Insolvency - Spongebob's Plan from a creditors perspective?

[sandandrocks]

Having found myself in the unfortunate position that one of my customers has become insolvent I've had a look through various threads/forums on advice how to proceed following a customers insolvency and I came across the "spongebob" plan on this forum, to which I believe I am on the receiving end of.

To give a bit of backstory, I supply Building materials the construction industry and am in the early stages of my Business (2< years). I have a customer, let's call him Customer A, who used to purchase building materials and services from the company I previously worked at (who ceased trading). He had always been a good payer in my previous role, and in the first year and half or so that he was using my services he was a great customer - paid well before due, minimal hassle at his sites, little to no haggling and never any drama of any kind.

Now, he purchased some materials in the lead up to October, including week 1 of October. He requested a statement in Week 2 of October then he went radio silent, and I assumed that work had slowed down for him as has most in my area. And to be honest, I never chased as I have a few similar and loyal customers who are sometimes a bit late with paying, but always do pay. However this Friday gone, he sent myself a letter via recorded delivery outlining his intent to voluntarily wind up due to Insolvency, that he had ceased trading in week 2 of October and that he would be submitting an application to wind up in January 2024. I have spoken with him today, and on the surface he seems upfront and has assured me that he will personally pay me for the monies owed (8k) within 6 months and that he has had to take the route of voluntary winding up as liquidators want in the region of 20k from him, which he does not have, however having read the "spongebob" method, I feel that I may be being "had" and this is all engineered in an attempt to defraud myself and any other creditors.

Some key points that seem relevant are:

- I delivered enough materials to his sites on Week 1 of October to continue building for a number of weeks, all of which have now been used as I have done site vists this weekend.
- He has verbally confirmed that he has another 2 years worth of work under his belt (upon my question of how he would clear my balance, if he cannot trade and is insolvent), which was recorded on my dashcam.
-His sites are still active with the same contractors/employees onsite, despite his company banners being taken down.
-He has approx 8 x companies structured in a manner that he has a number of companies with similar names, undertaking similar works which own significant control of each other for example: ABC Construction Ltd which is controlled by ABC Construction Holdings Ltd, which is controlled by ABC Construction Contractors Ltd which is controlled by ABC Contracting and Driveways Ltd.
-I had a conversation with one of his customers (who had used me for some other services after getting my details from delivery tickets), who claims that the director of the now insolvent company has taken a loan from him and others in the region of 100k with a lean on company vehicles outlined in a document he produced and misappropriated funds into renovating his own home (to which I supplied materials to Circa December 2022) and purchase a second home (the address the customer provided is to a home that I supplied materials to in Week 1 of October).

So as you can imagine, the events are all very suspect and so I am struggling to take the directors word that he will pay myself in full in 6 months, by which time his legal liability will have gone with his company being struck off. I am only in the second year of my business and so my working capital isn't massive, the 8k hit is a massive one at a time that the construction industry in the UK is at a very low point. I'm finding myself working every possible hour undertaking work that I would not normally do, to try make up the deficit to ensure all of my bills are paid, which is massively frustrating both commercially and personally as I am expecting a new born son in the coming weeks and the feeling of joy and the time that I anticipated and intend to take off has now been overpowered by the concern that this bad debt has raised and the likelihood that I will now need to work through the time off I had planned/needed to support my partner.

Anyway to round it off, what are the most sensible steps somebody at the receiving end of such a chain of events do to put myself in the best place to recover any amount of funds?

I understand the most appropriate actions would be to raise an objection with companies house for the voluntary strike off as a creditor, go down the route of obtaining a CCJ however I am under no illusion that if this situation is engineered, that the company has more than likely been stripped of assets and on the flip side, if it isn't engineered these actions would sour the directors willingness to pay his balance personally (if there was any intention to do so) and ultimately I wouldn't recover any funds.

I have spoken to both debt collection agencies and solicitors, the debt collection agencies seem to just do the same things that I have done - send letters etc., and the solicitors in no uncertain terms told me not to waste my time as the fees would not be worth chasing the 8k debt, which although I am appreciative of the honesty, I am struggling to accept considering just "forgetting about it"

At which point would a director become liable to company debts personally? If the director voluntarily strikes off his company with creditors, after intentionally purchasing materials with no intention of paying and misappropriating funds would the director be required to personally cover the debt? If so, do a zip it and try pursuing the director personally after his has wound up his company?

 

[Newchodge]

Having found myself in the unfortunate position that one of my customers has become insolvent I've had a look through various threads/forums on advice how to proceed following a customers insolvency and I came across the "spongebob" plan on this forum, to which I believe I am on the receiving end of.

To give a bit of backstory, I supply Building materials the construction industry and am in the early stages of my Business (2< years). I have a customer, let's call him Customer A, who used to purchase building materials and services from the company I previously worked at (who ceased trading). He had always been a good payer in my previous role, and in the first year and half or so that he was using my services he was a great customer - paid well before due, minimal hassle at his sites, little to no haggling and never any drama of any kind.

