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Insolvency News Blog

Disability charities could become insolvent due to government demands

A number of leading disability charities could be driven to insolvency following government demands for £400m in back pay for overnight carers. Mike Smith, director at debt advice provider Company Debt, explains the issue.

Mike Smith
Director at Company Debt

Charity chiefs have warned the result could be the loss of vital care for vulnerable people with serious learning difficulties.

The HMRC bill will be split between around 200 disability charities after new guidance was issued on the payment of night-time carers. Many of the charities affected currently support vulnerable people who risk being majorly impacted by the changes, with some potentially losing all the support they currently receive.

Fortunately, the government has said it will waive financial penalties levied on disability charities by HMRC and suspend enforcement action for two months until it has worked out how to ‘minimise’ the impact of the bill.

Charities and firms offering at-home help now have until October this year to figure out how to pay the bill £400m. However, the charity sector said this announcement doesn’t go far enough and warns of a ‘collapse in care’ if the back pay bill remains in place.

What changes have been made?

When the minimum wage was first introduced in 1999, the government issued guidance to disability charities that carers looking after someone with learning difficulties overnight should be paid a flat rate ‘on call’ allowance. This payment of between £25 and £35 would cover the period while they slept.

However, following two tribunal cases in 2015 and 2016, that guidance has now changed. In October last year, the Department for Business, Energy and Industrial Strategy said charities must pay the minimum wage for the whole shift. That means, rather than being paid £25 or £35 for an overnight stay, those aged 25 and over would earn the minimum wage of £7.50 an hour, equating to £60 for an eight-hour sleep.

Rather than making the changes applicable from October 2016, the government has decided charities will face a bill of £400m for six years’ back pay. That’s a cost few charities can afford and one that could potentially push dozens towards insolvency.

Charities support the new guidance

The charities affected by the new guidance are largely in support of the changes, with many believing their staff should receive the higher pay levels demanded by the business department. It is the unexpected demand for back pay by HMRC that has caused the consternation, with many smaller care providers around the country likely to struggle.

Research shows that 99.7 percent of overnight carers sleep peacefully and are not disturbed at night. However, the service they provide is still invaluable and can make the difference between someone with serious learning disabilities being able to stay at home or spend their lives in hospital.

The multiple insolvencies likely to result from HMRC’s enforcement action will be devastating for the sector and for those people who rely on the care provided to maintain their quality of life. With no alternative providers available, the Care Quality Commission is understandably concerned.

Politics is getting in the way

The charities are understandably extremely keen to start talks with the government and prevent what could be a disastrous situation, but at the moment discussions are stalling with the Parliamentary Recess and Brexit thought to be getting in the way.

If no solution is found, there are an estimated 178,000 people with learning difficulties in the UK who could lose the at-home care they need to continue living in their homes and communities. Clearly, it’s vital carers should be paid properly for the incredible job they do, but any action taken by the government should be fair and considered and not put this vital service at risk.

Posted on 2nd August 2017 by Marcel LeGouais • Read comments Permalink


Secondary insolvency proceedings – the industry's best kept secret?

Secondary proceedings, first introduced at the turn of the millennium, are something you rarely hear about. Richard Clark, specialist restructuring and insolvency lawyer at TLT, explains how they can be invaluable for creditors of overseas insolvencies.

Richard Clark
specialist restructuring and insolvency lawyer at TLT

With several recent high profile instances of such proceedings being brought in the UK and a recast EU regulation changing the circumstances under which they can be used, there has never been a better time to explore what they are, their benefits and what has changed.

Most people know about the 2000 regulation (Council Regulation (EC) 1346/2000) through cases concerning the centre of main interests (COMI) of debtors, such as Eurofoods and Interedil. Much less is known about secondary proceedings, which this regulation first introduced. These are confined to the assets of a debtor located outside of the COMI and run concurrently with the main proceedings.

