Many struggling businesses 'now technically insolvent'

A new report says many companies are now technically insolvent and could be forced out of business by an increase in interest rates. Marcus Brown says the report emphasises the need for firms to get tougher over debt collection to avoid being dragged down.

The insolvency trade body R3 surveyed 500 companies when compiling its Business Distress Index.

It found that one in six businesses ind it difficult to pay invoices on time.

R3 President Steven Law said: "The increase in businesses struggling to pay bills on time is worrying as this is the technical definition of insolvency.

"This coupled with an increase in the number of businesses using the maximum overdraft facility, which stands at 1 in 5, suggests that many businesses are running on empty. For many, an increase in interest rates could push them over the edge."

The figures are not only alarming for the businesses involved but also for those who trade with them.

They emphasise the need to take action to recover unpaid debts as soon as problems arise. If you delay, you could see debtors going out of business before they pay your invoice.

Even at the height of the recession, many firms were reluctant to get tough over late invoice payments for fear of damaging their relationship with the customer - even though that customer was racking up significant debts.

Many firms got their fingers burnt that way and are now far less shy taking legal action as soon as debts start to mount up and polite requests for paymrent are ignored.

A simple letter from a solicitor is often enough to ensure payment.

The realisation that you are now taking the matter seriously means that debtors usually take notice immediately and settle very quickly.

However, if the debtor still doesn't pay after sending a solicitors letter then a firm can take Court action to recoverthe debt, interest on the debt and some of the legal costs.

Firms should not be afraid to pursue these options. It's only natural to want to maintain a good relationship with a customer but at the same time, a customer who doesn't pay is not worth keeping.

For more information call Marcus Brown on 0115 988 6728.

Spread Christmas cheer but avoid costly claims

The problem of compensation claims arising out of office Christmas parties are now legendary and yet employers continue to get caught out every year. Laura Forster looks at how to ensure everyone has a good time without landing the firm in trouble.

In spite of the recession - maybe even because of it - many companies are pressing ahead with their Christmas Party as usual this year.

Hopefully most parties will pass without any incidents but some could lead to expensive claims so it is sensible for employers to take a few precautions.

Discrimination and harassment claims arising out of unwanted remarks are an obvious risk. With the alcohol flowing at an office party it only takes one member of staff to go too far and there could be a problem. To make matters worse, the offensive remarks don't even have to be made at the official company function. Something said at the pre-party drinks in the local pub could also land the employer in trouble as discrimination laws could still apply.

The answer is for firms to make sure their anti-discrimination policies are up to date and that every employee knows about them. Getting staff to read and sign such documents would also help when defending any future tribunal hearing.

Providing food, soft drinks and keeping a limit on the free bar will also show that a firm is adopting a responsible approach.

Remember also that third party harassment could now be an issues. For example, you could be held responsible if your employees are pestered by clients or suppliers that you invite to the party. This could be made worse if incidents have happened in the past and your firm hasn't done enough to deal with them.

Transport is another issue that still catches people out. You have a duty of care to your employees and sometimes you even have to save them from themselves. This involves such things as trying to prevent them driving home after they've drunk too much. You obviously can't order people not to drive but you need to show you acted responsibly. Handing out phone numbers of taxi firms or ending the party while public transport is still running would help your position enormously if a case ever ended up in court or tribunal.

The much maligned health and safety laws also need to be taken into account. A little forethought can prevent a lot of problems. For example, don't ask staff to put up Christmas decorations and then leave them to spin precariously on office swivel chairs. Make sure that decorations don't cover emergency exit signs and are not placed too close to heat sources.

It's hard for the boss to win at this time of the year. If they don't throw a party they can be branded a scrooge. If they do then they run the risk of getting into trouble if things get put of hand.

Each year the law seems to get a little more complicated and the employer's duty of care seems to increase with it/ It's essential to be pro-active and get the right policies in place. Otherwise the Christmas party could produce a painful, expensive hangover.

For more information please contact Laura Forster on 0115 947 0641 or email lforster@andersonssolicitors.co.uk.

