A message to Top Service members from Emma Reilly FCICM, CEO at Top Service Ltd & Credit Expert

A phoenix company is described by the Insolvency Service as the practice of carrying on the same business or trade successively through a series of companies where each becomes insolvent in turn. Each time this happens, the insolvent company’s business (but not its debts) is transferred to a new, similar ‘phoenix’ company. The insolvent company then ceases to trade and might enter into formal insolvency proceedings. 

Companies fail for many reasons and it is not always due to misconduct. For this reason the law allows business owners, directors and employees to set up new companies and carry on a similar business. 

Phoenix companies are not usually favoured by trade creditors and it’s easy to see why. It may seem that a director is walking away from an insolvent company to a new company free of the burden of any debt and the creditor may receive little return once the insolvency proceedings are over. 

In some cases creditors may benefit from the sale as a new healthier company eager to trade successfully and may pick up the contracts the insolvent company left behind, potentially forming a stronger trading relationship with creditors. 

Without doubt the phoenix company process can be exploited and we spoke to James Linton, Head of Creditor Services PKF Littlejohn Advisory who explained the potential penalties to directors found guilty of misconduct in relation to a phoenix company. “If a sale takes place to a successor company prior to and outside of a formal insolvency procedure, then the Official Receiver or an insolvency practitioner will have a duty to investigate it. If they find assets transferred / sold at an undervalue or director misconduct, then they have the powers to undo and reverse transactions, look to reclaim assets, and look into the conduct of the directors who may then become personally liable for the company debts.”

There are certain rules in these circumstances that should be followed and they include:

What’s crucial to note is that this process is not illegal as long as certain rules are followed:

• Director Qualifications: The director must not be disqualified or bankrupt.
• Fair Asset Valuation: Assets must undergo professional valuation, and a fair market value must be paid.
• Personal Funds: Assets must be purchased with the director’s personal funds.
• Transparent Marketing: A variety of marketing methods must be employed to advertise the pre-pack sale.
• Creditor Notification: Creditors must be informed of the pre-pack sale in a timely manner.
• Full Disclosure: The insolvency practitioner must provide a full disclosure of all actions taken.
• Director Investigation: Directors must undergo a thorough investigation to ensure transactions were in the interests of creditors.
• Company Name: The new company name must not mislead the public or creditors.

For more information on phoenix companies, check out this link provided by the Insolvency Service. Phoenix companies and the role of the Insolvency Service – GOV.UK (www.gov.uk)

The Director Monitoring Service allows you to keep track of who is running the companies you are dealing with. You will receive alerts when a director resigns or is appointed at another company, providing valuable insights into leadership changes within your business network.

When a director resigns, it can present challenges such as knowledge loss and transitional risks, but it also offers opportunities for fresh perspectives and new leadership that could benefit the business in the long run. 

Understanding both the positives and negatives of such transitions is crucial for assessing their impact on a company’s operations and future prospects.

Changes in leadership can sometimes result in alterations to credit limits, impacting the financial stability of the business.

Resignations and new appointments aren’t always a trigger for something negative happening. It’s essential to consider the history and background of the departing director. 

If the Director has been associated with companies that have faced insolvency or financial difficulties in the past. This may trigger a potential risk warning that should be investigated. 

Equally directors with a successful track record and experience in managing long-established businesses can bring stability and credibility to an organisation.

Monitoring services provide valuable real-time information that can assist businesses in making informed decisions, mitigating risk, and maintaining healthy business relationships within the construction industry. 

This service is designed to help businesses stay proactive in managing credit risk and staying up to date about critical changes that will impact their trading relationships .

Company monitoring – Top Service members have access to unlimited company monitoring.  Alerts are sent to members detailing changes & updates to key information within a subject company’s credit information. Using this service element along with the combination of credit checking & access to construction industry specific trading experience is a winning combination to minimise risk. 

The monitoring service alerts members by email when specific events occur, such as:

• New trading experiences have been reported
• Changes to in suggested credit limits
• Formal insolvency filings such as winding-up petitions and administration orders,
• New County Court Judgments registered against a limited company
• Changes to the company name
• When a company files new accounts

Thank you to Jo Stevens at Tarmac for your kind words.

