Q: I want to buy a business that’s about to go bust. Do I have to pay the claims of its employees?

A: It depends on:

• what you buy (assets alone or a business);
• the type of insolvency procedure (was it “instituted with a view to the liquidation of the assets of the transferor”?).

The Transfer of Undertakings (Protection of Employees) Regulations 2006 (TUPE) generally mean that:

• employment obligations move to the purchaser when a business is transferred; and
• rights and obligations relating to employees who were dismissed in connection with the transfer are also transferred to the purchaser (unless the dismissal was for an economic, technical or organisational reason).

However, in an insolvency “instituted with a view to the liquidation of the assets of the transferor” these obligations do not automatically transfer to the purchaser.

A challenge is that most businesses are transferred using administration and the obligations probably do then transfer to the purchaser.

Other pitfalls are that even if you purport to buy assets alone and there are elements of business continuation (intellectual property transfer, some employees rehired, same product/customers etc), the Employment Tribunal may find that it was a business transfer.

Liquidation may not help business continuity, but it can help avoid employment liabilities for a purchaser.

Two conclusions:

• be prepared to factor the cost of employment liabilities into your price calculation; and
• make sure there’s an experienced insolvency adviser on your team early.

 

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Repossession and the Limitation Act 1980 provoked several comments on our earlier post Repossession statute barred! Legal readers especially are invited to click on the link and share their views.

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The credit crunch is hitting mainland Europe, raising insolvency rates, according to Legal Week's recent article NautaDutilh launches 20-strong Benelux team.

Most UK insolvency practitioners felt the economy starting to bite in midsummer and all the signs here are that, despite the oil price receding, corporate insolvency will loom for many this autumn.

For some thoughts on avoiding insolvency, try our earlier post Find a Business Angel.

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The number of companies facing insolvent liquidation rose by 15% during the second quarter of 2008, as compared to the same period last year, as the credit crunch continues to impact upon the UK economy.

Figures from The Insolvency Service published on 1 August 2008 revealed that there were 3,560 compulsory liquidations and creditors' voluntary liquidations (CVLs) in England and Wales during the second quarter of 2008. This was made up of 1,324 compulsory liquidations, an increase of 19.8% on the previous quarter, and 2,236 CVLs, an increase of 7.3%.

Further evidence of an economic slowdown was highlighted by 1,246 other corporate insolvencies, comprising 177 receiverships, 938 administrations and 131 company voluntary arrangements, an increase of 63% compared to the same period last year.

These numbers support the findings of a recent survey (July 2008) undertaken by R3, the trade body for insolvency practitioners, which showed that 90% of respondents believed that a rise in business insolvencies would hit the UK in 12 months’ time, indicating that the worse is still to come.

The Insolvency Service figures support this survey and highlight retail, construction, property, leisure and manufacturing among the worst affected sectors as consumers rein in spending in the face of rising inflation rates and a deteriorating property market.

Offering his reaction to the latest statistics, Steve Smith, Head of Insolvency at Mercer & Hole comments: “These are very worrying figures and do not bode well for the UK corporate sector - particularly for small to medium-sized businesses which suffer most in a downturn. Of particular note is the rise in compulsory liquidation numbers which suggests that creditors are now seeking to recover their debts more aggressively as other forms of recovery become less effective.” 

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The number of individuals becoming insolvent fell 8.3% to 24,553 in the second quarter, surprising analysts who expected to see an increase as evidence that higher living costs were impacting upon people's finances.

Individual insolvencies were made up of 15,297 bankruptcies (down 6% on the same quarter a year ago) and 9,256 Individual Voluntary Arrangements (IVAs) (down 12%). Interestingly there was a pronounced shift towards debtors' petitioning for their own bankruptcy as, in the second quarter of 2008, 84% of bankruptcy orders were made on a debtor’s petition.

Nevertheless, we must look at these statistics with an element of caution as they may have been skewed by a rise in the number of people entering into informal debt management plans to try and head off insolvency.

Indeed, the decline in individual insolvencies is generally perceived to be a result of a reduction in the number of people entering into IVAs as lenders are more reluctant to accept IVAs and are imposing stricter terms. This has been fuelled by reports over the past year of banks raising their hurdle rates - the amount of money they are willing to accept from borrowers to settle their debts.

