A Limited Company ceasing to trade does not always have to mean the end of the collection process!

As commercial collection specialists we know that there still exists a collection problem that seems to endure the passage of time, regardless of financial crisis, credit, squeezes and the like. A problem that now seems to be reaching epidemic proportions.  In simple terms it is the common problem of Limited Companies, in particular those regarded as SME’s, simply ‘closing down’, ‘ceasing to trade’, ‘going Trace’ and many other euphemisms for much the same outcome – the supplier is not going to be paid and there is no formal liquidation or insolvency protection to give a proper explanation as to what has happened.

These debtor companies are not always obtaining goods with a view not to pay, many simply do not have any assets that would make a formal liquidation worthwhile, either for the directors, shareholders or creditors, secured or otherwise, indeed many such companies will simply wait to be struck off by Companies House, or even apply, themselves, to be struck off. In many cases creditors do not feel it worthwhile to take legal action including winding up proceedings.  In these instances the list of creditors would not be particularly great in monetary or volume terms, but can in many instances strike the death knell for a small supplier who now has to consider writing off the debt.

All that being said there are Companies, run by Directors, usually the major shareholders, who either have a complete disregard for their legal obligations , knowingly, or by virtue of example, they think that it is very easy to set up and operate as a limited company and thereby feel that they completely remove their personal obligation to payment of trade debt.

LPL has numerous examples of such companies and the havoc they reap on suppliers, small business in particular, which have not taken better precautions before dealing.

We take a more in depth view of how some of these Limited Companies have been trading.  It is a simple exercise to obtain dates of Returns and Filings (Accounts) details via Companies House website and looking at any filed information and director details in more depth from our partnerships with major information suppliers. In many instances we confirm that the Limited Company has not been trading properly within The Companies Act 2006 in particular.  Is it up to date with Returns and Accounts, has it filed any due Returns, is it filing as a Dormant Company, do the dates on the invoices we are chasing appear to contradict any of this information, e.g.  Orders and invoice dates actually coincide with the dates that the company was filing a Return as Dormant, or the invoices are dated two years after the last filed returns and/or accounts, – extreme examples but it forms a picture.

It is no secret that Directors can be taken to court on the grounds of ‘wrongful trading’ but often it has been as a result of an Insolvency Practitioner’s report after a formal liquidation. This report was then sent to the Dti (now BERR) for them to consider whether it was useful to take such action.  There still exists possibilities for creditors or shareholders to take directors to court, but in all these instances it is on the assumption that the Limited Company had been the entity that owed the debts, at least up to the point of legal action. Often, such action is thought too costly to contemplate by a small creditor and the result is all too often not to the benefit of unsecured creditors anyway, being the ultimate sanction that Directors were then disqualified as well as perhaps having to pay monies to secured creditors.

LPL has for some time been drawing a slightly different conclusion regarding these errant companies, based upon the results of our enquiries we can suggest that the company is not the relevant legally responsible entity for the debt we are chasing.  We therefore hold the directors as individuals/proprietors or partners liable for the debt and often take legal action against them on that basis.  Of course we take great care to give the individuals every opportunity to prove that they are directors of a properly trading limited company. Offering such confirmation should never be difficult; information from a certified accountant, vat records, tax returns, in fact any number of ways. Information which is requested on a voluntarily basis and if available and confirmed, obviously allows us to attempt collection from that correct entity.

Our own statistics show that where our investigations lead us to the above conclusions less than 5% of those listed directors could actually show that they were properly trading their Limited Company. More encouraging is the number of legal cases that are concluded successfully on behalf of our clients, with UK courts now far more attuned to how Limited Companies should be trading and understanding the abuses of a system that still needs to be tightened up.

The Companies Act 2006 is welcomed because it outlines the obligations of directors  under common law  and prescribes in better detail directors obligations to members, suppliers and others and their obligations regarding notifications to Companies House.

On the downside the 2006 Act changes address notification for directors.  Generally only a service address needs to be filed for public access and although a private address must also be filed, it will only be available to specific public bodies and Credit Reference Agencies, which does slow down verification processes for suppliers unless they use such agencies. The other problem being that there is no actual verification by Companies House of any private address filed.  Companies House will say that they are record keepers and not policemen but there is a need for them to reduce the ways that directors  can abuse the use of limited liability protection.  Whilst fines are in place to ensure proper notification by directors, unless there is better verification procedures the problems simply remain.

It is even more important now for suppliers to check new customers, particularly limited companies, to ensure that to their best efforts the potential customer is trading correctly within current legislation.  It is still far too easy to gain credit using limited companies that fail to satisfy the simplest tests of legitimacy.  From our research it is particularly common within the catering, restaurant, retail food and building sector but by no means restricted to these areas.  It really boils down to suppliers taking more time and effort to credit check all customers, existing and new. If a limited company does appear to simply ‘cease to trade’ the supplier need not immediately assume that they will simply be the losers as unsecured creditors.

For more information: slewis@lplgroup.com