Ruling could help businesses but hurt landlords

Businesses that lease offices in converted houses may now be able to buy the freehold at reduced rates following a court ruling. Peter Sutherland explains how the decision could be bad news for landlords but an unexpected gift for their tenants.

The simple question of "what is a house?" could be worth millions of pounds to Nottinghamshire landlords and their commercial tenants.

It's important because the law allows tenants in blocks of flats to get together and exercise their right to collective enforcement. This is a legal mechanism that allows them to buy the freehold of their homes on favourable terms as long as there is a majority in favour.

It usually applies to private tenants but recently three small businesses who leased offices in converted town houses argued that it should apply to them as well. They knew that if they succeeded they would be able to buy at prices way below the going rate on the open market.

The tenants argued that the buildings they occupied were still essentially houses and sought to exercise their right to collective enfranchisement under the Leasehold Reform Act 1967.

The landlords objected saying the Act did not apply in this case because the buildings were used exclusively for business purposes.

The case went all the way to the Court of Appeal which has ruled in favour of the tenants. Lord Neuberger said the definition of house could "extend to buildings exclusively used for business purposes".

He said: "Once could, it seems to me, quite naturally describe a building built as a town house, which had subsequently been internally converted into offices, as a 'house used as offices': hence it would 'reasonably be called' a house, even though it was not used for residential purposes."

The ruling could lead to several enfranchisement claims from commercial tenants who will see it as an opportunity to buy the freehold of their offices on favourable terms.

Nottingham could be among areas most affected as it contains so many offices situated in properties originally built as houses.

For more information please contact Peter Sutherland on 0115 988 6714 or email psutherland@andersonssolicitors.co.uk

Don't let late payers get away scot free

Businesses throughout the UK and Europe have written off a staggering £245bn over the last year because of late payments. Alex Brooke-Smith explains some simple steps that will help firms recover money that could be vital to their survival.

It's surprising how many firms are prepared to write off debts than pursue them to enforce payment.

The debt buyer Intrum Justitia surveyed 6,000 companies across Britain and Europe and found that the amount of debt that had been written off rose by £24bn to £245bn over the last 12 months.

One of the reasons for this is that many businesses, especially smaller ones, feel they simply don't have the time or the expertise to deal with the problem. This obviously has a major impact on their cash flow and the overall health of their business, yet there is so much they can do with minimal effort if they are prepared to exercise their legal rights.

It's even possible to turn credit control into a profit making exercise because under the Late Payment of Commercial Debts (Interest) Act 1998, firms are allowed to charge interest on overdue invoices. This punitive charge is currently 8% above base rate. They are entitled to levy a statutory late payment fee between £40 and £100 depending on the size of the debt.

The extra money recovered in this way is often more than enough to cover the cost of pursuing the debt.

The first step may be to simply ask your solicitor to draft a letter requesting payment and outlining what action may be taken if the debt is not settled.

Most companies will pay up immediately when they see you are serious about exercising your rights but for more hardened cases, it may be necessary to initiate legal proceedings. This steps up the pressure even further and often results in payment before the matter gets to court.

Firms should be aware that they are protected from unilateral changes to contract terms such as when a customer suddenly decides that they are going to pay less than the amount agreed.

This can often happen with larger business customers who feel they can flex their corporate muscle and buying power. The supplier is entitled to insist on sticking to the original terms. This is basic contract law which cannot be overturned on the whim of one of the parties involved.

If one of your business customers does decide to pay less than agreed then you will almost certainly be able to claim interest on the outstanding amount and impose a late payment charge under the Payment of Commercial Debts (Interest) Act 1998.

You should be cautious if you are tempted to continue with contracts after you have received a letter from the customer informing you that they are going to pay less. If you go ahead and fulfil the order it may suggest that you have accepted the new terms.

Late payers put suppliers in a difficult situation and the dilemma is often one of balancing the need to be paid on time with the need to maintain a good relationship with an important customer, but for those who feel the time has come to act, the law offers a considerable level of protection.