Secondary proceedings will take effect in, and apply the laws of, the country in which they are brought to the business and assets located in that country, and apply the consequences of the laws of the jurisdiction to the insolvency process (under Article 4). In domestic English liquidations, for example, this means that the prohibition against disposal of company assets and the powers to reverse transactions at an undervalue and preferences under the Insolvency Act 1986 will apply.

Secondary proceedings were introduced to afford the office holder in main proceedings a more orderly realisation of assets. But there is much more to secondary proceedings than meets the eye. Despite the “spirit of cooperation” in EU law, games of cat-and-mouse have been played between debtors in the COMI and creditors in other jurisdictions. Debtors attempt to relocate the COMI to take advantage of more benign insolvency laws (England and Wales being a prime candidate), or do not start secondary proceedings overseas in order to avoid the benefits afforded to creditors.

Creditors, by contrast, often commence secondary proceedings in order to secure collateral benefits. For example, in the UK, the commencement of liquidation will trigger the PPF assessment period for defined benefit pension schemes, whereas overseas proceedings do not have this effect. Another benefit is the UK moratorium on disposal of assets, which arises when compulsory winding up proceedings are filed under Sections 127 and 129 of the Insolvency Act 1986.

Bringing such proceedings is not without its issues, however. The petitioner must prove the debtor has an “establishment” in the UK (being a “place of operations where a debtor carries out, or has carried out in the three-month period prior to the request to open main insolvency proceedings, a non-transitory economic activity with human means and assets”), and that the debtor is insolvent.

The recast regulation

The recast regulation (EU) 2015/848 of the European Parliament and of the Council (the 2015 Regulation), which came into force on 26 June 2017, come with a nasty sting in the tail. Article 36 allows a foreign insolvency practitioner to provide an undertaking to UK creditors to treat them as they would have been treated if UK insolvency proceedings had been commenced. Where such an undertaking is given, Article 38(2) means the foreign practitioner can request a court not to open secondary proceedings and take the collateral benefits off the table.

This means creditors must rapidly decide whether their interests are prejudiced by the main proceedings and, if so, commence secondary proceedings as quickly as possible.

Each case will be assessed on its merits, and no doubt a further substantial body of law will follow on the subject. I look forward with much interest to seeing how this plays out.

Posted on 14th July 2017 by Marcel LeGouais • Read comments Permalink


How personal guarantees benefit lenders

Robert Moore, chief technology officer of insolvency practice KSA Group, explains how and why personal guarantees can be risky yet also beneficial to lenders.

Robert Moore
Chief technology officer at KSA Group

Lenders, landlords and suppliers will usually ask for a personal guarantee (PG) from company directors before agreeing to a deal.

It is a way for lenders to protect themselves if the company becomes insolvent. The PG means an individual, such as a company director, is personally liable for the debt, not the company. Even though the loan was used for the business.

This practice is especially common in the alternative finance market and peer-to-peer lending industry. For example, Funding Circle have lent small businesses around £2bn – each loan personally guaranteed. In the event of default, the PG will be called upon.

Of course, many lenders will rarely lend on the basis of a personal guarantee. If the business is sound and has very good prospects, they will lend even if the directors do not have much in the way of personal assets.

However, lenders will want to see a degree of commitment i.e. show they have invested in the business. Sometimes wealthy people will not be approved for a loan as the proposal or even the business itself does not stand up to scrutiny.

Can PGs be risky?

What if a borrower owes many different lenders and has several personal guarantees? There is the risk that lenders are relying too much on the personal guarantee.

No one can foresee the future. If there is a recession of some kind, then many ‘sound’ businesses could fail.

This will have a knock on effect as personal guarantees begin to get called in. This should be relatively manageable if a director has taken one loan, like they would a mortgage, for their business.

The problem is quite a few directors have taken out multiple loans with multiple personal guarantees.

How do we know this?

Because we talk to directors of companies in financial distress and they tell us this is the case.

