Bankrupt Company

Maybe be you’d like to enlighten us as to the legal obligations of a Company Secretary? Hint: the only obligations are the administrative requirements of the Companies Act – keeping the Registers in order and ensuring documents are filed with Companies House on time. The day to day running of the company and responsibility for the company’s actions are the directors’ responsibility only.

I completely agree that company law is a farce and virtually a licence to commit fraud; it will only get worse when the new Companies Act comes completely into force – single person companies with no Company Secretary, Directors’ residential addresses kept private and all sorts of other bollocks that will make things easier for fraudsters. One of the few useful things is that ‘shadow directors’ will become as accountable as registered directors for the actions of the company.

The idea is that if we don’t allow people to fuck their businesses up and walk away from the problems then nobody’s ever going to risk setting up a business. The economy will stagnate and we’ll all suffer. More intelligent people than any of us have come up with that over many years so we can only assume that they’re right. Seems like bollocks to me though.

I truly believe John to be a decent, hardworking and honest person and I’ve been more than a little upset by this recent bad fortune.

We can all learn a lesson from this: don’t allow more credit to one customer than you can afford to lose. If you’re getting in over your head with a big customer then think about taking out credit insurance – it should cost less than 1% of the outstanding debt. If you can’t get credit insurance on your customer’s debt then ask yourself if YOU can afford to lose the money more than the insurer can.

It’s hard to turn away potential business because of worries over your customer’s creditworthiness but unless you REALLY like living dangerously you have to assess the risk and act accordingly. The sad fact is that over half of the companies trading today will have failed within the next 5 years. Just make sure they don’t owe you more than you can afford to lose when they fail.

Posted under Late Payment, Legal Issues

Posted by Alec at 6:21 pm, June 11, 2007

5 Comments so far

  1. Alec added on  June 11th, 2007 at 19:11

    Tell me about it. 5 or 6 years ago I was mugged for around £200k by one of these sneaky, suited thugs: Managing Director of one of the largest same-day courier networks in the UK.

    From what John’s said it’s A & K that have had this done to them. The fact that they’re now unable to plug a £35k hole in their finances is hardly John’s responsibility – even if he was a director. When hit with a blow like that I can quite easily believe that the only practical, and legal, thing the company could do would be to call in the receivers.

    We could (and I did) question the directors’ judgement in allowing a single customer to accrue a debt large enough to sink the company; we could also question A&K’s creditors’ judgement in allowing such a young and unproven company credit. People make mistakes; shit happens. This is bad news for everyone concerned I think and there’s no winners.

  2. Alec added on  July 11th, 2007 at 19:46

    I’m not saying anything Bryan – that’s what John said wasn’t it?

    I don’t know anything about A&K’s financial situation but let’s create a snap-shot of a hypothetical company.

    They’re owed £35k by their biggest customer and £45k by their other customers combined.

    They owe £40k to suppliers, £5k in Corporation Tax (due in 6 months), £10k in VAT (due in a month) and £3k in PAYE (due next week).

    They’re technically solvent because they’re owed more than they owe and they can just about afford to pay their bills as they become due.

    If the company owing them the £35k go bump then they certainly won’t see anything of that £35k for a few months and if they’re lucky they might see £5-10k of it after a year.

    So they still owe £53k within the next month and £5k in six months. Total debt £58k.

    They can only count on receiving £45k in the immediate future so they’re both technically and practically insolvent. Legally, assuming that no source of finance is available, the directors have a duty to call in the Receivers in order to protect the company’s assets for the benefit of their creditors.

    John apparently believes that the VAT & Revenue are preferential creditors – they’re not any more as it happens; that all changed in 2003.

    So assuming that there’s no fixed or floating charges over the business’s assets (secured bank loans etc) all the funds received will be distributed to the creditors once the Insolvency Practitioner’s fees have been paid. That could easily be £10k on its own.

    So they’re owed £45k
    The IP takes ~£10k
    There’s £35k left to share out amongst the creditors that are owed £58k

    The creditors, including the tax and the VAT, would receive 60p in the pound as a distribution once receivables have been collected.

    There would be additional funds to distribute if the original defaulting debtor’s own insolvency results in a dividend to creditors.

    In reality 10p-20p in the £ is more realistic, although I once had a £600 debt finally settled in full after 6 years!

  3. Alec added on  July 11th, 2007 at 20:15

    Maybe I misunderstood then – it happens sometimes when I try to understand people from the less comprehensible side of the North

    Anyway, now I think about it, there may not have been £35k equity in the business to start with. So being bumped for £35k would wipe them out completely. In that case the only chance of the creditors receiving anything would be if the original defaulting debtor eventually coughed something up. Even then the dividend would be swallowed up by 2 lots of IP fees.

    Don’t go thinking I’ve got an inside track into what’s going on here Bryan – I’m as much in the dark as the rest of you. The whole thing’s got about as much to do with me as it has to do with you, so I think I’ll stay out of it.

  4. Alec added on  July 11th, 2007 at 20:24

    Can you see where I was coming from in the other place now then Dean? It would be nice to be able to present people with a viable solution to this bad debt problem. Credit reports based on out of date accounts aren’t the solution. Credit insurance MAY be the solution but most of ‘courier company’ customers aren’t deemed creditworthy enough to be insured. Maybe we should believe the credit insurer when they say our potential customer isn’t creditworthy?

    Looking on the positive side: our total sales ledger is currently less than four days average sales. Which is nice.

  5. Alec added on  July 11th, 2007 at 20:40

    What happens if you’re factoring and the debtor defaults Bryan? You have to pay back the factors all the money you’ve been advanced against that debtor immediately. THAT’S what pushes courier companies into liquidation.

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