Directors Planning Conference Update

It was good to get away from the office to concentrate on the wider issues that affect that management of our business.

The decisions made include: -

1. The enhancement of the firm-wide Brand Values
2. An action plan for development of some new legal services (look out for these in the early part of 2010)
3. An action plan for development for the process of delivery of the existing legal services so as to create efficiency saving and drive out further unnecessary costs

Persoanlly, I am excited at the prospects for the coming year and we have less concerns whatever the economic situation the legal services sector takes in the next 12-18 months.


Breeze & Wyles Solicitors LLP Directors Planning Conference

Breeze & Wyles Solicitors LLP will be holding their business planning conference on 21 November to build a development plan for 2010 and introduce exciting new business services


How Twitter will change internet search forever

The name alone instantly polarises reactions, but Twitter looks set to have a far greater impact on our lives than anyone could have imagined.

If you haven't heard the phrase already, Real Time Search is likely to become one of the buzz words of 2010. What it refers to is the ability to search for information published on the Internet as it happens and it is something Twitter has perfected as it sought to organise the tens of millions of tweets sent through the service every day. Consequently Twitter users can immediately see what the trending topics (read: hot topics) of the minute/hour/day/week are, read about developments and get involved.

High profile examples of this during 2009 include the breaking news of Michael Jackson's death, the Hudson river plane crash and the Trafigura waste dumping scandal. In fact multiple heavyweight news organisations now scan Twitter on a daily basis for breaking news and trends in public opinion - all of which is pulling traffic away from traditional search engines. After all, why use Google to find what the weather is like in Madrid when a Twitter search can pinpoint a local who made comment on it in the last five minutes and posted a picture?

The keyword in all this is relevancy. The battle for web supremacy lies in the service which can provide the most relevant information to the user and a key aspect of this is speed. So while traditional search engines work by web search crawls which index them into a logical order, the delay can take hours when the goal is seconds. Consequently the Twitter licensing deal will initially see users Tweets integrated into Google and Bing search results (Twitter users have the right to opt out) and the impact of this is profound.

While what Ashton Kutcher or Stephen Fry had for breakfast is unlikely to trouble CNN, it means the on-location reports from (for example) the Hudson River crash would now break through search engines not the BBC or Reuters. Never before has such people power been harnessed. Of course such a system is also open to great abuse, the recent tasteless fad for spreading fake celebrity deaths on Twitter is a prime example, but with this door now open it is extremely unlikely to ever be closed.

Still not convinced? YouTube and Facebook have recently both announced plans to integrate this technology into their respective sites. So that's Microsoft, Google, Facebook, YouTube (Google by proxy) and Twitter all focused on real time search. Resistance is understandable, but in the long run it's futile.

Follow us on www.twitter.com/breezeandwyles


Business Tax Deferment Scheme: Are businesses masking their true financial position?

Since the introduction of the HMRC tax deferment scheme business managers have been able to retain cash longer within the business. It is clear that this has had a beneficial effect in respect of the longevity of survival of numerous businesses. For some if not the majority this has created an opportunity to redress internal structural issues and trim costs particularly those that have an initial cost element. However, the deferment scheme is unlikely to be a permanent measure and as a result this cash will have to be repaid.

Should a business fail whilst using the scheme, the HMRC’s exposure is greater given that any tax deferred within the business would already have been lost. It has recently been reported that the scheme has created a hole in the HMRC revenues of approximately £20bn. If we are in the middle of a ‘W’ shaped recession and more economic pain is to follow then not only is the £20bn at significant risk but this amount is likely to grow. Can central government realistically afford this sort of loss? With pressure on public finances HMRC will be looking to retrieve this cash or a significant proportion of it so that going forward if businesses begin to fail in ever increasing numbers then its potential loss of revenue is reduced.

There is increasing evidence that the criteria for remaining on the scheme are being tightened by HMRC. So, what can businesses do?

It is now more critical than ever that business managers review their debtor profile, analyse the performance of profit centres and ensure that the business is as lean as possible. When HMRC comes knocking at the door requesting all of the ‘backed up tax’ the hit on cashflow may be fatal to the business. Those who have taken these pro-active steps will be better placed to withstand that cash demand that this will create.


