Going for broke

It is over a year since two of the UK’s biggest house builders, Taylor Wimpey and Barratt Homes, lost millions. Their share prices crashed – by as much as 80 percent. While both companies were financially stable enough to avoid insolvency many less well known property building and developing businesses – both commercial and residential – have not been as fortunate.

Officially, the UK is now out of recession but the fragile economy and more precisely the health of all our enterprises remains a hot and often controversial topic, not just for the new Government but in the minds of the general public too.

Never has this been more evident than within the property industry. Last year nearly 6,000 businesses were lost in the construction and property industry alone, of that nearly 1,000 were property firms. This was an increase of nearly 21 percent over 2008.  A further 1,101 tried to save their businesses through procedures that included receiverships, administrations, and company voluntary arrangements. With so many businesses leaving the property industry because of financial failure it is more important than ever that everyone from company director to employee understands just how the insolvency regime works.

Keeping busy
The work of the Insolvency Service as described by its chief executive, Stephen Speed, is “to create a fair and straightforward environment for businesses struggling with debt, whilst working to secure the best results for creditors.”  This is achieved through a statutory framework that predominantly uses the Insolvency Acts 1986 and 2000, the Company Directors Disqualifications Act 1986 and the Employment Rights Act 1996.

Staff are responsible for administering and investigating the affairs of all bankrupts, companies and partnerships wound up by the court, and establishing in the process why they became insolvent. The Insolvency Service is  also responsible for regulating the insolvency profession, advising the Government on insolvency law and taking action against wrong-doing or abuse through the investigation and enforcement team which is critical for maintaining business confidence.

The name, ‘The Insolvency Service’ may suggest that work is only with failed companies or individual bankrupts. However, it also investigates companies that are trading through the use of powers granted under the Companies Act. The Service takes effective action when misconduct is discovered and ensures that dishonest, negligent and incompetent people are excluded from the business world. In extreme cases, an individual found to be responsible for a fraudulent company will have their details passed to the police and they may even be prosecuted – something which can result in a prison sentence. The majority of investigations into active companies however will result in either the company being wound up and or the company directors being disqualified. Once disqualified, a director cannot take part in the formation or management of any company for up to fifteen years.

The investigation process for active companies
With hundreds of complaints each week from members of the public and from other businesses about active companies, no investigation is ever the same. However the Companies Investigations team will go through a number of key stages when investigating an active company suspected of misconduct.

The first phase will be to look in depth at the original complaint and any evidence from others that are connected to the business. They will then assess whether the company’s activities pose a threat to the public in general. If the answer is ‘yes’, then one or more investigators will be appointed to investigate the company. The investigator will then call at the company’s premises (often unannounced) and talk to the company’s employees. They will ask questions of those who appear to be in charge and look at relevant documents, taking photocopies of anything they consider to be important. Our investigators can demand detailed information not only from the company’s directors, but also from other company employees and third parties who may be in possession of relevant documents and information.

The time taken to investigate will depend on many factors and, in particular, the complexity of the issues and the extent of co-operation received. The Government target is to complete 90 percent of investigations within six months but in practice the majority are completed much sooner than this. Once our investigators are satisfied that they have obtained all the necessary information they will decide whether or not The Service needs to take legal action.

Each month over 100 company directors are disqualified for wrong-doing, fraud, negligence or other misconduct. But it is not just individuals and single companies that go through the investigation process. When necessary powers are used to stop fraudulent businesses from trading– as five linked London based land banking companies recently found out.

The companies mis-sold 500 separate plots of land across the UK – generating nearly £1.8m in the process. They lured property investors in by claiming that the land was ready for future development and would deliver large returns on their investments. However, following an investigation by the Companies Investigation team, it was found none of the sites had any prospect of getting planning permission for development and that the businesses did not even have the right to sell two of the plots. Following a hearing at the High Court, the companies were ordered into liquidation and are no longer trading.

How can I minimise the risk to my own business?
While unscrupulous companies clearly exist there are many more businesses that have become insolvent not because of their own actions but because of the practices of their suppliers. It is estimated that 27 percent of corporate insolvencies are in fact triggered by another company’s insolvency. The Association of Business Recovery Professionals suggests that one way of avoiding falling into such traps is for a business to impose strict credit control and debt collection procedures. This will guard against the domino effect within the supply chain.

Equally, smaller property and building companies should avoid holding large amounts of materials used for development projects in relation to turnover or profit. If possible they should arrange ‘just in time’ supplies with key component trusted suppliers as this will minimise material carrying costs. Whatever the problem within the supply chain, it is important that businesses do not hold back Crown payments. It is also worth remembering that businesses with cash flow problems can always ask for a ‘time to pay’ arrangement with the HM Revenue & Customs. This will allow a business to avoid being hit by large unexpected tax bill at its most vulnerable time.

In the current economic climate, it is more important than ever these good businesses have the support they need to remain solvent. However, if a business does get into difficulty it is also critical that they, their employees and  the wider property industry understand just how the insolvency regime works and what their statutory responsibilities are.

Companies must also be vigilant and should protect their own businesses from fraud. One way of doing this is by checking  The Service’s Disqualified Directors Database before working with a new business. We would also urge anyone to call our enforcement hotline if they suspect that a disqualified director is flouting a ban and continuing to run a company.

For more information
Robert Burns is head of Insolvency Service Investigation and Enforcement Services. To find out how to wind up a company or check the disqualified director database visit: insolvency.gov.uk. To report concerns regrading directors activities to the Insolvency Enforcement Hotline call 0845 601 3546