Our Expert, from Geldards LLP law firm, answers your legal questions.

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Question:

Overdue Debt

I supplied a client (limited company supplying credit cards) with some IT services and equipment back in 2004. I agreed with the MD that they would pay the balance of the account in instalments of £1000 per month.

Early in 2005 he asked if he could reduce this to £500 as they were having some cashflow difficulties. I agreed to this. Then in October 2005 they asked if this could be reduced again to £100. The last payment made was in Jan 2007 leaving the sum of £1638.47 outstanding.

Despite numerous phone calls and emails, they have made no further payments. Finally I managed to speak with the MD who requested that we reduce the amound to allow a single final payment. We reduced the amount to £1400, but this was rejected.

I have again finally made contact after many times chasing to be told that the company is now not operational.

The previous MD's father is now the only director and he is saying that they have no office, no bank account, no assets and no trade of any kind to pay any monies. He has also said that there has been no objections to the disolvement of the company other than the Revenue who he expects them to release shortly.

I had recently started to make a claim through the Money Claim Online facility but wonder if there is any point in pursuing this. Is there anything I can do to retrieve this money?

Our expert replies:

Where a debt is due from a limited company and the debt is greater than £750, it is possible to serve a statutory demand upon the debtor company demanding payment. As the debt due to you is from a limited company, the debt amounts to £1,638.47, and there appears to be no dispute that the money is owed, you have the option of serving a statutory demand.

A statutory demand is a written demand (in a prescribed form) which will require the company to pay the sum due. The statutory demand should be served on the company by leaving it at the company's registered office. Once the statutory demand has been served upon the company, the company has 21 days to pay the amount due or agree settlement with you, failing which the company will be deemed unable to pay its debts and you will be entitled to present a winding up petition against the company which could ultimately result in the company going into liquidation and having a liquidator appointed to deal with its affairs. To review the prescribed form of a statutory demand, please refer to the Insolvency Service website at www.insolvency.gov.uk.

The service of a statutory demand may provoke payment of the debt. However, given the fact that the company is allegedly no longer operating, has no assets and the sole director is looking to dissolve the company, the threat of a winding up petition may not bother the company. In this regard, it may be worth asking the director of the company to supply a copy of the company's latest accounts to verify the fact that the company has no assets and is no longer operating.

It is unlikely that you will be able to pursue the director of the company personally for payment as directors of limited companies are only liable for the debts of those companies in very particular circumstances, none of which appear to apply here.

Unfortunately, if it is the case that the company is no longer trading and has no assets, the chances of recovering the debt appear to be slim. However, it is worth carrying out further investigations in relation to the financial state of the company and possibly also serving a statutory demand as this may provoke payment if the company does in fact have some assets left.

In the event that the statutory demand is served and payment is not forthcoming, it is probably not worth the time and expense of presenting a winding up petition against the company if it is the case that the company does not have any assets and is no longer trading (this would cost a few thousand pounds if done by a solitary, as would continuing the court proceedings commenced via the Money Claim Online facility).

If an application to dissolve the company has been lodged at Companies House then a form should have been filed to say that the company is not insolvent (i.e. the company has paid all of its creditors). You should write to Companies House to object to the dissolution of the company on the basis that you are a creditor of the company (there is usually a three month time limit for doing this). Unfortunately however, even doing that will not cause payment of money that the company does not have.

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Question:
Could you advise what your company’s view is regarding Pre-Nuptial arrangements please.

Our expert replies:
We don't advise on family law matters so I am afraid we can't answer your query about pre-nuptial arrangements.

However, I suspect your question may be being raised because you are concerned about your investment in a business and how this may be dealt with in a divorce situation. With this in mind, it is important for you to consider a shareholder's agreement for your company if you don't already have one - this is an agreement between you and your fellow shareholders and is a vital piece of protection. 

You can use the agreement to cover off what happens to shares if specific events happen to a shareholder - for example, death, ceasing to be involved in the business or divorce. It would be unusual for a Judge in divorce proceedings to force an individual to transfer some or all of his shares in a private company to the ex-spouse - but the value of the shares is likely to be taken into account in any financial settlement. 

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Question:
I am self-employed with a growing client base so I am looking to create a pool of associates to contract work out to on an ad hoc basis. They will not be employees. Can you share any tips on what terms to include in our associate agreement document?"

Our expert replies:
The most important thing is to make it very clear that they are not employees or workers but are self-employed contractors. As part of this, you need to specify that there is no obligation on you to give them any work - or for them to accept any work that you do give them.

