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It’s a sad fact of business life, but from time to time companies with which members trade will fail. Within the motor trade we have recently seen some high profile failures including Unipart and Drive Assist. Often such failures leave large debts to creditors, so what do you need to know if you become a creditor to a failed company?
What will happen?
When a company is failing it will have a number of options. If the company is capable of being rescued, or there is a tangible benefit to creditors, then it may enter Administration. Here all debts are frozen and an independent expert appointed to run the company as a going concern, or to achieve the best possible outcome from creditors if this is not possible. Alternatively the company will enter Liquidation. Here it is not possible to rescue the company and an independent expert will be appointed to wind it up.
If the company is not trading do I have to pay them?
Yes. Any debts due will still be owed to the company. They will continue in a non-trading state in order to collect debts. If the company is in administration, when it is restructured it will be sold and start again and any debts will be dealt with. If not, then once the liquidation has been finalised the company will cease to exist.
Will I get my money?
This will depend on your status. If the company enters Administration then payment is possible once it is returned to a going concern. If the company enters into Liquidation, the company will collect in all debts as part of the insolvency process. Once all debts are collected, the amount recovered will be distributed between the creditors. Any secured creditors will be paid first, and in full, in line with their securities. Once these are settled, any remaining creditors will be paid a percentage of their debt.
Rarely do unsecured creditors get paid if the company enters Liquidation. Even if a payment is made, it is highly unlikely that a significant percentage of the debt will be recovered.
Am I a Secured Creditor?
I cannot say. You can gain a security over company assets in a number of ways.
The most likely will be a specific charge over an asset, similar to a mortgage. Most asset specific securities require a legal agreement between the parties. If you believe you hold such a security, you should review any written agreements as a matter of priority.
If there is no specific agreement, the most likely security held by a motor trader is a ‘Lien’ on the vehicle or goods held. Where you have carried out work that is more than maintenance, you may hold a ‘Lien’ on any vehicle or goods. If you are normally paid before you release the vehicle or goods to the owner and the company fails before you are paid but while you have the vehicle or goods, you may be able to withhold the vehicle or goods from the owner until you are paid. Furthermore you may be able to sell any vehicle or goods to settle your debt. This is complicated, so it is essential that advice is taken as soon as possible.
Offsetting your debts
Where you have supplied a product to the failed company, check your terms to see if legal ownership has transferred at the time of failure. If the goods remain your property, then it is essential that the rights of ownership are exercised immediately. Any goods may be recovered to you and their value used to reduce the money owed.
If you bought and sold products and services to each other, and any goods and services have already passed to the failed company, you may have ‘a history of mutual credits and debits’. In this case you can offset that money owed to the failed company against that money owed to you by them.
For example where the motor trader owes the failed company £1,000, and the failed company owes the motor trader £500 then the motor trader can withhold their £500 in order to reduce the amount they owe.
This right cannot be excluded under the contract. If there is the potential for such a relationship, it is essential that advice is taken as soon as possible.
Who is liable for any failures?
This is a trickier question and, to a greater extent, will depend on the nature of the contract and services provided.
Where the failed company is a parts supplier, then you will remain liable to your customer for the quality of any work, including the parts supplied. Where a parts supplier would normally arrange for a repair or replacement, this will no longer be an option and will result in a greater risk to you.
The same applies where the failed company is a supplier of work. You will have a liability to the failed company in the event they are sued for a fault on your work. However, this is unlikely if they are in liquidation. A much more difficult question is whether the ultimate customer can overreach your supplier and hold you responsible. Again statutory protections apply, but this is arguable where your contract with the failed company excluded the Contract (Rights of the Third Party Act) 1999. Again it is essential that advice is taken as soon as possible on this point.
What to do next
The effects of a company failure will depend on how much money you are owed, and prevention is much better then cure. Often the first sign of a problem will be difficulty in obtaining payment and an increase in the length of time taken to pay. You should maintain accurate records of the payment terms between you and your suppliers/customers and monitor these regularly. As this is a general guide only, any motor trader who is looking for more advice on this matter, or even assistance should us for more detailed position.
Paul Carroll, Solicitor, Motor Industry Legal Services