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Insolvency law - who benefits?

Insolvency law - who benefits?

Postby atticus » Tue Jan 23, 2018 11:12 am

I stopped acting for liquidators just over 10 years ago. I found it dispiriting. The figures on a case I have looked at this morning explain why.

Legal action against company director nets £300,000
Other realisations NIL

Total receipts £300,000

Liquidator's fees £78K
Solicitor's fees £90K
Counsel's fee £37K
ATE insurance £60K
Other expenses £25K

Total payments £290K

And the liquidator says that £20K of liquidator's costs are yet to be invoiced.

So exactly how much of the settlement paid by the director will go to creditors of the company? Yes, not a single penny.

In this respect, the insolvency system really is not, as they say, fit for purpose.

It was the realisation that most of the time my work was not leading to money that would be paid to creditors that made me demoralised. I realised that my heart was no longer in it, and that I had to leave that job and work in other areas of practice.

Seeing sets of figures like the above remind me of all that.

Those figures, by the way, are taken from a liquidator's report filed at Companies House that I have looked at this morning. It is a public document. Of course the figures are not presented as clearly as I have done above. I wonder why.

Before you say the director should have settled earlier, my experience was (and still is) that directors often offer to settle early, when liquidator's costs are low(er) and there will be a worthwhile sum to pay creditors. But those offers seem almost invariably to be turned down.

We are going to see something similar with Carillion. There are presently many people rightly questioning payments made to directors when the pension fund was underfunded. How much of anything the directors eventually pay do you think will go to the pension fund? Forgive me for being cynical.

I am far happier doing work that benefits my clients. I do not take on cases where I cannot see a path to that outcome.
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Re: Insolvency law - who benefits?

Postby dls » Tue Jan 23, 2018 11:39 am

It is depressing indeed.

I am not sure what might be done in the alternative.
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Re: Insolvency law - who benefits?

Postby atticus » Tue Jan 23, 2018 12:16 pm

In the light of the above, I thought I would write a kind of basic guide to what insolvency law is all about. This is going to be basic and simplified.

what is insolvency?

The answer is simple …

insolvency is when there is not enough money to go round

That’s right. A debtor – a person/business/company - is insolvent when he owes more money than he can pay. (I am going to say “he” to cover men, women and companies.)

When this happens, the rather simplified legal position is that he is made bankrupt or goes into liquidation. His assets are sold, cash due to him is collected. The money raised is then paid to his creditors, according to what they are owed. They each get the same percentage of the money available as the debt owed to them bears to the total of the debtor’s overall debts. Of course it is not as simple as this, not least as it is not often possible to sell assets/collect debts at full book value and the fees charged to collect money will often take a huge part of the money collected (see first post in this thread).

This principle of equal pro-rata payment underlies the theory of insolvency law. Everything flows from it.

But we then need to understand aspects of insolvency law that relate to efforts to bypass this principle.

First, security. Banks and major suppliers may require a charge for mortgage over property as security for a loan or credit. They do not want to be an ordinary unsecured creditor sharing equally in the value of the debtor’s realised assets. So they take security. This puts them in the position of having the first bite at the value of the charged property, ahead of unsecured creditors.

Second, you get the debtor who realises that he or his company is heading into insolvency. Sometimes he puts property or other assets assets into “safe” hands to put them out of reach of a liquidator/trustee in bankruptcy. Or sometimes he arranges to pay off particular debts ahead of others, for example to family members or to people with whom they will want to do business when they set up a new venture.

Insolvency law has mechanisms to deal with these types of situation. Certain dealings in the usually 2-5 years before liquidation or bankruptcy can be set aside by a Court. If a debtor, within a specified period of time before bankruptcy liquidation has disposed of an asset at less than market value (very often for no payment) or has paid a creditor so that he is in a better position than he would have been in a bankruptcy/liquidation (making other creditors worse off), then the Court can undo that transaction. The creditor who has been paid or the person holding the asset can be ordered to pay money to the liquidator/trustee in bankruptcy.

Third, Liquidators can also bring an array of claims against company directors under the Insolvency Act including for “fraudulent trading” or “wrongful trading”: these are variations on a theme of trading while insolvent and causing a company’s debts (i.e. losses) to increase whether knowingly or recklessly.

But I am cynical about how these things actually benefit creditors. Too often too much of what is paid is taken up in fees of the insolvency practitioner and his lawyers.
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Re: Insolvency law - who benefits?

Postby Hairyloon » Tue Jan 23, 2018 4:49 pm

It is a racket.
All the more so when you consider how many companies operate on the basis of cashflow and that works perfectly well as long as everything keeps moving.
Take any given instant in time and the liabilities may outstrip the assets but it doesn't matter because this payment should come in before that payment is due...
Stop the clock at the wrong tie and it all falls over.

And that is without looking into any nefarious connections that there might be.
With the eye-watering sums that can be made from a company's collapse, and the fact that so many directors and investors have their hands in each others' pockets and fingers in each others' pies, it is almost a wonder that it doesn't happen more often...
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Re: Insolvency law - who benefits?

Postby atticus » Tue Jan 23, 2018 5:05 pm

Indeed. As to cashflow, the collapse of Carillion, with their 120 day payment terms (shocking in itself) will cause a cascade of insolvencies amongst their contractors and suppliers.
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Re: Insolvency law - who benefits?

Postby Hairyloon » Tue Jan 23, 2018 6:12 pm

The insolvency services and disaster capitalists will be coining it in hand over fist... no doubt mostly through offshore tax havens.
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Re: Insolvency law - who benefits?

Postby diy » Wed Jan 24, 2018 9:33 am

Is there anything to stop a director inviting creditors to make a deal pre-liquidation? I guess from his point of view, he may not care. But could the system not encourage a failing company to wind up and offer settlement, where the estimated company assets are below a certain value?

I read the guide and have a few questions, if I may..
1. If the company doesn't have enough money to pay liquidators, what happens? is there some sort of insurance?
2. If the company bosses try to ring fence their severance payments (as has been reported in one recent case) does that expose the directors to a personal claim?
3. If all those fees are due anyway, I don't understand the benefit of After the event insurance - or does that answer question 1? i.e. its covering the risk that there isn't enough money left to cover liquidation.
4. knowing a bit about legal firms billing processes (having written software for one or two), I'd be suspicious, that the fees earned were designed to consume the pot. What governance is in place to prevent that? Do they have any kind of duty to be value for money to the creditors - i.e. not spent £5k in fees, finding £3k of funds,
My suggestions are not legal advice
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Re: Insolvency law - who benefits?

Postby atticus » Wed Jan 24, 2018 1:42 pm

diy wrote:1. If the company doesn't have enough money to pay liquidators, what happens? is there some sort of insurance?
The liquidator and his lawyers work speculatively, expecting to be paid out of anything they get in. There is no insurance.
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Re: Insolvency law - who benefits?

Postby atticus » Wed Jan 24, 2018 1:43 pm

diy wrote:2. If the company bosses try to ring fence their severance payments (as has been reported in one recent case) does that expose the directors to a personal claim?
Potentially, yes.
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Re: Insolvency law - who benefits?

Postby atticus » Wed Jan 24, 2018 1:44 pm

diy wrote:3. If all those fees are due anyway, I don't understand the benefit of After the event insurance - or does that answer question 1? i.e. its covering the risk that there isn't enough money left to cover liquidation.
ATE insurance covers the risk of losing the claim against the directors (or whoever) and having to pay his costs.
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