Now, he purchased some materials in the lead up to October, including week 1 of October. He requested a statement in Week 2 of October then he went radio silent, and I assumed that work had slowed down for him as has most in my area. And to be honest, I never chased as I have a few similar and loyal customers who are sometimes a bit late with paying, but always do pay. However this Friday gone, he sent myself a letter via recorded delivery outlining his intent to voluntarily wind up due to Insolvency, that he had ceased trading in week 2 of October and that he would be submitting an application to wind up in January 2024. I have spoken with him today, and on the surface he seems upfront and has assured me that he will personally pay me for the monies owed (8k) within 6 months and that he has had to take the route of voluntary winding up as liquidators want in the region of 20k from him, which he does not have, however having read the "spongebob" method, I feel that I may be being "had" and this is all engineered in an attempt to defraud myself and any other creditors.

Some key points that seem relevant are:

- I delivered enough materials to his sites on Week 1 of October to continue building for a number of weeks, all of which have now been used as I have done site vists this weekend.
- He has verbally confirmed that he has another 2 years worth of work under his belt (upon my question of how he would clear my balance, if he cannot trade and is insolvent), which was recorded on my dashcam.
-His sites are still active with the same contractors/employees onsite, despite his company banners being taken down.
-He has approx 8 x companies structured in a manner that he has a number of companies with similar names, undertaking similar works which own significant control of each other for example: ABC Construction Ltd which is controlled by ABC Construction Holdings Ltd, which is controlled by ABC Construction Contractors Ltd which is controlled by ABC Contracting and Driveways Ltd.
-I had a conversation with one of his customers (who had used me for some other services after getting my details from delivery tickets), who claims that the director of the now insolvent company has taken a loan from him and others in the region of 100k with a lean on company vehicles outlined in a document he produced and misappropriated funds into renovating his own home (to which I supplied materials to Circa December 2022) and purchase a second home (the address the customer provided is to a home that I supplied materials to in Week 1 of October).

So as you can imagine, the events are all very suspect and so I am struggling to take the directors word that he will pay myself in full in 6 months, by which time his legal liability will have gone with his company being struck off. I am only in the second year of my business and so my working capital isn't massive, the 8k hit is a massive one at a time that the construction industry in the UK is at a very low point. I'm finding myself working every possible hour undertaking work that I would not normally do, to try make up the deficit to ensure all of my bills are paid, which is massively frustrating both commercially and personally as I am expecting a new born son in the coming weeks and the feeling of joy and the time that I anticipated and intend to take off has now been overpowered by the concern that this bad debt has raised and the likelihood that I will now need to work through the time off I had planned/needed to support my partner.

Anyway to round it off, what are the most sensible steps somebody at the receiving end of such a chain of events do to put myself in the best place to recover any amount of funds?

I understand the most appropriate actions would be to raise an objection with companies house for the voluntary strike off as a creditor, go down the route of obtaining a CCJ however I am under no illusion that if this situation is engineered, that the company has more than likely been stripped of assets and on the flip side, if it isn't engineered these actions would sour the directors willingness to pay his balance personally (if there was any intention to do so) and ultimately I wouldn't recover any funds.

I have spoken to both debt collection agencies and solicitors, the debt collection agencies seem to just do the same things that I have done - send letters etc., and the solicitors in no uncertain terms told me not to waste my time as the fees would not be worth chasing the 8k debt, which although I am appreciative of the honesty, I am struggling to accept considering just "forgetting about it"

At which point would a director become liable to company debts personally? If the director voluntarily strikes off his company with creditors, after intentionally purchasing materials with no intention of paying and misappropriating funds would the director be required to personally cover the debt? If so, do a zip it and try pursuing the director personally after his has wound up his company?

I would start by issuing a letter before claim and then suing for the amount outstanding.

 

[sandandrocks]

I would start by issuing a letter before claim and then suing for the amount outstanding.

Thanks for taking the time to read and respond.

Suing the director or the Company? If Director, based on the loose outline of the Directors doings - would I even have a case to go after them personally? If Company, would the insolvency and inevitable wind up/liquidation prevent any recovery of funds if successful?

 

[Gyumri]

At which point would a director become liable to company debts personally?

From what you say I would home in on his assurance to you that he would personally see to it that if his company didn't pay the bill then he would.

A "see to it" guarantee is a strange legal creature in that it doesn't have to be by signed writing, but a comfort letter would also be binding on him and clarify matters.

So thank him in writing and confirm that he has agreed to pay off the debt over six months as discussed on your dash cam.

It seems that you have merely contracted with one of his Ltds which if it has no assets is not going to be of any use to you in getting your money back.

Your customer is clearly taking you for a ride.

 

[Frank Wessely]

Hi @sandandrocks

Thank you for the comprehensive post. I do not think it is worth taking action against the limited company. It already sounds like the company is a shell with no assets and unpaid liabilities.

As mentioned above, you should adopt a friendly approach and obtain a written commitment to pay you personally.

There is no automatic trigger which makes a director personally liable in the event of a company insolvency, apart from those debts which have been personally guaranteed. Personal liability only arises as a result of legal action taken by an Insolvency Practitioner.