Is it possible for lenders to find out what proportion of loans a company takes out that are backed up by a personal guarantee?

The simple answer is no. Charges are registered at Companies House, mortgages are registered on properties, credit card companies liaise with other card companies by sharing information on credit check databases but personal guarantees have no register anywhere.

Many of the new lenders claim they have sophisticated systems and algorithms that go beyond the normal credit check, which to extent I’m sure they can, but perhaps these systems can only reveal the situation the business is in now.

Lenders cannot predict the future. One national lender recently told me they were concerned their book was “stacked”. They were worried the borrower had made multiple personal guarantees.

At KSA Group we are looking for partners to assist in setting up a register of personal guarantees that can be searched by potential lenders.

No lender to date has been prepared to release details of clients with PGs to any other lender for obvious reasons. It is a highly competitive market. However, insurers share information on claimants, so why can’t the lenders?

With new technology, like biometric systems, it is possible to hold information on people without any actual personal information being shared.

All that is needed is something unique to the individual and/or business. In the case of school lunches, it is the child’s finger print. For business, it could be something as simple as their email address or company registration number which won’t be shared later on.

Let me explain…

The borrower’s email address or registration number is translated into a unique reference number, plugged into a website or portal, that can be shared with other lenders.

Lots of information can be attached to this unique ref number without giving away the borrower’s identity and personal information – not even their email address.

For example, a unique reference could provide information on the number of personal guarantees a borrower has without needing to state who the lenders are.

Posted on 26th January 2017 by Marcel LeGouais • Read comments Permalink


Post Brexit: How do I recover money from a debtor in Europe?

Partner at specialist debt recovery firm Welbeck Solicitors, Jeremy Boyle, discusses the processes creditors can use to recover debt from businesses in Europe, and how they might change in a post-Brexit world

Jeremy Boyle
Partner, Welbeck Solicitors

So you did some work for a client in Madrid and you are based in England.

In the event of non-payment, how do you recover the sum due to you under your invoice for professional accountancy services provided?

Prior to the regulations referred to below, if a small business or consumer needed to recover money from a debtor in another EU country, such recovery was difficult, time consuming and expensive.

Challenges included differences in national or domestic laws, the cost of hiring legal expertise and translating documents.

Accordingly, the European Commission proposed a Europe-wide expedited regime aimed to ease the recovery of cross-border debts for both citizens and businesses.

Jurisdiction

Dealing as we do on a daily basis with cross-border debts at Welbeck Solicitors, we always advise clients to ensure that they regularly update their terms of business.

For the sake of expediency, one of the main clauses we like to see in agreements reads something along the following lines:

“This engagement letter is governed by and construed in accordance with English law. The courts of England will have exclusive jurisdiction in relation to any claim, dispute or difference, concerning this engagement letter and any matter arising from it”.

It is likely that post-Brexit, the EU member states will still recognise a choice of English law so its perhaps of paramount importance that such a clause is inserted into contracts sooner rather than later.

Presently, there are two useful tools in a creditor’s armoury:

European enforcement order (EEO)

The chances are that if you do have such a clause in your terms of business you can secure a judgment in the English court.

At the very least it will encourage your debtor to engage with you in the English courts which will mean they will probably have to appoint a solicitor to deal with the matter.

Who knows – the debtor may decide, at that point, that it would be more beneficial to pay the invoice rather than hire a lawyer.

If the debtor does not reject the claim, or fails to appear in the proceedings, after initially objecting to the claim and you obtain a judgment – what’s next?

Member states can enforce ‘uncontested’ judgments under the European enforcement order regulation.

A judgment is considered ‘uncontested’ if it comes via a consent order approved by a court or if the defendant did not reject the claim, or failed to appear in the proceedings, after initially objecting to the claim.

If the EEO regulation applies, a creditor may apply for an EEO certificate from the court where the judgment was entered.

Once certified, the judgment is automatically enforceable in the court of any other member state as if the judgment had been made in that particular state.

