What power do creditors have?

Discussion in 'Insolvency' started by eteb3, Mar 12, 2020.

  1. eteb3

    eteb3 UKBF Regular Free Member

    166 25
    Hi all

    Tiny private school. Charitable ltd company. Parents pay fees. May be trading while insolvent.

    A few weeks ago senior manager (non-director) writes to parents saying "We're getting final demands; some teachers haven't been paid for months; we would love to see your fees please". So...

    If the teachers are owed pay, is there any way they can take over the school themselves through the insolvency process?

    Context is historic poor financials, and the teachers may do better than current directors.

    I'm told the founders were very smooth with parents to get them on board, promised to make the fees easy, pay by instalments, etc - fearful that insisting on full payment would mean families go elsewhere, so better accept part-payment than get none at all.

    Charity nearly went under. Another charity bailed it out, and new directors came in. I'm told they have a moral objection to insisting on recovering debts of fees, so school now back where it was pre-rescue. Appears to be a culture of non-payment among some parents.

    It's an open question whether it can ever wash its face: never been run like a business, so who knows whether the parents can't pay, or just don't. But there's a chance it could work.
    • After administration is the company always handed back to the old directors? (Looks like that wouldn't solve the problem.)
    • Could creditor-teachers impose new directors? (Seems teachers are pushing for debt recovery, but to no avail: as directors themselves, maybe they could make it work.)
    • In a vote of creditors, how are votes weighted? (There are several teacher creditors owed perhaps ~£2k each, and what looks like a mortgage at ~£250k.)
    • Does it being a charity make any difference?
    Any thoughts? Many thanks if so.
     
    Last edited: Mar 13, 2020
    Posted: Mar 12, 2020 By: eteb3 Member since: Jul 18, 2019
    #1
  2. Mr D

    Mr D UKBF Legend Free Member

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    The creditors between them could pay to wind the business up. Taking it over - a management buyout?
    Would that not have the similar cashflow situation as now?
     
    Posted: Mar 13, 2020 By: Mr D Member since: Feb 12, 2017
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  3. Ian J

    Ian J Factoring Specialist Full Member - Verified Business

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    No. The Administrator is duty bound to raise as much money as he can for the creditors and he should sell the assets to the highest bidder

    I am not a lawyer and a bit rusty but I don't think secured creditors such as the mortgagor have a vote
     
    Posted: Mar 13, 2020 By: Ian J Member since: Nov 6, 2004
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  4. Chris Ashdown

    Chris Ashdown UKBF Legend Free Member

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    As it appears insolvent then I guess it should be shut down as thats the directors responsibility

    If the directors cannot make the company financially secure then it fails, a
     
    Posted: Mar 13, 2020 By: Chris Ashdown Member since: Dec 7, 2003
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  5. Lisa Thomas

    Lisa Thomas UKBF Enthusiast Free Member

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    Hi My thoughts to your questions are below:

    • After administration is the company always handed back to the old directors? (Looks like that wouldn't solve the problem.
    Very rarely as the Administrators have to achieve one of the following objectives:

    (a)rescuing the company as a going concern, or

    (b)achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being in administration), or

    (c)realising property in order to make a distribution to one or more secured or preferential creditors.

    and the exit routes tend to be Liquidation (if a dividend is available to unsecured creditors) followed by dissolution, or straight to dissolution so the Company tends to die (although the business is often rescued by a sale in an Administration).

    • Could creditor-teachers impose new directors? (Seems teachers are pushing for debt recovery, but to no avail: as directors themselves, maybe they could make it work.)
    No, creditors can impose insolvency, but cannot appoint Directors, without Board approval.
    • In a vote of creditors, how are votes weighted? (There are several teacher creditors owed perhaps ~£2k each, and what looks like a mortgage at ~£250k.)
    It depends on what the vote relates to - what type of vote are you referring to please?

    If they have a debenture they can force the Company into Administration.

    Any creditor owed over £750 can force a Company into Liquidation.

    • Does it being a charity make any difference?
    Make a difference to what please?
     
    Posted: Mar 13, 2020 By: Lisa Thomas Member since: Apr 20, 2015
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  6. eteb3

    eteb3 UKBF Regular Free Member

    166 25
    Thanks for all replies.

    I'm really asking, what negotiating leverage do the creditor teachers have here?

    And in particular, what leverage to push for the only realistic option I see:
    • current board retires, as they seem unwilling to squeeze parents to pay their dues
    • new board chases non-payers hard, and has a really good go at running the charity at a surplus.
    Liquidation would be terrible for the students, so teachers would be unlikely to go that far. But some kind of 'you guys have had your crack, now we get a go' solution might work.

    Is unpaid wages a 'debenture'? (an email saying 'we're late paying you, we'll pay you asap' is 'any other security'?) If not, could the teachers deftly offer to compound their wages into a debenture in order to force administration?

    I'm a novice in this: I had an idea that the creditors took over the company as if they were members of it? But not one creditor, one vote?

    Does the liquidator have to follow the objects clause (Muslim charity, so arguable that sale of debt would be in breach of objects), or is it just a pile of plain vanilla debt? If an administrator saves it, does she save it as a plain vanilla company, or to pursue the objects stated in the articles?
     
    Posted: Mar 13, 2020 By: eteb3 Member since: Jul 18, 2019
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  7. eteb3

    eteb3 UKBF Regular Free Member

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    Oh and most important, when do the kids get sent home? (I mean thanks to the liquidation/administration, not the virus!)
     
    Posted: Mar 13, 2020 By: eteb3 Member since: Jul 18, 2019
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  8. Lisa Thomas

    Lisa Thomas UKBF Enthusiast Free Member

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    Hi

    It's hard to answer your queries as you seems to be asking them from the point of the creditors, rather than the Directors.