That being said, it might be advantageous if he found a cheaper liquidator and did liquidate the company. The name “ABC Construction” and any obvious similar derivative might become a restricted name for him which could mean that by continuing to trade as such, he would be committing a criminal offence with associated personal liability.

Obviously each situation rests on its own circumstances but if you would like to give me a call to discuss, my contact details are below.

Thanks.

 

[JEREMY HAWKE]

I would also go with the personal payment plan as well as that's the best deal you will get

Let's remember that the SpongeBob plan is for those that have nothing .Not people with money in the bank
This plan is abused by most that implement it

 

[Lisa Thomas]

Liquidation in court costs £2,900. I cannot see why the IP's have quoted £20k unless there are sufficient assets in the company to cover those costs.

 

[Newchodge]

Thanks for taking the time to read and respond.

Suing the director or the Company? If Director, based on the loose outline of the Directors doings - would I even have a case to go after them personally? If Company, would the insolvency and inevitable wind up/liquidation prevent any recovery of funds if successful?

The company is not in liquidation. They are thinking about maybe, possibly, doing it in January. The company owes you the money, you sue the company.

Others have suggested a softly softly approach. Your client is a conman, do you think that will work?

 

[Mark T Jones]

You are getting yourself distracted with red herrings and false hope


Your client has ceased trading and is filing for insolvency. Highly likely there are no assets, so no payout

Unlike @Frank Wessely I would definitely go to LBA and potentially pursue through the courts in principle.

You have no direct claim against the director or other companies without some complex and ultimately tenuous legal work.

They may or my not honour their 'promise' to pay you personally - that mostly depends on whether you have something they cant easily get elsewhere. Unfortunately there is always someone who will offer credit to these people

Essentially, fight your corner but dont let it become a distraction, learn your lesson and move on

 

[eteb3]

So thank him in writing and confirm that he has agreed to pay off the debt over six months as discussed on your dash cam.

Absolutely this. My only question would be, what consideration was given for the guarantee? If OP agreed not to oppose the MVL in return, that would be good consideration; otherwise it’s no more than a voluntary promise by the director and he’s on his honour only.

 

[Lisa Thomas]

Absolutely this. My only question would be, what consideration was given for the guarantee? If OP agreed not to oppose the MVL in return, that would be good consideration; otherwise it’s no more than a voluntary promise by the director and he’s on his honour only.

Do you meal CVL? MVL is a solvent procedure.

Also what do you mean by oppose? Creditors can object to the process, and insist on a physical meeting being called if they fit the criteria. They can then vote on their own choice of liquidator. But they cannot oppose the insolvent Liquidation.

Thanks

 

[eteb3]

Do you meal CVL? MVL is a solvent procedure.

Also what do you mean by oppose? Creditors can object to the process, and insist on a physical meeting being called if they fit the criteria. They can then vote on their own choice of liquidator. But they cannot oppose the insolvent Liquidation.

This is me showing my embarrassing ignorance of insolvency: evidently know less than I thought!

 

[eteb3]

Though (at the risk of digging at the bottom of a hole) the basic point remains: any personal guarantee needs some value given by the OP in exchange for it, or else a right waived , else the director’s words are just so much hot air.

 

[Michael Loveridge]

Unlike @Frank Wessely I would definitely go to LBA and potentially pursue through the courts in principle.

Sorry to disagree, but that would almost certainly be throwing good money after bad. Even if you deal with the claim yourself there's a court fee of £455 just to issue the claim. I strongly suspect that the debtor wouldn't bother defending it, so you''d get your default judgment for £8k within three weeks or so.

However, the judgment is unlikely to be worth the paper it's written on, as you then have to try to enforce it. If the company has no assets it's a further waste of time and money sending in the bailiffs.

Your best bet would be to try and obtain a written guarantee from the director in his personal capacity, but I'd be very doubtful that he would provide one.

Your best tactic is therefore to threaten him with a winding up petition, and if he shows any concern you could say you'd hold off if he promises you that the debt will be paid.

It's important not to insist on him promising that he will pay the debt personally, as that'll scare him off. But if he promises that the company will pay you then have legal consideration in the act of withholding the petition, so that when, as is inevitable, the company goes into liquidation and you get nothing you can sue him personally.

I've used this technique on several occasions, and in the right circumstances it can work. It's certainly better than throwing money away on fruitless litigation.

You have no direct claim against the director or other companies without some complex and ultimately tenuous legal work.

No matter how much legal work you put into it you will never be able to make a direct claim against the director. The only person that can do so is the liquidator, and any recovery he makes wouldn't be paid to you - it'd simply be shared amongst all the creditors pro rata.

 

[Lisa Thomas]

Just to clarify, Michael, the money would not be shared against the creditors pro rata.

There is a specific order of priority.

The costs, preferential and secured creditors get paid first. Depending on the figures, a slice of the debenture holders funds are reserved for the unsecured creditors.

Then if anything is left the dividend is split pro rata between the unsecured creditors.

 

[eteb3]

you then have legal consideration in the act of withholding the petition

That’s what I was trying to say

if he promises that the company will pay…

Out of interest, how do you pin that on him personally, rather than it being a promise by the company’s director?