changes? Yes, but the issues remain the same
It has been impossible not to notice some of the largest and
well known companies teetering on the brink of, or falling into,
insolvency in the last year. Banks have clearly not been immune
with the likes of Northern Rock leading the way for the hurried
takeover of HBOS by Lloyds and the government digging deep into
taxpayers pockets to support almost everyone else.
At the same time, consultations and bills have been issued
dealing with, amongst other things:
- Insolvency reform – to give absolute priority to new money lent
post an insolvency event – to encourage lending to cash strapped
but otherwise viable businesses (if that is not a contradiction in
itself);
- The creation of the Business Payment Support Service – to give
those cash strapped businesses time to pay HMRC arrears – with a
view to helping them survive the recession;
- Proposed reduction in the limitation periods for pursuing
recovery of simple breaches of contract – namely debts; and
- The Safety Deposit Current Account Bill – to force banks to
hold customers deposits at banks in an account where title remains
vested in the customer (after all the money we put in the bank is
our money, right?....wrong!) and to alleviate the need for the
government to guarantee bank customers deposits other than in these
accounts.
Of course we all know that many things look like they could be
done better in hindsight and that change is borne out of necessity
but there seems to be a lot of action being proposed currently that
may only have come to life now because of this rearward view or
which otherwise have has been overlooked for long periods but now
look more important.
A great example of this is the recently completed consultation
(13 July 2009) in respect of the proposed changes to the limitation
periods for breach of simple contracts (debt actions). The law in
this area was settled originally in 1623, is presently contained in
the Limitation Act 1980, was reviewed by the Law Commission in
1990, its recommendations were published in 2001 and yet action is
only being taken now, following the announcement that it would be
legislated upon in 2009 in the Queen's Speech in December 2008.
This change (if it proceeds) will only have taken 386 years odd to
arrive!
There are some otherwise more obvious things though that you can
take care of yourself that may mean that the amounts you could
possibly lose are drastically reduced and they are not necessarily
difficult to achieve.
Firstly, make sure you have what you thought you were
getting.
Review your legal files, particularly your security (corporate
and personal) as you never know when you may need it. Check that
you not only have the security that you covenanted to get but that
it is dated, properly executed (as a deed in most cases, with two
signatures generally for companies and signatures witnessed for
individuals), that corporate security has been registered at
Companies House (and the Land Registry if it contains a fixed
charge on specified land) and importantly that you have also
received the waivers or deeds of priorities from existing security
holders that you require and that they remain valid.
If your client is a sole trader or partnership (but not a
Limited Liability Partnership) ensure that your Bills of Sale
registration has been made and is current, if not renew it. In a
market where insolvency rates are high (and industry comment
suggests they are likely to increase further in the fourth quarter
of 2009 and first quarter of 2010) you will likely want to ensure
you have the protection of the registration of the assignment of
debts in your favour against a trustee in bankruptcy that this
registration affords.
Secondly, make sure that any variations to your facilities have
been properly documented including any additional advances or
over-advances so that it is clear what is outstanding and when or
how it will be repaid.
Thirdly, with facilities being stretched and fraud increasing
make sure that your account managers are aware of what is happening
in the client's business. While asset based lending is a finance
facility in demand in a recession beware of clients 'bucking the
trend' and investigate any gut feeling of uneasiness.
As part of your KYC procedures and in accordance with the
requirements of the Data Protection Act, refresh your directors and
beneficial owner searches, ensure that the correct people are tied
to the facility by security and that your documents are coming from
the appropriate people. If there have been changes get them
verified both by the client and independently (this can be done
relatively cheaply and easily with online tools like Companies
House, the electoral role, yellow pages and other telephone
directories as well as subscription services of Experian and
others) and if needs be ensure the client's corporate filings are
updated.
Fourthly, and importantly, make sure that you are not left
exposed on the left hand when secured on the right hand. If
multiple funding lines are given to a client either in your own
business or by companies within your own group of companies, make
sure that your facilities are properly
- cross securitised/collateralised;
- co-terminus;
- cross-defaulted; and
- any monies owed by one part of the business can be set-off or
combined with any monies owed to another part.
Failure to get this right can not only be embarrassing (imagine
having to pay money to a client under one facility while the client
remains indebted to you on a different facility for perhaps a
greater sum so you are left as a creditor of the client when it has
insufficient assets to repay you) but can cost more than just
money.
Equally, if this is not put in place you could easily find
yourself obliged to advance funds under one facility when a
concurrent facility has been breached and is liable to be
terminated or is terminated.
It is perhaps surprising how easily this can occur.
As the number of client's of asset based lenders referred to the
'risk' departments increases hopefully you will have steps in place
to minimise the potential risks that failures in these regards may
pose. If not then hopefully this will help to remind you of a few
of the steps that we often see overlooked which could easily make
the difference between a loss and a recovery.
