all goes terribly wrong. Some people might say that this is negative thinking, but it's actually about being sensible and well prepared.
This is especially important for business deals between close friends, as often both parties are pouring a lot of resource into the business and these close relationships are the last ones you would expect to end badly. Carefully drafted written agreements can help ensure that in the "unlikely event of a catastrophe" you both end out coming out of the relationship with as few bruises as possible.
The kind of dispute resolution topics a well drafted agreement might include are:
You might be reading this thinking that sorting out dispute resolution clauses for your various business agreements probably isn't at the top of your ‘to do’ list. But it probably should be. You should give this high priority and make sure it gets done, now – dispute resolution could be an absolute saviour when you need it.
And you never know when you’ll need it.
Businesses must take note of a recent decision of the House of Lords, applying a European Court of Justice (ECJ) ruling on the holiday rights of workers on long-term sick leave.
In this long-running case, all the workers had been employed by HM Revenue & Customs (HMRC), and brought proceedings under the Working Time Regulations 1998 (WTR) for unfair dismissal. Earlier this year, the ECJ ruled that a worker is entitled to paid annual leave during the time that he has been on sick leave; where he remains unable to work until the end of his employment relationship, he is entitled to an allowance in lieu of the paid annual leave, to be paid at his normal rate of pay.
Giving its decision in this case, the House of Lords overturned the decision of the Court of Appeal from 2005, and ruled, in accordance with the ECJ ruling, that the workers were entitled to be paid for annual leave that accrued while they were on sick leave, on the basis that their claims for failure to pay under the WTR could be treated as a claim for unlawful deduction from wages under the Employment Rights Act 1996, which provides for a longer time-limit for bringing a claim. While this decision will inevitably increase costs for employers who find themselves in this situation, businesses must not be tempted to dismiss employees on long-term sick leave or they risk facing claims of unfair dismissal and, potentially, disability discrimination.
From 1 October 2009, the maximum statutory amount that employers must pay for redundancy and unfair dismissal claims is due to increase.
The maximum amount of ‘a week’s pay’ for employees made redundant, or who succeed in a claim for unfair dismissal, will increase from £350 to £380 per week. The amount is usually increased in February each year, but next year’s increase has been brought forward to help employees being made redundant in the current economic climate.
As a result, the next annual increase of the amount will not be made until February 2011. In addition, Acas has recently updated its guidance on redundancy handling, which emphasises:
The booklet also considers the practicability of offering redundant employees alternative work, counselling or other assistance.
Businesses must check their subcontractors’ invoices carefully, as they may not be able to recover amounts inadvertently overpaid, according to a recent Court of Appeal decision.
In this case, subcontractors provided services to the main contractor, and submitted invoices calculated on the basis of a daily rate, although there was no record of the number of hours’ work on which the daily rate was calculated. When the subcontractors told the contractor that they wanted to increase their daily rate, the contractor responded with a claim that the daily rate used for the previous six months’ invoices, most of which had been paid, was too high, and that the subcontractors owed them money. A judge in the county court decided that the contractor was entitled to have the invoices re-assessed on the basis of the work actually done by the subcontractors, and could use the difference to reduce the amount payable on the outstanding invoices. However, the Court of Appeal ruled that the judge had been wrong not to distinguish between paid and unpaid invoices; in the absence of any misrepresentation or mistake by the subcontractor, he had no right to permit the contractor to re-open the invoices that had already been paid. Furthermore, the court found that the contractor had made a further substantial payment to the subcontractors after it became aware of the issue of overpayment, which meant that it had waived any claim to recover the money.
This case acts as a useful reminder to businesses to check invoices carefully and, wherever possible, ensure that charges, and the basis on which they are payable, are agreed in writing beforehand.
Businesses are advised to ensure that their contracts are clearly drafted, rather than risk expensive litigation leading to an outcome that neither party intends, following a recent Court of Appeal ruling.
The issue arose in a dispute between two parties to a property development contract, each of whom preferred their own interpretation of a provision that had not been clearly drafted. The judge who heard the case initially rejected both parties’ interpretations, but refused to give his own interpretation. As a result, the meaning of the agreement was not resolved.
The Court of Appeal, however, stated that the judge should have given his own interpretation. It said that, if an agreement could be interpreted in a way that made it enforceable and effective, a court should prefer that interpretation to any interpretation that would result in the agreement being declared void. The court also said that an interpretation which produces a result that the parties are likely to have agreed is preferable to an improbable result. In applying these principles to this case, the court gave a ruling that put the parties in a position to avoid further delay and costly litigation.
Businesses can avoid litigation altogether if their contracts are well drafted, and should not expect that a badly drafted agreement will be declared void.
Employers seeking to defend equal pay claims cannot rely on the fact that the claimant does not identify an individual comparator, following a recent Court of Appeal decision.
This case concerned a number of female employees who brought equal pay claims, based on the fact that they were employed on less favourable terms than men in the organisation generally. An employment tribunal ruled that it could not hear the claims, as no specific male comparator (or group of male employees) was named in the grievance. However, the Employment Appeal Tribunal (EAT) stated that the information to be provided in an equal pay case is minimal, and needs only to state that it is a claim under the Equal Pay Act.
The Court of Appeal agreed with the EAT, thereby removing a technical defence that employers may have had to an equal pay claim.
Although this case arose under the old statutory grievance procedures, and there is no longer a requirement (under the rules in force since April) to raise a grievance internally before making an equal pay claim, this will nevertheless continue to be relevant to the question of how much information needs to be given by the claimant about the comparator.