    May I ask what your connection is?

    If the Company is insolvent it is vital that the Directors seek urgent insolvency advice to explore which option is best for them if they haven't already.

    If Liquidation then the Company/School will close. The date will be determined based on the advice from the Liquidator, perhaps in line with a term break, but it depends on the financial picture as they cannot advise for any wrongful trading to continue.

    If Administration is the best option then it depends on what objective is being achieved, I suspect the school would continue trading in order to meet one of the objectives, probably whilst a marketing exercise is carried out to find a buyer.

    A debenture is a floating charge and gives creditors security for their debt, but it must be put in place and registered at Companies House before any monies are advanced to be valid.

    Based on your comments it would seem that perhaps no security is in place for the teacher's lendings (although they may have preferential status in insolvency if the loans relate to wage arrears or holiday pay and proper paperwork has been drawn up).

    You mentioned a mortgage of £250k - I presume this is secured so the lender will likely rely on their security (if sufficient). They could put a Receiver in to recover their debt if the mortgage terms are breached.

    The Liquidators/Administrators don't sell the debts. They sell the assets.

    If someone buys the shares of the Company then of course they will inherit the debts, but this is unlikely to happen in the case of an insolvency Company as no-one would want to buy the shares.
     
    Posted: Mar 13, 2020 By: Lisa Thomas Member since: Apr 20, 2015
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  9. eteb3

    eteb3 UKBF Regular Free Member

    166 25
    All super helpful, thank you.

    I have good friends who are teachers and parents, and I know (and like) the directors. It's a great school, but financially appears never to have been run sustainably. I'm trying to work out how it could be saved from going bust and put on a better footing. It's better the teachers go into negotiations knowing what hard power they have, if any at all.

    I suspect the directors have taken some sort of advice - a few weeks ago they updated their PSC info, several years late. (And I do wonder what state the register of members is in, too.)

    I've found there's no mortgage and no charge, so all creditors unsecured.

    There are no shares to buy, as it's a charity: what could a 'buy-out' look like given this is a company limited by guarantee?

    Sorry - I meant the debts owed by parents, so an asset of the company.

    Whose decision is this?

    Thanks again!
     
    Last edited: Mar 13, 2020
    Posted: Mar 13, 2020 By: eteb3 Member since: Jul 18, 2019
    #9
  10. Mr D

    Mr D UKBF Legend Free Member

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    If there isn't the money for wages you don't get paid.
    No negotiation by the teachers will change that.

    However the directors could be preferring some creditors over others. Paying some bills over wages.
     
    Posted: Mar 13, 2020 By: Mr D Member since: Feb 12, 2017
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  11. Lisa Thomas

    Lisa Thomas UKBF Enthusiast Free Member

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    Posted: Mar 13, 2020 By: Lisa Thomas Member since: Apr 20, 2015
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  12. eteb3

    eteb3 UKBF Regular Free Member

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    You're right if liquidation is the aim. But the aim is really to have the school run so as to be able to pay those wages, by people prepared to insist that parent fees are paid. My hunch is the business could be profitable - it's just not asserting its rights through (imo misguided) religious scruples about pursuing ppl for debts owed. Change the directors, and it might get on track.

    I was thinking there might be some strategy like serving a statutory demand post-dated 48 hours, and having some calm conversations about people stepping down. Then once a new board is in place, withdraw the demand and see what can be done. But pointless if there's no real power behind the threat.

    Does rather smell like that. I don't know if they know it's illegal.

    Thank you and when would they do that? Before or after a statutory demand? Or maybe they can do either? What might an administration cost, roughly? Turnover is ~£130k, creditors ~£300k.

    Again, if it's a charity, and no shareholders to consider, what are the fiduciary considerations the directors need to make - who are their duties to?
     
    Last edited: Mar 13, 2020
    Posted: Mar 13, 2020 By: eteb3 Member since: Jul 18, 2019
    #12
  13. Mr D

    Mr D UKBF Legend Free Member

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    Presumes of course that debts can be paid.

    If people don't have the money - then what?
    Or they offer payment of a couple of grand at £1 a month?

    All well and good to chase debts. That is not a guarantee that sums owed will be paid.
     
    Posted: Mar 13, 2020 By: Mr D Member since: Feb 12, 2017
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  14. eteb3

    eteb3 UKBF Regular Free Member

    166 25
    Yeah, that's true. I guess all round it's the fees in the future I'm more interested in: change the non-payment culture, probably have to say goodbye to some families, and you might have income to cover the outgoings. And for that you need new leaders...
     
    Posted: Mar 13, 2020 By: eteb3 Member since: Jul 18, 2019
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  15. Mr D

    Mr D UKBF Legend Free Member

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    New leaders. Which is a lot of hassle for a charity to find and put in place.
    You won't get the best people for the jobs - they will never volunteer.

    Also need new parents willing to pay the fees.

    Back when I were a lad the parents had a week after school started that term to pay that term's fees or else their child was excluded from the school.


    Ultimately if the organisation as it is cannot pay its bills it should shut down. Save running up yet more debt that isn't paid.

    Dunno whether the teachers could get some of their money via insolvency service if that happens?
     
    Posted: Mar 13, 2020 By: Mr D Member since: Feb 12, 2017
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  16. Lisa Thomas

    Lisa Thomas UKBF Enthusiast Free Member

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    If the Company enters Liquidation or Administration, assuming they were employees and not subcontracted, the teachers can make claims to IS for wage arrears, holiday arrears, notice pay, redundancy pay and some pension contribution shortfalls, capped at certain limits.
     
    Posted: Mar 16, 2020 By: Lisa Thomas Member since: Apr 20, 2015
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