Ideas for an I-phone App

I-phone Apps are in vogue, and a great vehicle for bringing your business to the attention of customers.

If we were to develop legal services Apps, what would people want them to be able to do???


The “rescue culture” and employment law

The statutory protection afforded employees by the Transfer of Undertaking (Protection of Employment) Regulations 2006 (TUPE) is the most recent enactment of successive EU Acquired Rights Directives. Under these Regulations, in circumstances where a business or undertaking is transferred to a new owner, an employee’s employment is protected and is not automatically terminated.

Regulation 4 provides that the employment contracts of the transferor company’s employees will not be terminated upon a transfer. Those contracts will still have effect after the transfer to the transferee undertaking “as if originally made between the person so employed and the transferee”. Accordingly any employee moving to a new company will be transferred under his existing terms and conditions.

TUPE and insolvency situations
Nonetheless, where the transferor company has become insolvent, the position is somewhat different. Regulation 8(7) of TUPE provides that Regulation 4 does;

“not apply to any relevant transfer where the transferor is the subject of bankruptcy proceedings or any analogous insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor and are under the supervision of an insolvency practitioner”

As such, employees (and their contingent liabilities) will not pass to the transferee company and any dismissal will not be automatically unfair. The reasoning behind this provision is to facilitate and promote a “rescue culture” for failing businesses. Evidently, this will be of assistance to businesses facing financial difficulties. Prospective purchasers will be less likely put off by the protection of TUPE which would be otherwise triggered.

The application of Regulation 8(7) was recently examined by the Employment Appeal Tribunal in Oakland v Wellswood (Yorkshire) Limited [2009], a case which involved a pre-pack administration.

Facts of the case
Mr Oakland, the claimant, had been a co-director and 50% shareholder of Wellswood, a firm supplying produce to the catering industry. The company fell into difficulties in 2006 and appointed administrators. The administrators transferred the assets of Wellswood Ltd (OldCo) to Wellswood (Yorkshire) Ltd (NewCo) which had been set up by one of OldCo’s creditors for that purpose. The book debts of the OldCo remained. Some five of the seven employees of OldCo were transferred to the new undertaking, Mr Oakland being one of them.

Upon the claimant’s subsequent termination of employment he brought a claim for unfair dismissal. However, the respondent NewCo argued that Mr Oakland did not have the requisite one year’s continuous service to be able to substantiate such a claim. They argued that Regulation 4 was not applicable in this case as by Regulation 8(7) a relevant transfer had not taken place. The tribunal agreed.

Administration or liquidation? That is the question…
Mr Oakland appealed to the Employment Appeal Tribunal, arguing that the appointment of joint administrators did not constitute the institution of insolvency proceedings nor liquidation. This would only arise where there was a creditor’s voluntary liquidation (or a compulsory winding-up by the court). It was further argued by the claimant that the business continued to trade as before under the guise of NewCo.

The EAT considered the administrators’ Statement of Proposals in depth. It indicated that the administrators had concluded that it was impossible to rescue the company as a going concern. They had therefore applied themselves to the secondary purpose at para 3(1)(b) of Schedule B1 Insolvency Act 1986, namely:

“achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being in administration)”

Further consideration by the administrators indicated that ongoing trading of OldCo in its insolvent position would have led to increased losses further prejudicing the creditors’ position and causing a loss of customers. Accordingly the administrators decided that a pre-pack sale to NewCo was in the best interests of the creditors and a transfer of the assets was concluded on the same day as the appointment of the administrators.

The administrators had also concluded in their Proposals that OldCo would imminently proceed from administration into a creditor’s voluntary liquidation. Due to this finding, the EAT decided that Regulation 8(7) did indeed apply. Mr Oakland did not therefore have the requisite continuity of employment necessary to substantiate his unfair dismissal claim, his employment not having been transferred to NewCo.

