Please see below our corporate insights for August from our business law experts.
Preferences in corporate insolvency
by Catherine Fisher
So what exactly is a “preference”?
A company gives a preference to a person if:
a) that person is one of the company’s creditors or a surety or guarantor for any of the company’s debts or other liabilities;
b) the company does anything which has the intentional effect of putting that person into a position which, if the company goes into liquidation, will be better than the position he would have been in; and
c) the company was unable to pay its debts at the time of the transaction or became unable to pay its debts as a result of it.
Examples of a preference include paying an unsecured creditor in priority to other creditors, granting security to a previously unsecured creditor, allowing a supplier to change its terms and conditions of sale to include a retention of title clause, repaying a director’s loan account or reducing a company debt guaranteed by one of the directors.
How far in advance of insolvency could giving a preference become an issue?
The relevant time for review of a preference is during the six months before the onset of insolvency (two years if the preference was to a connected person). The precise date of the onset of insolvency depends on the insolvency procedure in question. Broadly, it is the date on which the formal process towards administration or liquidation started.
What can a court do?
The court may make any order it thinks fit for restoring the position to what it would have been if the company had not given the preference. This could include, for example, ordering the person who entered into the transaction, or who received the preference, to return property or its value to the company. In particular, the court may require any property transferred as part of the transaction to be re-vested in the company, require property representing the subject-matter or the proceeds of sale of the property to be re-vested in the company, or discharge any security given by the company.
What about third parties?
The court may make orders affecting third parties. Someone other than the preferred creditor, who did not act in good faith and for value, could be ordered to restore or re-vest the preferred payment to the insolvent company.
If you would like advice or assistance on any of the issues raised in this blog please contact Catherine Fisher.
Be careful making drunken promises – our view on Mike Ashley’s recent high court victory
You may have seen the recent headlines about billionaire Sports Direct founder, Mike Ashley’s victory in the high court over a deal allegedly made in a pub with his former investment banker colleague, Jeffrey Blue.
Mr Blue had claimed that Mr Ashley promised to pay him £15 million if Sports Direct’s share price doubled over three years. Mr Ashley denied that this was a binding business deal and that the conversation was simply a joke during “ludicrous” drunken banter.
“I can’t believe that [Mr Blue] is now trying to take me for £14m off the back of some drunk banter that he is seeking to engineer into something more.”
Whilst the court found in Mr Ashley’s favour it’s worth thinking about the implications of this case to ensure that conversations like this don’t come back to bite you. What may be intended as banter to one person can be taken as a serious offer by someone else. Even if it is not in writing, a binding agreement can be created in this way. And if you didn’t mean it you could find yourself in court having your drinking habits aired to all the world just like Mr Ashley.
We see similar problems with business owners who promise staff shares in their company – but then don’t go on to formalise the arrangement in writing. This is risky because even if you agree that there is a binding arrangement (unlike Mr Ashley), you could still end up arguing over what was and what was not agreed. For instance, how many shares is the employee getting? What price was the employee to pay? When does the employee get the shares? What happens if the employee leaves the company?
Another huge downside to having an informal arrangement like this is that you are also missing out on the opportunity to take advantage of some great tax breaks. If you give shares or promise to give shares in your company to staff there is a risk that the gift will be treated as a benefit of employment – and therefore that the value of the shares will need to be taxed through the PAYE system. This can be avoided (in part) by putting a formal EMI (Enterprise Management Incentive) scheme in place – but you must follow the correct procedure to get the benefit of this.
If you are interested in finding out more about tax efficient share schemes for employees please contact a member of the Morrisons’ Solicitors Corporate Team.
Four ways to exit a business lease early
by Lily Meyer
There are many reasons why a tenant might wish to terminate their commercial lease early. They may have outgrown their existing premises and be looking to relocate to expand the business. Alternatively, the premises may have become too expensive or too big, making it appropriate to move to a more suitable, cost effective location.
The ability to terminate a lease early depends on the terms of the lease, the state of the property market at the time and other negotiating factors.
Some options to consider include:
1. Agreeing an early termination with the landlord. The landlord is under no obligation to agree to an earlier termination but may be willing to do so in return for a premium. If a business is struggling, a landlord may be agreeable to negotiating a lower rent or accepting a relatively small premium for a surrender (as this may be more attractive than ending up with an empty premises should the tenant become insolvent).
2. Assigning the lease to a new tenant. Assigning a lease (passing it on to another business) is an alternative to terminating or sub-letting. The lease is likely to restrict who the current tenant can assign their lease to and landlord’s consent will also be required. The landlord would normally want to check the prospective tenant’s accounts and references to ensure their financial standing is at least as good as the outgoing tenant. The current tenant would also need to guarantee the new tenant’s obligations under the lease under an authorised guarantee agreement. The current tenant will remain ‘on the hook’ under the guarantee until the lease is further transferred.
3. Subletting the property to a new tenant. If a lease permits subletting, this may be an attractive way for a tenant to recover some rent and other overheads such as business rates and service charge from a subtenant. However, the landlord’s consent is likely to be required and will be subject to the same or similar conditions as an assignment (other than the requirement of an authorised guarantee agreement). The original tenant will still be liable to fulfil their obligations in their lease and so will continue to be responsible for the rent and any damage to the property, regardless of whether the subtenant complies with their sublease.
4. Exercising the break option (if any). The existence of a break clause gives a tenant the right to terminate the lease on a specified date or dates. Usually, the landlord must be notified in writing during a fixed notice period so it is essential the notice is served formally in compliance with the lease provisions. If the notice and conditions are not strictly complied with, the right to break will be irretrievably lost. The landlord may also be legally entitled to refuse to accept the break if the rent is not paid up to date, vacant possession is not given and/or there are any outstanding breaches of the lease, however minor. A tenant wishing to exercise a break option should check the break conditions carefully before serving a break notice.
Tenants looking to end a commercial lease early should take the advice of a specialist commercial property solicitor to find out the best way to proceed. To discuss this further or any other commercial property requirements, please contact the Commercial Property Team on 020 8943 1441. For more information on Commercial Property please visit click here