Fast, Decisive Action Saves the Day – A Case Study by NDP Director Neil Davies
In this case study, we detail how fast and decisive action by our insolvency litigation solicitors saved the day for a director whose company had been issued with a winding-up petition. He had been advised by an insolvency practitioner that the ‘game was up’ and the only option was to enter into voluntary liquidation. On investigation, we found that there were more options available and were able to help the director – and his company – find a better solution. Above all the key was to take swift and decisive action.
Neil Davies, Insolvency Litigation Solicitor, Takes up the Story
“Imagine the scene. 6.00 pm on a dark, winter’s night just before Christmas. I was just packing up to leave the office for home, when the office landline rang.
It was a London based Company Director. He explained that his building company (‘the Company’) had been served with a Winding-Up Petition (‘Petition’) the previous day from HMRC, claiming £300,000 odd, for unpaid taxes owed by the Company. The debt was not disputed by the Company. The Director had found us on the web through a Google search.”
“I spent an initial hour on the phone with him. The Director explained that the Company had enough cash to pay the Petition debt, but he had held off paying HMRC because:
- The Company was owed and was (he hoped) about to receive £350,000 of overdue debtor money, from its customers who had delayed payment to the Company; and
- Paying the HMRC debt, before receipt of that debtor money, would have necessitated stretching the Company cashflow to the limit and necessitated tipping the Company into maxing out its overdraft facility with its Bank. That facility was guaranteed by the Company Director. If he paid HMRC before the debtor money came in, it would leave him exposed personally to the Bank on his guarantee liability.
In short, the Director gambled on his Company receiving the debtor money to enable him to pay HMRC before HMRC issued the winding-up petition. Had he proactively spoken to HMRC, perhaps starting the process by reading read our article – 10 tips for dealing with winding-up petitions – he may have been able to avoid this position. The gamble in any event failed and the winding-up petition was issued.”
What Did the Director do on Receipt of the Petition?
He spoke to the Company Accountant, who in turn referred the Company for advice to a local, London based Insolvency Practitioner.
The Insolvency Practitioner helpfully met with the Accountant and the Director, that same day. The Insolvency Practitioner was told of the above position. He was also told:
- Of the significant value and profit locked in the Company’s ongoing work in progress, across 4 different construction jobs.
- Of the Company’s significant and valuable future order book.
- That the Company had suffered two very large bad debts in the last 12 months (including Carillion), which had caused the cashflow problems for the Company.
- That based on the Accountant’s cashflow projections, marginal as it was, the Company could trade on and pay HMRC, provided that the £350,000 debtor money was received.
The Insolvency Practitioner Advised…………..That the Game Was Up…..
………..because the Petition had been issued. He further advised that the Company should look to enter into voluntary liquidation, appointing him as Liquidator, as soon as possible. The Company had over £150,000 in its Bank account at that point.
There Were Other Options Available to the Company
There was (remarkably) no real discussion with that Insolvency Practitioner (or advice from him) as to the other options that were available to the Company. These included:
- Immediate discussions with HMRC to resolve the payment problem (in conjunction with chasing the debtors), in order to pay the Petition debt before the winding-up hearing, and more importantly, before the Winding-Up Petition was advertised.
- Formal restructuring options, to include:
- The placing of the Company into administration (albeit that needed the consent of the Company’s Bank as a creditor with security over the Company); or
- A Company Voluntary Arrangement (‘CVA’) for the Company.
In other words, voluntary liquidation was not the only option. On NDP’s advice, the client decided to seek alternate insolvency advice immediately.
The Next Steps – Neil Takes up the Story
“I know from experience how important it is to move quickly when a winding-up petition has been issued. Once I got home, I spoke that night with the Director and his Accountant and received from them by email cashflow projections, a copy of the Petition, details of the debtors due etc.
A meeting was then arranged by me by phone that evening, for the next morning in London, with a tried and trusted Insolvency Practitioner contact of mine, local to the Company.”
Why Did we Recommend an Alternative Insolvency Practitioner?
