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70 | LEGAL WORDS | Stefano Lucatello Go for broke

When times are tough fi nancially, just how long can you continue to run your business without becoming personally liable for any losses suffered by your creditors?

The Problem:

I am an agent based in the UK. During the last few months our sales have picked up a lot but I am having more and more problems getting paid my commissions. This has reached the point where my company is struggling

to pay its own bills. We are now threatened with court cases. One of our sup-

pliers is also threatening to wind our company up. We owe him about €12,000 and there is no way I can raise that kind of money. Another is saying that the company is trading while insolvent and threatening me and my wife with bankruptcy, despite the fact that we are a limited company. What should we do?


ll agents MUST start off their commercial relationship with developers on the basis of a signed agency agreement. This agreement can be exclusive or non exclusive: the developer will only be able to deal with you if it is an “exclusive” one.


The agency agreement is the starting point. If there is no written agency agreement, then a contract can be pieced together from oral conversations or emails which show clearly the intentions of the parties. The agency contract should, if drafted correctly, set out how much commission is payable, how it is payable and when it is payable. The fi rst thing to do is to engage with your developer and ascertain whether he is deliberately not paying you or whether he is also experiencing cash fl ow problems.

If so, agree a payment programme with him so you start receiving your commission on a drip basis. This will allow you to cover some part of your debts to others, thus keeping their credit control department happy. This will buy you time.

Sit down with your partners or directors and set out all the debts your business owes, starting with the most pressing and important ones. By this I mean The Inland Revenue, NIC, VAT and any other Government department that could shut you down overnight.

If one of your creditors is threatening to wind you up, start a repayment programme, however small, and stick to it.

This is especially important if the

creditor is the HMRC, NIC Department, VAT or Customs and Excise. If the creditor refuses to accept a series of small payments, you might have to consider a Voluntary Arrangement. This is an arrangement whereby you make a binding agreement with your creditors, through the intervention of an insolvency practitioner. They will set out the liabilities and assets of the person or company which cannot pay its debts and then propose to the creditors that they will either not receive a penny or that they can agree to receive a percentage of their total debt over a period of time. The agreement stipulates that if the debtor fails to meet his monthly or whatever obligations to pay a fi xed sum to the insolvency practitioner, then the insolvency practitioner has the potential to bankrupt or wind up the debtor. If you feel that you are at risk of losing your personal wealth and belongings, you cannot just transfer them to someone else without that person paying a “valuable consideration” - a just price. So if you try to transfer assets of value out of your name without receiving good money for the asset, then these

Stefano Lucatello is senior partner at Kobalt Law LLP, a specialist international law fi rm based in London. He has practised international law as a solicitor for more than 25 years, specialising in foreign property, litigation law and related matters. Email: Telephone: +44 (0) 2077 391 700

transactions can be set aside and reversed.

This means that the liquidator

or Trustee in Bankruptcy can treat the transactions as if they had never happened and take the assets from you or the company.

There are certain exceptions to your assets being taken away from you. A Trustee in Bankruptcy or Liquidator cannot take away from you your tools so that you cannot exercise your profession, or throw you out of your home if you have a child or children under the age of 18 or who suffers from medical problems. You have advised that you trade through the vehicle of a company. As a director of the company you have statutory obligations. One of these is to ensure that the company is solvent -0

“If the company trades while insolvent the directors may become personally liable”

i.e. It can pay its debt as and when they fall due.

Under UK insolvency law, if the company continues to trade while it is insolvent, the directors of the company may become personally liable to contribute to the company’s assets. Under UK insolvency law, “wrongful trading” occurs when the directors of a company have continued to trade a company past the point when they: • “knew, or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation”; and • they did not take “every step with a view to minimising the potential loss to the company’s creditors.” Where, during the course of a

winding-up, it appears to the liquidator that wrongful trading has occurred, the liquidator may apply to the court for an order that any persons carrying on such business are to be made liable to make such contributions to the company’s assets as the court thinks proper. The normal approach to wrongful trading actions is that the liquidator will try to establish a date at which the company can be shown to be balance sheet insolvent, and then show why it was unreasonable for directors to continue to trade after this. In the UK, and contrary to many misconceptions, it is not an offence to trade a company while it is insolvent. Indeed in some situations, if the directors genuinely believe that the position will be turned around and the position of creditors will improve, it is the correct thing to do.

When it becomes wrongful trading is when it should have been realised that the position of the creditors would likely deteriorate from that position onwards and the company would proceed into liquidation.

Once a director realises that his or her company is insolvent, one important thing for them to do is to seek immediate professional advice from a licensed insolvency practitioner. Many legal systems recognise the blue sky defence: if the directors, in good faith, believed the company was about to turn the corner and improve, they would not normally be held liable for continuing to trade. Liability only attaches when the company has no realistic prospect of avoiding insolvent liquidation.

The court has wide discretion over the contribution that it can require. Traditionally this has been compensatory, rather than punitive. Good luck!.


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