Top Service provide Tarmac with an invaluable support for new customer trading history, and early fraud detection. The trading histories enable us to avoid potential late payers, or to identify that a customer has cash flow difficulties

Tarmac, is the UK’s sustainable construction materials, road contracting and building products business. UK supplier of Aggregates, Asphalt, Concrete, Cement, Blocks, Mortar, PAVE Contracting & Recycling Service. Tarmac joined the Top Service community in March 2020  to help manage risk, minimise debt & maximise cash. 

We’re not your average credit reference agency!
 
The unique credit information we gather and our specialism in the construction industry gives our members a competitive advantage over those using one of the generic credit reference agencies.
 
Our insider intelligence is the most relevant credit information available to the construction industry.
 
We have been protecting the #constructionindustry and minimising our #members exposure to bad debt for over 30 years!

Our own industry specific data plays a pivotal role and can lead to credit limits and scores being reduced or removed when other mainstream agencies are still offering substantial limits & scores. 

Our credit limits and credit scores are calculated by taking the opinions of two of the major credit reference agencies and then applying our own industry specific data to produce the most informed, up to the minute and realistic information for the construction industry. 

We are the only credit reference agency, specifically for the UK construction industry,  Our industry specialism ensures our members have the ability to make better credit decisions than they can by only using a mainstream agency, resulting in minimised risk for their business. 

Our team of credit management experts have their ears to ground and hundreds of years of knowledge & experience between them. It’s our industry knowledge that allows our team to react to changes in trading experience patterns, to respond to rumours and concerns within the construction sector. 

Director Resignations – When a director resigns, it can present challenges such as knowledge loss and transitional risks.Changes in leadership can sometimes result in alterations to credit limits, impacting the financial stability of the business. It’s essential to consider the history and background of the departing director. Warning signs may arise if the individual has been associated with companies that have faced insolvencies or financial difficulties in the past, indicating a potential risk factor for the current business.

Group Company Activity – If a company is part of a group structure, its credit limit may be influenced by the financial performance and credit worthiness of other entities within the same group.If one group experiences financial difficulty, it could negatively impact the creditworthiness of the entire group, resulting in a reduction to credit limits for all group members.

Rate of Insolvency within a specific Industry – The industry a company operates in can impact its creditworthiness. If a company is in an industry with a high rate of insolvency, credit reference agencies may view that industry as riskier, potentially leading to tighter credit limits. Overall, while the industry’s rate of insolvency can influence a company’s credit score and credit limit, it is just one of many factors considered by creditors when assessing credit risk.

Every supplier of credit information will have invested in different algorithms to attempt to produce the most relevant credit limit and credit scores. Unfortunately this is never going to be an exact science.

The majority of credit reference agencies will take mostly the same factors into account when suggesting credit limits but how they apply each factor will be slightly different. 

For example, most agencies will take outstanding mortgages and charges into consideration when suggesting a credit limit and score for a business, they will also take into account the businesses age, location and line of business. The weighting of each of these factors though may be slightly different, so one agency may score lower for a business in the construction industry than another, or higher for a business based in London than another.

Some other key elements of a credit reference agencies algorithm:

• Net Worth: This reflects a business’s solvency, assessing whether it would remain financially viable after settling all liabilities. A negative net worth can significantly impact a credit score, sometimes leading to the denial of credit altogether.
• Working Capital: Vital for assessing liquidity, working capital reveals the cash flow available to a business after deducting current liabilities from current assets. A low or negative working capital could signal potential difficulties in meeting trade creditor payments.
• Turnover: While turnover indicates a business’s size, it holds minimal sway over credit limits if expenditures exceed earnings, rendering the business unprofitable.
• Assets and Liabilities: Tangible and intangible assets, compared with liabilities, form a crucial aspect of credit assessment. A decline in assets, particularly alongside rising liabilities, can spell trouble for credit limits.
• Late Filings and County Court Judgments: Late filings at Companies House and County Court Judgments (CCJs) reflect negatively on a business’s organisational efficiency and financial health, respectively, impacting credit scores accordingly.
• Winding-Up Petitions: Among the most serious threats, winding-up petitions significantly impact a business’s creditworthiness due to their severe consequences.
• Notice of Intents: Notices of Intent highlight a concern as they suggest that the company may have difficulty meeting its financial obligations and could be taking steps into official insolvency.
• Directors’ roles are also examined, with resignations or departures carrying significant implications. Such events are viewed as potential knowledge and experience loss, prompting adjustments to credit limits for a period of time.
• Payment data – the majority of CRA’s are now collecting payment data, which they say gives an indication of how promptly a business pays its suppliers. However, in reality this non industry specific data very often strongly differs from real, industry specific trading experiences. 