The contractors should be made responsible for any tax / national insurance.

You should set out the remuneration terms - when should they send you an invoice, when do you pay and how much?

It is worth including some protections for your business - obligations on them to keep your information confidential and not to poach your customers / employees.

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Our expert replies:
Geldards don't provide advice on divorce work so you should speak to a lawyer dealing in that type of work to understand what type of awards the Courts will make on a divorce.  I believe the value of shares held in a company will usually be taken into account in a divorce settlement and so you or your business partner might be forced to sell some shares to realise their value and so meet the Court award.

It can be worth making it clear in a shareholders agreement that shares cannot be transferred to a spouse.  That way, you can be sure that an ex-spouse will not become a shareholder.

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Question:
Does a new start business need a solicitor? If so, what areas do you see having legal advice as the highest priority?

Our expert replies:
The difficulty for a start-up business is that there are usually so many legal requirements that need to be addressed but, with a shortage of money, a balancing act has to be struck.

The key issues that need to be addressed are:

1. The format of the business - will it be a limited company, a partnership or a sole trader?
2. Does it own all of the assets it needs to operate - in particular, are its intellectual property rights protected?
3. The relationship between the business partners - a shareholders or partnership agreement is a bit like a pre-nuptual agreement and solves a lot of problems if things go wrong at a later stage
4. Contracts with customers, suppliers and employees.

Geldards have huge experience of working through these issues with start-up and early-stage companies and will advise on which of these are going to be most crucial and when.

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Question: 
I've just started a business with a partner. What are the benfits of setting up a limited company as opposed to a partnership?

Our expert replies:
The major difference between a company and a partnership is that a company is a distinct organisation whereas a partnership is merely a group of individuals operating a business together. 

In essence, a company can enter into contracts / obligations in its own name but, with a partnership, it is the partners themselves who enter into contracts / obligations.  With a company, this means that if things go wrong, a third party can sue the company but not the individual shareholders - if the assets of the company are not enough to meet the third party's claim, the company will be wound up and the shareholders will lose their investment but nothing more. This is what is meant by "limited liability". With a partnership, however, each partner is liable for ALL (and not just his or her proportion) of the obligations / liabilities of the partnership.

As a company, you will be able to easily issue shares in the business to people, and in different proportions.  If your business is going to seek outside investment, then any investor is likely to require you to be set up as a company rather than a partnership.

A company has to file public accounts each year - an advantage of being a partnership is that you do not need to file public accounts.

A company needs directors, and these are bound by very stringent duties to act in good faith and to promote the success of the company. 

Finally, there are different tax treatments applying to companies and to partnerships and you should take an accountant's advice on this.

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Question: 
My business partner & I own 50% each of the business. We want to go our separate ways but each want to trade using the company name. How do we resolve this?

Our expert replies:
What format is the business?  Is it a limited company or an informal partnership?  In either case, do you have any form of agreement (whether in writing or not) with your business partner from when you set up the business?  If there was an agreement, then this should be your starting point.  If, however, you don't have an agreement, or if the agreement does not cover the issue, then it becomes more complicated. 

If your business is a limited company, no other company may be set up at Companies House with an identical name, so neither of you could use the same name for a new company.  There are also Intellectual Property Law restrictions on the use of names which conflict with other trademarks (whether registered or unregistered) or are used in an attempt to "pass off" one business as somehow being connected with another.

Apart from the points above, each of you could, in theory, use the name.  However, it is usually to a business's advantage to come up with its own unique name and branding so it perhaps makes sense for you both to agree not to use the existing name, or for one of you to buy the right to the name from the other.

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Our expert replies:
You should write to the debtor explaining the background to the debt including key dates and details of the work done.  The letter should include as much information as possible in relation to the circumstances surrounding the debt.  You should finish your letter by giving the debtor 14 days within which to respond, failing which you will be left with no alternative other than to commence proceedings in order to recover the debt due together with interest and costs.

If the debt is undisputed then you will have the option of serving a statutory demand (provided that the amount of the debt exceeds £750).  The statutory demand gives the debtor 28 days within which to pay, failing which bankruptcy proceedings can be commenced.

However, if the debt is disputed then court proceedings will need to be issued.  Again, the amount of the debt is relevant here as it will effect which court the proceedings are issued in and the amount of the court fee. 
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* Please note: the answers given above are general advice based on the questions. They should not be taken as detailed advice or as a recommendation to pursue any particular course of action - Geldards would need to review the specific circumstances to provide such advice/recommendation.

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