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To be or not to be — what happens when an insolvent company isn’t insolvent?

Tonnes of clinical waste and hundreds of workers without pay. In the case of Health Environmental Services (HES), Scots Law on insolvency could potentially lead to something of an impasse.

HES has been disposing of this waste, including dressings, needles and even body parts, for over 20 years. Over the festive period, the company ceased trading and some 350 workers were laid off.

What it has highlighted from a legal perspective is the difference between the insolvency process north and south of the border, differences worth bearing in mind for company directors and creditors alike.

Scotland v England and Wales

When faced with insolvency — when a company has insufficient funds to pay its bills — in England and Wales an insolvency practitioner (IP), can take on an appointment as liquidator and manage the company through the winding up process, or indeed deal only with liquidations.

If an IP isn’t willing to take on the appointment, the official receiver, a civil servant will carry out the initial stages of winding up the business before appointing an IP to complete the process.

The upshot is that that in England and Wales if a company is insolvent, there is always a mechanism to place it into a formal insolvency.

Meanwhile, there is no official receiver in Scotland.

HES is registered in Scotland, and north of the border, only private IPs can act as the liquidator of a company. The party wishing to place a company into liquidation, be that its directors or creditors, needs to find an IP willing to take the case on before official proceedings can begin.

IPs need to be paid like everyone else, so if the company has reached the point where there are not even enough assets to meet the IP’s costs, finding one will be difficult.

As a result, there are many “ghost” companies in Scotland that are insolvent but have not entered a formal insolvency process.

What happens with pay?

The problem here is that for ex-employees to access pay they’re due, usually the company needs to placed into a formal insolvency process. And that hasn’t happened yet with HES.

Normally when a firm fails, the workers can claim statutory redundancy pay, unpaid wages and holiday pay from the UK-wide Redundancy Payment Service (RPS), run by the government and paid for by the National Insurance Fund.

However, claims can’t usually be processed without a reference number. And it seems in the case of HES, at least, no such reference number exists because the firm’s directors haven’t appointed an IP. At the time of writing, the RPS has confirmed it will allow claims for redundancy, but not wages and holiday pay.

Creditors can force the company’s hand by petitioning the court place the company in the hands of a liquidator, but that only works in Scotland if there is an IP lined up.

Recent media reports suggest HES’ ex-employees are considering making a joint application to the court to put the firm into insolvency so they can recoup wages due, but time will tell if this happens, and indeed if it’s successful.

Seek early advice

The advice for directors, and it sounds simple, is not to let your company get to that point.

Even if you can still pay debts, but it looks like that cannot be sustained, speak confidentially to an IP to get the best advice. Your solicitor or accountant can refer you to someone who can help.

Equally, if you are a creditor considering placing a company into liquidation that decision should be made earlier rather than later, before all the company’s assets are totally depleted.

Rebecca Walker

Aberdeen-based senior associate Rebecca Walker specialises in commercial litigation, with a particular focus on both personal and corporate insolvency. She holds a Certificate of Proficiency in Insolvency (CPI), a prestigious Insolvency Practitioners’ Association qualification.

Posted, 11 January 2019 by Rebecca Walker
Categories: Bankruptcy and insolvency law | Corporate | Employment