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All Change in Corporate Insolvency?

Phil Farrelly

The Corporate Insolvency and Governance Act 2020 (CIGA) became law on 26 June 2020. It contains some temporary provisions required as a result of COVID-19 and some permanent provisions that have been in the offing for a while which will make sweeping changes to the current insolvency rules.

The Temporary Provisions

The temporary provisions are aimed at providing businesses with some relief from problems created by the current COVID-19 pandemic including the temporary suspension of wrongful trading laws and the prohibition of the use of statutory demands and winding up petitions.

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Is this the calm before the storm for business?

Phil Farrelly

Is this the calm before the storm for business?

At the start of the COVID 19 pandemic many were predicting that this could be the busiest time ever for insolvency professionals. Early indications seemed to indicate this with many insolvency practitioners  and lawyers experiencing an initial manic period of providing (often free) telephone advice, but most companies now appear to be hunkered down waiting for the lockdown to finish and surviving by utilising the rescue packages created by the Treasury.

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Bermans bolsters its restructuring team with key lateral hires

L-R Martin March, Phil Farrelly and James Whittaker

L-R Martin March, Phil Farrelly and James Whittaker

North West commercial law firm Bermans, which is celebrating its 50th year in business, has made two key appointments to its busy restructuring team. The team, led by Phil Farrelly, welcomed Martin March as a partner and James Whittaker as a Senior Associate.

Martin has more than 20 years’ experience working in the insolvency and restructuring arena and joins the firm from Knights Plc. A well know face across the North West, Martin focuses on transactional and advisory work, acting for business owners, insolvency practitioners and other professionals in relation to business restructuring. He has been involved in a number of high-profile property related insolvencies involving distressed “investor funded developments”. His focus at Bermans will be on corporate transactions particularly property related insolvencies.

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Bermans advise Administrators of Bolton Whites Hotel Limited

The Manchester insolvency team at Bermans advised Andy Hosking, Sean Bucknell and Michael Kiely of Quantuma LLP as Administrators of Bolton Whites Hotel Limited.

The Hotel was a subsidiary of Bolton Wanderers Football Club and operated a 125 bed, 4- star hotel, from premises in the South Stand of Bolton’s Stadium. It provided conference, banqueting and leisure facilities and match day hospitality for the football club from a number of function suites and hospitality areas around the stadium.

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Insolvency – Company Voluntary Arrangements (CVA)

A company voluntary arrangement (CVA) is a process that allows a distressed company to pay back its creditors over a fixed period of time. The company may negotiate to pay a proportion of the debt owed to the creditors as opposed to the whole amount thereby reducing its debts.

In order for a company to enter a CVA, 75% of the company’s creditors who vote at the creditors’ meeting must approve the CVA. Once in place, all unsecured creditors are bound by the terms of the CVA.

Is a CVA right for my business?

As with all insolvency processes there are advantages and disadvantages to a CVA.

A successful CVA can allow a company to restructure its cost bases or make any other necessary changes to improve its financial position while continuing to trade.

It is important to note that CVAs are not binding on secured or preferential creditors (such as employee wages or banks with security). There is also no automatic moratorium preventing creditors from taking action during the application process (unlike with Administration), so a CVA proposal may prompt creditors to consider a more formal insolvency process.

It is important to seek advice to see if a CVA is right for your business.

The process

There are strict procedural requirements and time scales that must be complied with when applying to enter into a CVA. The CVA must be supervised by an insolvency practitioner (IP). The IP plays a key role in the application process.

For a proposed CVA to stand a chance of success it is essential that you seek early professional advice.

Get in touch if your business is experiencing financial difficulties and you would like to explore whether a CVA could assist. We regularly advise companies and IPs in relation to CVAs including, drafting documentation, attending creditors’ meetings , advising on any modifications put forward by creditors or any objections. We also assist clients where a CVA proposal has been unsuccessful or where a CVA has failed.

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Insolvency – Directors’ Disqualification

Company directors can be disqualified if they do not meet their legal responsibilities. When a company is unable to pay its debts the law sets out a number of specific duties that a director must comply with. However, this is likely to be a highly stressful situation and it is not uncommon for directors to be in breach of one or more of their duties for example, by continuing to trade the business when they know it cannot pay its debts.

If this happens they may be disqualified from being a director. Disqualification is for a specified period, between two years and 15 years. During that time the director is prohibited from being a director of a company, or directly or indirectly being concerned or taking part in the promotion, formation or management of a company without the court’s permission. The term ‘director’ is widely defined in the law and can include individuals who do not have the title ‘director’.

The court also has powers to order a disqualified director to pay compensation to the Company for the benefit of its creditors.

The Insolvency Service

When a company enters into a formal insolvency process a director’s behaviour will come under scrutiny. The liquidators or administrators are required to make a confidential report on the directors’ conduct to the Insolvency Service which may investigate you if there has been a report complaint of unfit conduct.

Unfit conduct covers the following:

  • Allowing a company to continue trading when it can’t pay its debts
  • Not keeping proper company accounting records
  • Not sending accounts and returns to Companies House
  • Not paying tax owed by the company
  • Using company money or assets for personal benefit

For many directors the first knowledge they may have that there is a threat of disqualification will be the receipt of a letter from the Insolvency Service.

Next Steps

When operating a distressed business you will be making difficult decisions. Having a clear understanding of what is legally required of you is essential.

If you are concerned that you could face disqualification proceedings or if you receive correspondence from the Insolvency Service regarding your conduct as a director, you should seek professional advice as soon as possible.

