LUPC Conference: 26 March 2015 Dealing with suppliers in financial difficulty Ed Husband, Partner
Overview Case study: the administration of Swets Information Services Limited ( Swets ). What can we learn from this and from other cases? Spotting the early signs of financial distress. Precaution is better than reaction. The different types of insolvency procedure; the key differences and what this means for you. What do you do if one of your key suppliers fails?
Insolvency News: 14 October 2014 UK information services provider enters administration 14 October 2014 The UK subsidiary of Netherlands-based information services provider Swets Information Services B.V. has entered administration. Swets Information Services Ltd, based in Abingdon, has followed its parent group into administration, resulting in 120 redundancies. David Taylor and Matthew Wild of Baker Tilly were appointed as joint administrators to the company on 9 October and are currently seeking a sale of the company s customer list. Administrators also confirmed a skeleton staff has been retained in the UK in the short term. Swets, which provided information and content management services for media and publishing houses, filed for bankruptcy in the Netherlands last month. The group had operations in 26 countries globally, all of which are being placed into the relevant insolvency procedures in their respective jurisdictions. The company s most recent annual report (to the year ending 31 December 2013) described 2013 as a turbulent year for the group, as both net sales and cash flow fell. A statement issued by the company upon entering bankruptcy said: We are currently reviewing various options in order to preserve as much of the inherent value of the business as possible and to continue the business. Please note that at this time we also review the consequences of this bankruptcy on the activities of Swets Information Services B.V. and its foreign subsidiaries.
background Long established: incorporated 11 March 1920. Specialised as intermediary between publishers, libraries and other academic institutions. Published accounts for 2012 showed a turnover of 91m. Part of a larger worldwide group in 26 jurisidictions, with parent company based in The Netherlands. One of three favoured contractors appointed under LUPC framework agreement dated 24 April 2012. SWETS was Most Economically Advantageous Tender. But within 30 months of its appointment to the framework agreement, the worldwide business had failed.
Spotting the early signs Most companies exhibit signs of financial distress long before their formal failure. Some examples: Requests for extension of credit terms and/or price reductions Slower payment or default on invoices CCJs or other petitions advertised against the company Late filing of accounts Published accounts are qualified or have unusual entries Low profit margins Director resignations Drop in quality of service Frequent changes of auditors and/or accountants Market gossip!
So what should you do if you are concerned (or in any event)? Carry out a credit check. Access to Creditsafe (www.creditsafe.co.uk) is a free benefit to all members of LUPC. Get your contract right. Ideal contractual terms would include a number of protective provisions including: Paying advance payments into an escrow account/ trust (this was offered by the other two participants in the FA); Guarantees from other group companies, directors or third parties; Securing your debt? Effective termination provisions (3 months in any event but more immediate on an insolvency event) (clause 17 of Swets Model Terms). Enforce your contractual rights, especially in relation to escrow or trust arrangements. Shorten your credit terms or withhold payment.
But what if the supplier goes into insolvency? The different procedures Administration Liquidation: compulsory, creditors voluntary ( CVL ) and members voluntary ( MVL ) Administrative receivership Company voluntary arrangement ( CVAs ) Bankruptcy and IVAs All governed by Insolvency Act and Rules
Administration A rescue procedure, aimed at the survival of the company as a going concern Larger insolvencies invariably administrations, including Swets. Can be initiated by a Qualifying Floating Charge holder, the company or creditors (although banks prefer company appointments). No longer necessary to enter administration by way of court order. Key features: ability to trade and the company has the protection of a moratorium against legal and insolvency proceedings by creditors. Where possible the administrator will seek to sell the business in whole or in part as a going concern, often as a pre-pack (parts of Swets business were sold and liabilities left behind).
Terminal procedures for companies Aim is to realise company s assets and distribute to creditors Liquidator s powers directed towards the protection and realisation of assets; very rare for liquidators to trade companies in liquidation Assets sold on break up basis with negative effect on realisations Compulsory = creditor driven Voluntary = company driven MVL = solvent = rare good news for creditors! CVL = insolvent Liquidations key features
Another survival procedure. An agreement between the company and its creditors by which creditors agree to accept dividend in satisfaction of debts. Approved by 75% of creditors by value. Once approved all unsecured creditors bound by terms of CVA (which will preclude court action). Opportunity for creditors to amend details of CVA. CVAs often fail, leading to liquidation. CVA
How do you know? Can be difficult as communication is often understandably poor. Good deal of speculation on Swets. Speak to your contacts at the company. Telephone Companies Court (0906 754 0043) London Gazette (www.gazette-online.co.uk) Companies House (www.companieshouse.gov.uk/webcheck) - verify date of order and name and address of office-holder For individuals, www.insolvency.gov.uk/bankruptcy/bankruptcysearch Check the company s website.
Business failure and job losses. Assets realised sale of business or assets; collecting debts. Assets distributed: Fixed charge Office holder s fees and expenses Preferential creditors Floating charge Unsecured creditors The impact of insolvency If insufficient funds to pay a whole class in full, dividend paid pari passu. But, this relates only to company assets, not to assets held on trust for another or owned by another, hence the importance of ROT for suppliers of goods. Prescribed part: ring fence up to 600k for unsecured creditors.
Enforce your security or guarantee rights. So what can I do post-insolvency? Consider set-off mandatory in liquidation (IR 4.90), but also contractual and common law rights ( see clause 10.6 of Swets Model Terms). Consider counterclaim and/or withholding payment. Consider take assignment of other parties debts to increase set off sums? Negotiating position with IP are they reliant on the provision of your ongoing services? Future liabilities to be paid in full as administration expense. Consider joining forces with other creditors (e.g. local authorities in relation to Icelandic banks) or join creditors committee Litigation? Rarely worth while and consider administration moratorium.
Enforcing your agreement Terminating your agreement. Not automatic survives insolvency, unless express. Are your termination provisions effective in the event of insolvency? Common for older clauses to refer to administrative receivership or the making of an administration order. Defective if out of court appointment (see William Hare Ltd v- Sheppard Construction, 2010) Can apply for specific performance where damages would not be an adequate remedy. Generally need to have proprietary interest in asset for Court to enforce. eg courts have required completion of contract for sale where contracts exchanged, as purchaser already had interest in asset Courts reluctant to interfere in commercial decisions of office holders
Trust claims and advance payments in insolvency Only assets of an insolvent company are available to its creditors. Can payments you have previously made be categorised as being held on trust? If so, may be entitled to repayment in full. Express trusts. Constructive trust where law considers that insolvent company should no longer hold in good conscience and no sale to BFPFVWN Resulting trust where paid for specific purpose (Quistclose) or mistake (eg payment to stranger for no consideration). Argument in relation to advance payments that no consideration?
Supporting the IP? If you have concerns about the conduct of the company, office holder has power to: report on conduct of director, potentially leading to his/her disqualification; bring misfeasance and wrongful trading claims against the directors; and seek the repayment of monies made by the company in the twilight zone But, will often need creditor support. Often limited appetite for this. Consider instructing another IP to attend at creditors meeting if you have concerns about the proposed IP?
Ed Husband Partner ehusband@vwv.co.uk 0117 314 5233