There are now four, not three tracks for cases in the civil courts to be assigned to:

The new intermediate track will apply to cases valued between £25,000 to £100,000 which are for monetary relief only (not injunctions or specific performance) where the trial is likely to last no longer than three days, with no more than two experts per party giving oral evidence. Furthermore, certain claims must still be allocated to the multi-track such as those concerning cases against the police, human rights issues, asbestos lung disease or clinical negligence claims or those involving the harm, abuse or neglect of children or vulnerable adults.

The intermediate track, like the fast track, will also have four complexity bands, with each case being assigned to both a track and a complexity band. The parties may agree on the complexity band for their case, but the court will retain its discretion to assign each case to the band it feels is most appropriate.

The benefits of the intermediate track will be a simplified procedure, which includes stricter case management, a maximum of fifteen stages and fixed recoverable costs.

This is an attempt to provide certainty as to costs, allowing wider access to justice for all as costs do not run the risk of spiralling. The complexity band along with the stage the claim has reached will be used to ascertain the level of fixed recoverable costs.

What Does This Mean For Claiming Costs of Legal Action?

Usually, no costs are awarded to cases within the small claims track, apart from the fixed costs relevant to making the claim. Costs for defended cases are not awarded, whether or not you are the winning party. 

Once a case is allocated to a specific track (such as Small Claims Track, Fast Track, Intermediate Track, or Multi-Track), there are set fees recoverable as costs by the successful party from the losing party. The complexity of Fast Track and Intermediate Track cases determines the Band the case will be assigned to, and this, along with the stage the case concludes at, will determine the fixed costs recoverable. You can find more information here: Practice Direction 45 – Tables of Fixed Costs (2023).

For Top Service members, we will always ensure you are fully aware of the merits of each case before legal action is instructed. Our team of experts review cases individually and are able to review cases both from a legal and commercial perspective. 

Our advice to members is that solicitor advice should be sought where possible, to ensure you are fully aware of the cost implications of taking action and how those implications compare to the merits of the case. 

The Insolvency Service has released the latest figures for February 2024, shedding light on the state of insolvencies in the UK. Here’s a breakdown of the numbers:

Registered Company Insolvencies Breakdown:

In February 2024, a total of 2102 company insolvencies were recorded, with the following distribution:

• 1707 Creditors Voluntary Liquidations
• 217 Compulsory Liquidations
• 166 Administrations
• 12 Company Voluntary Arrangements

Year-on-Year Comparison:

Comparing February 2024 with the same month in the previous year reveals a notable increase. There’s been a 17% rise in insolvency cases, with February 2024 witnessing 301 more cases than February 2023.

Month-on-Month Comparison:

In February 2024, there’s been an 18% surge in insolvency cases compared to January 2024, marking a significant increase of 328 cases.

Changes in Insolvency Types:

Compulsary Liquidations: Decreased by 35% 📉

Creditors Voluntary Liquidations: Increased by 32% 📈

Administrations: Increased by38% 📈

Company Voluntary Arrangements: Decreased by 25% 📉

Upcoming Insights:

The industry specific insolvency statistics for the construction industry in February will be released next month, however for the month of January, 295 insolvency cases were registered.

These statistics provide crucial insights into the financial environment, enabling businesses to make informed credit decisions.

At Top Service, we encourage businesses to regularly check how well your credit management tools and processes are working. Given the high number of companies facing financial issues, it’s crucial to review these processes carefully. A proactive approach to credit management will help to support businesses through challenging times.

Contact Top Service on 01527 503990 to explore how we can assist you further with credit management tools and to learn more about the range of services we offer.