“We chose that Insolvency Practitioner because we know he specialised in turnaround and insolvency in the Construction industry – our client’s industry sector. We had worked with him and his firm on a number of occasions and had been impressed with how he worked. I spoke to that Licensed Insolvency Practitioner at length that same evening and updated the Director and Accountant as to those discussions in advance of the meeting.
The Director and his Accountant met with our trusted Insolvency Practitioner contact the next day. I joined into that call by telephone. Ironically, I was in another meeting, also in London, on that morning so could not physically attend.
All (emphasis added) of the options available to the Company were explained and discussed in that meeting, in the context of, and in the knowledge of, the wider and full financial position of the Company, the contractual position on various ongoing jobs and the needs of the Company and its customers on the Company’s ongoing projects.”
A Structured and Controlled Way Forward Was Agreed Upon
The Insolvency Practitioner that we introduced was retained by the Company. He immediately spoke with HMRC and with the Company’s Bank (who had security over the Company and its assets) and with the Company’s key customers and creditors, all as stakeholders in the Company’s future.
A structured, controlled way forward was decided upon and agreed between all concerned. The debtor money was quickly collected in with assistance from the insolvency litigation solicitors here at NDP (owed in the main on finished jobs).
The Route Forward for the Company – Pre-pack administration that saved jobs
With the knowledge and concurrence of key clients and key creditors, the Company was placed into pre-pack administration, with the consequence that:
- The ongoing Company contracts were sold for value to NewCo and were completed by NewCo, with some funds flowing back to OldCo (those monies would not have been realised in a shut down, liquidation scenario).
- The jobs of most of the Company’s 15 employees were protected and transferred over to NewCo.
- The Company – OldCo – will in the coming months move from administration to voluntary liquidation, with the very real prospect of a dividend being paid to unsecured creditors of the Company.
All in all, the best possible outcome was achieved for all concerned.
- No matter how bad the Company position might appear, there are inevitably always options available to the Company and its Directors.
- The Directors should however always remember that the Insolvency Practitioner is advising the Company, not the Directors, who should always seek his/her own personal legal advice from Solicitors experienced in insolvency, litigation and commercial work.
- When times become financially difficult for the Company, getting the right advice as early as possible, from the right experienced Insolvency Practitioners and experienced Insolvency Solicitors is vitally important. Not all Insolvency Practitioners nor all Solicitors are going to be properly in your corner. We can help with that.
- There is a very fine line between (as here) a passionately committed Director who wants to save his Company and a Director who carries on trading regardless of the extent of the financial problems, who then runs the personal risk of breaching the statutory duties that the Director owes to the Company and also (when insolvency looms) his/her duties to the creditors of the Company.
Breach of those duties by the Director is territory that the Director should avoid, leading as it can, for example, to:
- A Director Disqualification investigation into the conduct of the Director.
- Difficult, future discussions with the appointed Insolvency Practitioner and possible proceedings from the Liquidator against the Director alleging Misfeasance (aka improper use of Company assets and/or funds) under section 212 of the Insolvency Act 1986.
The NDP Team of Insolvency Litigation Solicitors
At NDP, our team of insolvency litigation solicitors has over 100 years of combined experience in the sector, and is passionately committed to advising Directors, Companies, creditors and Shareholders and assisting them to achieve the best possible outcomes, especially when facing insolvency, director disqualification, a misfeasance claim or, as in this case, a company winding-up petition.
Neil Davies who heads up the NDP team of Insolvency Litigation Solicitors is:
- An advisory editor to Mithani: Directors’ Disqualification, the leading work on Director Disqualification law and practice.
- A member of the Insolvency Lawyers Association.
- A founder of NDP back in 2007 with 33 years’ experience of company and personal insolvency work, advising Insolvency Practitioners, the Secretary of State, individuals, Directors and companies in financial distress.
If your company has been issued with a winding-up petition by HMRC, call us on 0121 200 7040 or contact us as soon as possible. As this case study shows Neil and the team will work late and through the night in order to get the ball rolling quickly to help you achieve a positive outcome.