We have acted for directors facing disqualification proceedings. We have also advised Insolvency Practitioners (IPs) on whether the actions of company directors amount to a breach of their duties. In addition, we have advised individuals who have been disqualified on their roles post disqualification and we have applied for leave of the court for them to hold office during a period of disqualification.

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Insolvency Litigation

We advise a wide range of stakeholders on litigation that arises as a result of a company being insolvent. This includes actions against the company and its officers as well as actions which the directors, officers or insolvency practitioners (“IPs”) pursue on behalf of the company.

Advising Directors/Shareholders

We advise directors/shareholders on numerous matters including:

  • Directors duties and how to ensure they do not breach them and leave themselves or the company open to claims.
  • Bad debts, property issues and other matters that could give rise to financial issues for the company.
  • Claims against the company and the best action to take.
  • Claims against employees, fellow directors and other stakeholders.

We regularly accompany directors and shareholders to meetings relating to disputes to enable them to obtain immediate advice on the best way forward.

Advising IPs

We advise IPs on all aspects of litigation arising out of insolvency, whether that be bringing a claim on their behalf or defending one.

We also assist IPs with applications to court for directions, administration orders and extensions and approval of their costs.

Advising banks, lenders and other creditors

We regularly advise lenders, suppliers and other creditors on proposed actions against companies which are struggling to pay their debts. Our broad range of experience means that we can give useful commercial advice on the best way to recover debts and the realistic prospects of success. If an insolvency process is the best way forward, we can work with creditors to achieve the best outcome available.

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Insolvency – Security and its enforcement

We regularly advise organisations and individuals on loan arrangements with companies which include taking security over assets in case the borrower defaults on the repayments and becomes insolvent. Clients range from banks, finance companies and private debenture holders to shareholders who have taken security for deferred consideration following a business sale or directors who have lent money to a company and require security.

We provide advice on the different types of security available and how effective each type will be in each situation. We draft security documentation and register this where required and we advise clients on how to enforce the security and the different enforcement options available to them.

Types of security

The main types of security that are granted are charges (fixed and floating) on a variety of assets , mortgages and pledges.

When deciding whether to take security and what security is appropriate, the lender must consider a number of factors.

We have a wealth of experience of advising on all types of security and can offer clients legal and commercial advice on their situation.

If you are loaning money to a company or if you are struggling to obtain repayment of an existing loan please get in touch.

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Insolvency – Liquidation

Liquidation is the procedure through which the assets of a company are realised and distributed to creditors to satisfy the company’s debts in accordance with the Insolvency Act 1986. At the end of this procedure the company is dissolved and no longer exists. The process is often referred to as winding up a company.

Liquidation can happen in isolation, for example if there is no prospect of selling the company, but it can also follow as an exit route for a company in administration. In 2018 over 15,000 companies were liquidated.

There are two types of liquidation; voluntary liquidation and compulsory liquidation.

Voluntary Liquidation

Voluntary liquidation can be achieved in two ways:

Members’ voluntary liquidation – this option can be used if a company is able to pay its debts but the management have decided to wind up the company, for example on retirement.

Creditors’ voluntary liquidation – if a company is unable to pay its debts then a creditors’ voluntary liquidation is the process to follow to wind up the company.

Compulsory liquidation

A compulsory liquidation comes about as a result of the court granting an order to wind up the company, most likely on the petition by HM Revenue & Customs of one of the company’s other creditors.

The Role of the Liquidator

The liquidator has wide ranging powers including to collect and realise assets, to disclaim onerous property, to pursue or defend legal proceedings and to challenge antecedent transactions.

What to do next?

If you think your company is in danger of being liquidated, has received a winding up petition or if you are considering exit strategies that include liquidation, it is important to seek professional advice.

We act for liquidators, creditors and companies in relation to the liquidation process. We can offer practical and commercial advice as well as giving you expert advice on your legal position.

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Insolvency – Receivership

Administrative Receivership

Prior to 2002, creditors holding a charge over a company’s assets (usually a bank), had the right in certain circumstances to appoint a receiver. A receiver was an Insolvency Practitioner who acted on behalf of the creditor. Its duty was to take custody of the company’s assets and exercise powers with a view to satisfying the debt owed to the creditor.

In 2002 the law changed and restricted the use of this procedure to certain types of companies or floating charges created prior to September 2003. For this reason, administrative receiverships are rare (in 2018 there were only a handful in the UK).

LPA Receivership and Fixed Charge Receivership

LPA receiverships and fixed charge receiverships are different to administrative receivership.

Under the Law of Property Act 1925 (LPA), creditors (usually banks/lenders) that hold a fixed charge over property have a statutory right to appoint an LPA receiver.

A fixed charged receivership is when a creditor who has a fixed charge over a company’s assets, has the power under the terms of the security documentation to appoint a receiver.

In these situations the receiver will have powers to help realise the debt owed to the creditor by taking charge of the assets/property. This could mean selling the assets that are the subject of the charge or managing them and collecting the rent for the benefit of the lender.

What can you do if a receiver is appointed in respect of your company’s assets?

We are experienced in advising both lenders in respect of the appointment of receivers, receivers in relation to legal issues arising from the exercise of their powers and companies facing receivership which gives us valuable experience in advising on this specialist area.

If you receive a formal demand from a lender indicating their intention to appoint a receiver, or a receiver has been appointed in respect of your company, it is critical that you seek urgent advice.

We regularly advise companies on the validity of the appointment of a receiver, their rights and the best course of action. We offer practical, commercial advice rather than just restating the law.

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