For more information on Debt Recovery please contact Alex Brooke-Smith on 0115 988 6707 or email abrooke-smith@andersonssolicitors.co.uk.

Landlords getting tougher over break clauses

Extreme times lead to extreme measures and the world of landlord and tenant is no exception. Peter Sutherland looks at why disputes over break clauses are on the rise.

The standard break clauses to be found in most commercial tenancy agreements have often led to disputes, but the numbers have risen dramatically over the last few years.

The recession is the main reason, of course.

Declining orders mean more and more firms are using the break clause option to downsize or just find a better deal elsewhere. In their haste to depart and save money, tenants may not be too careful about meeting all the conditions of the lease, particularly relating to maintenance and repairs.

The landlord is just as likely to be money conscious. In better times, a tenant departure might only be a temporary inconvenience. Now it can be the difference between staying afloat or going out of business.

Faced with the prospect of empty premises they have very little chance of re-letting. landlords increasingly respond by poring over the small print of the tenancy agreement to make sure everything is in order.

It means there have been several recent cases where landlords have challenged break notices for technical reasons.

One example involved a tenant who tried to exercise the break clause by giving the landlord six months notice as required by the tenancy agreement. The landlord refused to accept it because the tenant had failed to also give notice to the property's management company - another requirement of the lease.

The tenant argued this was a mere technicality. The case went all the way to the Court of Appeal where the landlord eventually won and prevented the break clause being exercised.

In another case, a commercial tenant was prevented from terminating a lease because it gave notice under the name of its new parent company rather than its original name which was still on the tenancy agreement. This was in spite of the fact that the landlord had been informed of the change of name and rent invoices were sent to the parent company.

Conditions relating to vacant possession, repairs and maintenance can also lead to disputes as landlords take a tougher stance. They need their properties to be in a fit state so they can re-let them as soon as possible.

It means that if work is not carried out to an acceptable standard or is not completed exactly on time then the landlord may refuse to accept the break. Some tenants try to prevent any problems by asking the landlord for guidance on work required but the landlord is under no obligation to help.

Landlords who do choose to help should make it clear that any information they give does not over-rise the need to comply with the terms of the lease.

Both sides are entitled to protect their interests and so now, more than ever, both sides must try to make sure they comply exactly with every detail of the terms and conditions in the lease. Failure to do so could prove very costly.

For more information please contact Peter Sutherland on 0115 947 0641 or email psutherland@andersonssolicitors.co.uk.

Will your insurers pay up if catastrophe strikes?

The case of a landlord who lost thousands of pounds through fire damage because his insurance policy turned out to be invalid highlights the dangers of ignoring the small print. Marcus Brown looks at how property owners can ensure they are fully protected.

How many of us could honestly say that we pore over every detail when it comes to insurance policies? Or maybe we're aware of our obligations at the time we take out the policy, but then we forget as time goes by and fail to ensure it remains valid.

Unfortunately, you can lose out when catastrophe strikes and the insurance company refuses to pay out, as in the recent case of landlord Qayyum Ansari who had insured one of his properties with New India Assurance.

When the building was later ravaged by fire the insurers refused to pay out. It pointed to a clause that had asked if the premises were protected by a sprinkler system. At the time the policy was taken out it had been so Mr Ansari answered yes.

However, the tenant who rented the building from Mr Ansari later disconnected the sprinkler system and it was inoperative at the time of the fire. The insurers were able to point to a clause in the policy which stated: "This insurance shall cease to be in force if there is any material alteration to the Premises or Business or any material change in the facts stated in the Proposal Form."

Mr Ansari submitted that switching off the sprinkler was not a "material change" to the premises but the Court of Appeal ruled against him and so his insurance is invalid.

Thousands of people find themselves in the position every year. Policies are taken out and conditions are agreed, but over time our circumstances can change and we may forget to keep up with the terms of our policies.

For example, many people now have smoke alarms in their homes and this can help keep down insurance costs. However, you then have to make sure the alarms are kept in working order or your insurance could be affected.