Judge Peter Clark in the EAT stated that difficulties had arisen in the instant case as TUPE did not specify which insolvency proceedings are those instituted “with a view to the liquidation of the assets of the transferor”. However, it was his view that this was a question of fact for a tribunal to decide. Whilst an administration would normally fall within the remit of Regulation 4, in this particular case the facts indicated otherwise. OldCo’s precarious financial position had been promptly ascertained by the administrators upon their appointment. The assets were quickly transferred to NewCo in the best interests of the creditors and the appointment of the administrators had been with a view to a CVL following thereafter.

How should administrators view this decision?
The EAT has clearly indicated that every case will be fact dependent and the exception provided by Regulation 8(7) may or may not be applicable to a transfer.

In Oakland, Regulation 8(7) applied as it was evident during the administration that the company could not be sold as a going concern and there would be an eventual liquidation. Clearly such a situation is an advantageous one for a transferee as obligations under TUPE restricting post-transfer changes to employees’ terms and conditions will be avoided. Furthermore such a transferee will be able to choose those employees whom he wishes to retain in the new undertaking.

Nonetheless, administrators should not seize this as an authority to use to their advantage. Indeed, the timely “pre-pack” execution of the transfer in Oakland which took place immediately after appointment of the administrators indicated that OldCo was not traded as a going concern. The sale which took place was accordingly “with a view to the liquidation of the assets”.

It should be noted however that this decision also conversely suggests that the longer a company is traded under any administration then it is much less likely that a Tribunal would make a finding that Regulation 8(7) applies. Therefore, any purchase of a business as an ongoing concern where previously it has been traded by the administrators for any length of time is more likely to afford employees the protection of TUPE.

To obtain the best outcome for a company’s creditors, it still remains the objective of many administrations to wind up a company. However, whilst Regulation 8(7) is intended to promote a rescue culture, Employment Tribunals remain ever vigilant to TUPE avoidance. Tribunals will have to have regard to what the relevant parties intended with regards to the insolvent undertaking. In light of this, administrators and prospective purchasers of businesses must negotiate carefully and consider their relative positions with care and due diligence.


Pre-packaged sales and SIP 16

A “pre-packaged” sale of all or part of an insolvent business may well be negotiated between a seller, the proposed administrator and the buyer on the understanding that the transaction will be concluded immediately upon or very shortly after the appointment of an administrator. Such sales appear to have become increasingly prevalent; this in spite of the legislature’s intended effect of the Enterprise Act 2002, namely to rescue a viable company as a going concern.

Not unsurprisingly such sales have become the topic of rigorous debate amongst insolvency professionals, legal practitioners and academic researchers. The advantages of the transactions for failing businesses are clearly apparent. Where the insolvency process has become public knowledge the value of a business is likely to be diminished; a quick sale may well avoid or limit this. Business continuity can be preserved more effectively, valuable employees may well choose to remain with the company, jobs are thus preserved and contracts, both with other businesses and customers are much more likely to last.

In contrast, critics of pre-pack transactions question their suitability as a means of realising an insolvent business’ assets. The arguments made against the sales are numerous. Interests of unsecured creditors may well be prejudiced in contrast with those of secured floating charge holders. The principle incentive of the transaction may well be to discharge any secured indebtedness and no more than this. As the company is unlikely to have been marketed on the open market, any consideration received might well be less than that potentially achievable. Apparent lack of transparency in these arrangements as well as possible collusion with intended purchasers are similarly cited as areas of disquiet.

“A general summary of these concerns would be that the speed and secrecy which give rise to the advantages claim for pre-packs may too easily lead the directors and the insolvency practitioner to arrive at a solution which is convenient for both of them and their interests but which harms the interests of the general creditors…" (i)

Statement of Insolvency Practice 16
Most recently in Re Kayley Vending Limited [2009] EWHC 904 (Ch), HHJ David Cooke gave an extended consideration to the approach of the courts in pre-pack administration applications. His intention, following an invitation from counsel in the case, was to give guidance following the introduction on January 1, 2009 of the Statement of Insolvency Practice number 16 (‘SIP 16’).

A primary objective of SIP 16 is to increase transparency and accountability. It is well known that the numerous duties of administrators are outlined in the Insolvency Rules 1986 (‘the Rules’). Similarly within SIP 16, administrators are reminded of their duty to all of those affected by a pre-pack sale and of the importance of explaining to all creditors why the intended sale will be in their interest. Insolvency practitioners are also once more soberly reminded of the potential liability for fraudulent or wrongful trading by those who cause the company to incur credit in the period prior to administration.