European order for payment (“EOP”)

Although a judgment on an ‘un-contested’ claim may be obtained as above, in addition as of December 12 2008, use may be made of the uniform procedure called a European order for payment process.

If a European order for payment is obtained, this order is automatically enforceable once a declaration of enforceability has been obtained without having to get a European enforcement order certificate.

An EOP is automatically enforceable in every EU country if it is uncontested by the defendant.

What is the position post-Brexit?

It is unlikely that there will be an immediate change.

The procedure for a member state that withdraws from the EU is set out in Article 50 of the Treaty on the European Union.

It provides for the UK to negotiate a withdrawal agreement with the EU and for the treaties to apply to the withdrawing state after two years, unless there is unanimous agreement to extend that period.

Posted on 22nd November 2016 by Marcel LeGouais • Read comments Permalink


Court of Appeal: Pensions not yet in payment are protected from bankruptcy

On October 7, the Court of Appeal ruled in Horton v Henry that pensions not yet in payment are protected from bankruptcy. Graham McPhie explains the implications for creditors

Graham McPhie
Partner, Moon Beever

The issue at the crux of Horton v Henry was to what extent, if any, is a pension not yet in payment, available to be taken into account on an application by a trustee in bankruptcy for an income payments order?

Relevant factors for the profession before the Court of Appeal decision were:
1. What does “entitled” mean in section 310 Insolvency Act 1986? Does it mean only that money which the bankrupt has elected to take from the pension pot? Or does it include the funds for which the bankrupt could elect to take but has not yet done so?

2. Is it possible for the court to make an order requiring the bankrupt to take certain steps in relation to the pension pot?

3. What are the true effects of the amendments made to section 310 Insolvency Act 1986 by, progressively, the Pensions Act 1995 and the Welfare Reform and Pensions Act 1999? Do they allow only actual payments to be taken into account for income payment purposes? Or is the cumulative effect of those amendments to make the entire pot available?


The Court of Appeal has decided that:
The pension pot remains an asset excluded from the estate and income to which the bankrupt is entitled only applies to a pension fund that is actually in payment.

There is no right on the part of a trustee in bankruptcy to compel a bankrupt to take any particular election in relation to a pension scheme.


The reasons:
1. The clear rationale from the 1995 and 1999 Acts was to exclude pensions from the bankruptcy estate;

2. A trustee in bankruptcy cannot have rights to compel a bankrupt to take an action in relation to an asset that is not part of the estate;

3. It would drive a coach and horses through bankruptcy legislation if this were so;

4. The bundle of rights that the bankrupt has in connection with a pension fund do not naturally fit within the definition of “income” under section 310 Insolvency Act 1986;

5. The bankrupt was only “entitled” to the income that was actually in payment.


The outcome
The decision at least has now settled the issue of the position of pensions and their interaction with the income payment regime of the Insolvency Act.

There has always been a balancing act to ensure that pension pots have a measure of protection.

However, creditors are not prejudiced by this result, because income from the pension can be taken into account for income payment purpose. Plus, excessive contributions to a pension can be recouped in certain defined circumstances.

The 2012 decision in Raithatha v Williamson had cast doubt on this. That doubt has now firmly been quashed.

The Court of Appeal has restored a position that many considered it should be, i.e. that pension pots are protected, and this was the legislative intention.

The court used statutory explanatory notes as an aid to interpretation.

This made it plain that the intention was for a trustee to be able to seek an income payments order on pension plans, which were in payment and not otherwise. These notes had not been referred to in Raithatha.

Ultimately, the court agreed that the aim of the exclusion of pensions from a bankruptcy estate and the income payments regime was that only pensions in payment were susceptible to an income payments order.

The trustee has no right to force an election on a non-bankruptcy estate asset, in much the same way that there was no right to force a bankrupt to work, nor to request a payment from a discretionary trust.

Posted on 9th October 2016 by Marcel LeGouais • Read comments Permalink


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