The same thing applies when you tell your insurers you have a burglar alarm. You should remember to put it on when you leave the house or you may find your policy is invalid if you are then burgled. Similarly, you could face problems if you tell your insurer that you keep your valuables in a safe but then leave them on the coffee table overnight.

If you tell your insurer your car is kept in a garage every night then make sure you abide by that. If you park it on the street because the garage is full of clutter then again you may have problems if it is stolen.

It's not that insurers are looking for a way to avoid paying you. They just have to compete for your business and so they keep their prices low by rewarding people who are low risk, but that means you have to fulfill your side of the bargain.

It's easy to forget the exact terms of a policy as time goes by but it's worth taking the trouble to check it occasionally. Otherwise, it could let you down just when you need it most.

For more information contact Marcus Brown on 0115 947 0641 or email: mbrown@andersonssolicitors.co.uk

Handing over your business can involve head and heart

Business owners dreaming of giving it all up and retiring to a life of leisure have several options open to them when it comes to handing on control of their company.

Which choices they make will depend on several factors, some of them financial but many of them are more to do with emotion and loyalty.

Those who simply want to extract the best price possible and then move on may find that private equity firms have a lot to offer. These firms have received a lot of criticism recently, mainly to do with how much tax their directors pay, but they do have a role to play.

They can provide sellers with a simple way out at an attractive price with money up front. That can be very appealing to someone who wants to bow out quickly with a bulging bank balance to finance a comfortable well-earned retirement. It’s particularly appealing when compared to the possible alternative of selling to managers or partners within the existing company structure who may have to buy in instalments over several years. No one wants to wait for their money if they can help it.

The temptation to cut and run is high but that’s when emotional ties kick in. Most businessmen become very loyal to their staff and worry about what will happen when people who’ve worked hard for the firm for several years suddenly find themselves at the mercy of hard-nosed outside owners.

It’s quite possible that a private equity firm will want to put in new management and perhaps streamline the operation leading to redundancies. Such prospects can make the seller feel disloyal. There may also be concerns that the whole nature of the company will change. That too can worry entrepreneurs who’ve spent all their lives building the business up and still feel a strong attachment to it.

These feelings can be magnified for directors running a family business. It means many people prefer to ignore the higher price offered by private equity firms and sell instead to the next generation, whether family members or long term colleagues.

In these cases, the best way to ensure a smooth succession is to start planning as early as possible, preferably several years ahead of the target retirement date.

This is particularly important for small to medium size firms where the departure of one key person can have a major impact. Hold meetings with those who will be left running the company so you can agree an exit strategy.

If you own a large share of the business, the remaining partners or directors may need to raise money to buy you out. Or if the firm is very successful, some of its profits could be used to raise part of the necessary finance. This approach would need Inland Revenue clearance but is worth exploring.
You may choose to sell your shares back over several years so the firm’s finances aren’t put under too much pressure all at once. In that case, you may need to change your will so the arrangement can continue should you die before the sales are completed. There could be tax implications whichever system you choose for withdrawing capital from the firm so professional advice should be sought.

If you own the business premises, you will need to decide whether to sell or lease them back to the firm. This could be influenced by how much capital you need to raise or whether you would be content with a monthly rent.

Throughout the succession planning it’s important to get advice from your accountant, lawyer and possibly your bank manager. They will have helpful suggestions and can ensure that the agreement is fair to everyone.

This is particularly important if you are passing the business on to family members because emotions can easily get in the way. Sons and daughters may feel guilty that they are demanding too good a deal from their parents, while parents may feel they are taking too much out of the business making it difficult for their children to succeed in the future. Independent opinions from lawyers and accountants can help guide and reassure both sides.

Once an agreement has been reached it’s important to get it all written down properly so it’s legal and everyone knows where they stand.

This will enable you to plan a proper exit strategy that will allow you to bow out gracefully without affecting the smooth running of the business.

Peter Sutherland is a Partner at Andersons Solicitors and can be contacted on 0115 988 6714 or by emailing psutherland@andersonssolicitors.co.uk.