It is well established by the courts that an administrator can dispose of company assets without a prior meeting with its creditors (ii). However this is not an unfettered power and the duty of administrators to act with propriety are similarly highlighted in SIP 16. Attention is drawn to Schedule B1 of the Insolvency Act 1986 (‘IA 1986’) and notably paragraphs 74 and 75. The former allows an application to court by any creditor or member of the company for unfair harm to their interests. The latter allows the courts to examine the conduct of the administrator or misfeasance.

As outlined in SIP16, paragraph 8, “it is in the nature of a pre-packaged sale in an administration that unsecured creditors are not given the opportunity to consider the sale of the business or assets before it takes place”. Accordingly, disclosure is a principle aim of SIP 16 and the administrator should convene a meeting as soon as possible after his appointment. Paragraph 9 lists some seventeen items to be disclosed to the creditors by him in order that this information can be assessed, analysed and discussed. HHJ Cooke stated in Re Kayley Vending Limited that this disclosure should not be an onerous task for the administrator, in the course of his due diligence and enquiries such information should already largely be in his possession.

The Enterprise Act 2002 and the administration procedure
The fundamental role of the administrator prior to the Enterprise Act 2002 (‘EA 2002’) remains the same. His statutory purpose is to assess the business and its options and to present proposals based on that study to the creditors. The administrator was appointed by the court and prepared an independent report on the relevant company for that court’s information. This regime often resulted in the court, provided with such costly and lengthy reports, often accepting the administrator’s view of the situation.

The post EA 2002 landscape is almost quite the reverse. An appointment is made by the directors or by holders of a qualified charge and is notified to the court along with the prescribed documentation (note that where the application is made by the directors they must give notice to the holders of a qualifying charge). The court simply receives these documents. None of them contain information about the company’s affairs. However the administrator provides a statement on Form 2.2B that the primary objective of the administration is to rescue the company as a going concern.

Where a petition for compulsory winding up has been made (often by an unpaid unsecured creditor), the directors are not able to appoint an administrator and must make an application for instruction by the court. This results in adjournment of the petition. The petitioner is made aware of the application and has the opportunity to oppose it. It is in these circumstances that applications for an administrator arrive at court. The court is therefore under a duty in using its discretion to make such an administration order, rather than allowing the winding up petition, to be satisfied that it is the correct course of action.

By Rule 2.4 of the Insolvency Rules 1986 (‘the Rules’), the evidence required to support an application by the company’s directors must provide proof of the applicant’s belief of the company’s inability to pay its debts. By Rule 2.5 the proposed administrator must make a statement that he believes that there is reasonable likelihood of achieving the purposes of administration (on Form 2.2B). As such there is no requirement clearly specified in the Rules to disclose information regarding the purpose of the administration. It is only by virtue of the ‘general’ nature of Rule 2.4(2)(e) requiring that the affidavit in support should contain “any other matters” which will assist the court to come to its decision as to whether or not to make an order that disclosure of a pre-pack sale can be deemed to become relevant. Information concerning the pending intended transaction would clearly be pertinent.

His Honour’s conclusion in Re Kayley Vending Ltd was that the courts in considering applications where pre-pack sales have been negotiated will be assisted by relevant information made available to them by the disclosure required by SIP 16. Furthermore, the generality of Rule 2.4(2)(e) would require any relevant material concerning the pre-pack to be made available to the court. The courts will be vigilant to recognise and accordingly block those applications for administration orders where it is apparent that the process is being used to disadvantage creditors as already discussed in this article. Of course, each case is to be decided upon its merits and upon the information provided and a judge must decide whether or not he has sufficient information at his disposal to consider the application before him.

Commercially sensitive information
The requirements of SIP 16 may cause situations where commercially sensitive information should be disclosed. The court by Rule 7.31(5) can make an order that such information is not made available for inspection. For practical reasons such information should be separated in clearly identified exhibits. The information can be held by the Applicant’s solicitor against an undertaking to lodge it when required by a further order.