Steve Smith, Head of Insolvency at Mercer & Hole, comments: “Although the 'trickle down' effect of the credit crunch hasn’t truly hit personal insolvency figures, over the next 12 months the situation seems certain to deteriorate as consumers in the UK rein in their lifestyle borrowings. The downturn in the housing market, soaring commodity prices and the credit crunch will continue to take their toll.”

 

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In some jurisdictions not only may a bankrupt's mail be redirected to his trustee or insolvency administrator but so may his e-mails (eg Article 99 German Insolvency Code).

I'm not aware of this happening in England & Wales because s371 Insolvency Act 1986, which enables the court to order re-direction, does not extend to electronic communication.

But if as an insolvency administrator you have obtained a local court order that e-mails arriving in the bankrupt's e-mail account are bcc'd to you, how do you implement it, particularly for webmail or other accounts hosted outside your jurisdiction? Who would you serve the order on - does it have to be the entity with whom the bankrupt contracted for the provision of e-mail services or could it be his local internet service provider?

I don't have an answer, so please comment or otherwise let me know if you do!

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The credit crunch has made it more important than ever for business owners to address
viability and solvency issues early. Delays in taking remedial steps now will only result in
more pain and fewer options, and will give you less time to act later on. 

Directors and managers concerned about their business should carry out an ongoing and in-depth assessment of the company, asking themselves the following five key questions:

1. Where can I improve cash generation or legitimately defer outgoings in order to
   improve the retention of cash in the company? 
2. Where are the main risks in the business? What would I do if I lost that valuable
   customer, or the bank were to withdraw its support? 
3. Are there any costs which can be moved from being ‘fixed’ to ‘variable’? 
4. Are there any areas of business that should be pruned back or sold? Is that
   person, department, service or product adding real value at this point in time? Can
   I afford to take a long term view without increasing risk? 
5. What can I do to cut my drawings from the business?

You need to be brutally honest with yourself. If you are at all unhappy with the
answers to these questions, you should re-assess all of your available options, which could
include restructuring the business using formal or informal routes. Now is not a good time to
defer that re-assessment.

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We all know how to find a good service provider - personal recommendation. But what if you want help now and don't know who to ask?

One piece of good advice is to be wary of paying someone up front to find an investor for you - see Corporate Insolvency - Ecademy for an independent consultant's view. Any good professional will discuss your business with you first without charge and look to establish whether a business angel is likely to invest. I certainly would, and I would be delighted to help you find an investor if that's the best thing to do in all the circumstances. Of course, the right solution may be corporate or operational restructuring, or even the use of an insolvency process, and you may be advised to spend money with the professional to implement that optimum solution.

By the way, adding to the Ecademy post, if you want to find an insolvency practitioner (not that you need to look any further if you're reading this),  the most user-friendly search tool is at the website  of R3, the insolvency practitioners' trade body,  here.

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The High Court insists on payment of the bankruptcy debts and expenses being made in full before granting an annulment order, whereas in the county courts orders are often granted based upon undertakings to pay.

In the case of Halabi v London Borough of Camden and another Mrs Halabi applied for an annulment under section 282 of the Insolvency Act 1986 on the basis that the debts and expenses of the bankruptcy had been paid or secured. Her solicitor gave an undertaking to hold the funds in his client account until the annulment order was made by the court.

It was ruled that 'paid' in section 282(1)(b), taken together with rule 6.211(2) Insolvency Rules 1986, did not include the provision of security for a debt by way of undertaking. The wording of section 282 was clear that the bankruptcy debts and expenses had to have been actually paid, not just that the bankrupt's solicitor undertook to pay them. The court did however have the power to specify that an order for annulment should not take effect until a later date. If this method were used the operation of the order would be suspended until the conditions specified by the court were satisfied. It was ordered in this case that the annulment should not take effect until the Official Receiver had notified the court that the bankruptcy debts had been paid.

The ruling should have the effect of ensuring that in future annulments will not be granted until payment of the bankruptcy costs and expenses has been made in full, regardless of in which court they are heard. Debtors and their advisers should take note.

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