Pre-appointment costs of the proposed administrator
His Honour in Re Kayley Vending Limited made an order under Paragraph 13(1)(f) of Schedule B1 of the IA 1986 that the administrator’s pre-appointment costs are to be treated as an expense of the administration. In so doing he followed the approaches of HHJ Norris QC in Re SE Services Ltd (9 August 2006), unreported and HHJ Purle QC in Aldersley Battery Chairs Limited, also unreported.

His Honour made it clear that the order was discretionary under Paragraph 13(1)(f) as opposed to finding all such costs as costs of the Applicant which must be allowed under Rule 2.67(1)(c). He clarified that it is appropriate to make such a discretionary order where the “balance of benefit arising from the incurring of pre-appointment costs is in favour of the creditors rather than... the management as potential purchasers” (iii)

Conclusion
The aim of issued Statements of Insolvency Practice is to provide clarity of approach with regards to varied aspects of insolvency practice. However, SIP 16 has at its core the aim of clarifying those issues peculiar to pre-pack sales. This is a controversial area of insolvency practice where competing interests have not unsurprisingly caused conflict between those involved in a company’s affairs and its future viability. SIP 16 makes it clear that the interests of all creditors, and not only secured or preferential creditors, must be taken into account when such a transaction is contemplated.

The provisions for disclosure under Paragraphs 8-12 of SIP 16 have clearly been drafted to improve the position of general unsecured creditors. Administrators are similarly reminded that they are to consider the interests of all creditors and members of the company. The analysis of HHJ Cooke in the recent case of Re Kayley Vending Limited has made it clear that relevant information placed before the courts as required by the Rules and SIP 16 will be duly scrutinised by judges when using their discretionary powers to make an administration order. It is in this way that obvious abuses of the procedure can be blocked.

(i) Re Kayley Vending Limited [2009] EWHC 904 (Ch) at paragraph 11
(ii) T&D Industries Plc [2001] 1 WLR 646; Transbus International Ltd [2004] EWHC 932 (Ch), [2004] All ER 911; DKLL Solicitors [2007] EWHC 2067 (Ch)

(iii) Re Kayley Vending Limited [2009] EWHC 904 (Ch) at paragraph 33


Nationwide cuts fixed and tracker rates

With effect from Friday 6 November 2009, Nationwide is cutting its rates on selected fixed-rates and tracker mortgages.

Purchases:
Two year fixed rate available from 3.78% (up to 70% LTV) and two year tracker available from 2.78% (up to 70% LTV)
New customers can borrow up to 85% LTV
Existing borrowers who are moving home can borrow up to 95% LTV
£99 booking fee (payable upfront and non-refundable)
£896 reservation fee

Two year fixed rate available from 3.88% (up to 70% LTV) and two year tracker available from 2.99% (up to 70% LTV)

New customers can borrow up to 85% LTV
Existing borrowers who are moving home can borrow up to 95% LTV
£99 booking fee (payable upfront and non-refundable)
£396 reservation fee

Remortgages:
Two year fixed rate available from 4.37% (up to 60% LTV) and two year tracker available from 3.48% (up to 60% LTV)
New customers can borrow up to 85% LTV on the fixed rate and up to 75% on the tracker rate
£99 booking fee (payable upfront and non-refundable)
£396 reservation fee

Two year fixed rate available from 4.87% (up to 60% LTV)
New customers can borrow up to 85% LTV
£99 booking fee (payable upfront and non-refundable)
No reservation fee


Recession: A Recipe for Survival?

It is unclear from the number of sources commenting on the economy what 2009 holds for business. The Government’s official position is that growth will decline in 2009 by 1%. However, some commentators are predicting a decline of more than 3% and a return to growth only well into 2010. In these uncertain times how do businesses with a profitable core operation ensure survival? Cost cutting exercises are being carried out by many to ensure survival. Staff costs are being reduced but this costs money as redundancy payments must funded. Cheaper supply options are considered. From where will this money come? During the boom, the majority of businesses needed to concentrate on customer and contract acquisition and then delivery to those customers. With banks lending in support of growth book debt recovery was down the list of priorities. Now that there is a stiffening of the credit conditions funding for restructuring is difficult, if not impossible, to obtain and then at penalty rates.

The requirement on the banks that have taken the Tax-payer funded bailout is that they must significantly increase the amount of capital/cash on their balance sheets. As a result the appetite for the banks to lend to businesses is severely curtailed. Decision makers in business are now considering how to restructure the operations to maintain a strong cash-flow position. One certainty is that turnover will continue to reduce for all but a few market sectors. It is certain that in the short- to medium-term trading your way out of the situation, on the same basis is not an option. In the forefront of the decision makers mind is the hope that some competitors will fail. Even though the market will contract further, if a significant number of competitors fail then the share of the market available to the business will be sufficient to guarantee its existence through to the end of the downturn.

A considerable amount of the ‘survival’ money is tied up in debt of which a significant amount may be long-term. As Debt Recovery lawyers we have noticed that the age of debt upon which we are asked to advise is increasing. A small number of businesses have realised that the impact on cash-flow of a robust and rigorous debt recovery process is now a business imperative. By stealing a march on your ‘cash competitors’ you will be taking steps to ensure the business survives. More importantly in your banking relationships greater emphasis is now being placed on your ability to review and analyse the profile of your debtor book. Banks are taking a much greater interest this information for the purposes of assessing the viability of your business.

Strategies and Techniques for Recovery

1. Credit Control
There is now an industry delivering various techniques for debt recovery or collection without the need in the vast majority of cases for the use of courts. The court procedure adds a cost element to the process of recovery which need not be incurred. Using techniques such as telephone contact, letters and personal attendance recent debts are likely to the recovered in full. At the very least an assessment of the debt profile can be undertaken. Credit control is not a simple recovery procedure in the sense that this is all it seeks to achieve. If only it was that simple. In the current economic climate cash-flow of all of our customers is limited. If Debtors are prudent then they will make payment of their debts strictly in priority to their business needs. An assessment of their liability forecasts will mean that the amount they owe you is down the list of priority. The credit control process enables you to move your debt up that list.Furthermore, it enables you to assess whether the debtor is of sufficient financial standing to maintain an ongoing relationship.

2. Statutory Demand
Where there is no likelihood of a dispute about the amount outstanding and that sum is more £750. It may be worthwhile serving on the debtor a Statutory Demand. This process is the preliminary step to bankruptcy or liquidation of the debtor. It focuses the mind of the debtor on the payment of your debt above all others due to the potentially catastrophic impact of not dealing with the Demand.Once the time period for the debtors to apply to have the Demand set aside or make payment has expired you have a number of choices as to how to proceed. Formal insolvency proceedings are an option but this means that all creditors will then have equal rights in accordance with the class of debt that they have as against any funds available to pay the creditors. This may mean that you will only recover a small portion of the amount owed to you by the debtor.

Caution should be exercised when using this process. It is critical that a proper and detailed assessment of the circumstances surrounding the debt is carried out before a Demand is served. The Court frown upon creditors using this process where there is or is likely to be a genuine and serious dispute about the claim. Criticism and costs penalties will arise where there is a genuine dispute as to the claim.

If this article and the points it raises are of interest to you please feel free to contact Brendan O'Brien on 01279 715333 for a confidential and no-commitment chat.


Insolvency: A new species of debt relief for debtors

On 6 April 2009 a new species of debt relief for debtors was created. Affecting debtors with low debts (less then £15,000), surplus income (disposable income of less than £50 per month) and assets (under £300). This is a cheaper option to bankruptcy and does not require the sanction of the courts.

With some similarity to the rules on bankruptcy this may be an avenue to Official Receivers and other appointees where there is limited funding available from the estate to cover the professional and other costs of recovery. Similar rules apply such as Debt Restriction Orders and Undertakings restricting the actions of the debtor during the period of the disability. In the same way with bankruptcy debtors period of disability can be extended if necessary where the debtor has in some way contributed to his/her financial situation.

If you would like to discuss about Insolvency & Corporate Recovery please contact Brendan O'Brien on 01279 715333.