SECTIONS 127 AND FOLLOWING OF THE INSOLVENCY ACT 1986

The Insolvency Act 1986 (“IA”) as amended contains provisions designed to assist the pari passu (i.e. equal, by category) distribution of the company’s property to its creditors.  Key provisions relating to a liquidator’s ability to recover company property from directors are as follows (a broadly similar regime operates in the case of company administrations).

Effect of the petition on the directors’ powers of management

The winding up of a company is generally deemed to commence at the time of issuing the winding up petition, and not on the subsequent making of the court order to wind up (section 127 IA).  The purpose here is to prevent directors from disposing of company property to the prejudice of creditors.  Dispositions of the company’s property, whether in the course of carrying on business or otherwise (and unless subsequently validated by the court) will generally be void if a winding up order is made. If the property is not recovered, the directors may be personally liable to reimburse the insolvent estate.

Effect of making the winding up order

A compulsory winding up order has the effect of terminating the appointment of directors and their powers as directors.

Liquidator’s powers of investigation

Liquidators have powers to require directors to provide information.  This is not only to assist them to get in the assets of the estate and identify liabilities but also to identify the causes of the failure of the company and, if considered appropriate, to pass evidence to the Secretary of State or prosecuting authorities, with a view to disqualification or criminal proceedings. 

Thus, directors and other specified persons are under a duty, on notice, to provide a statement of affairs. There are civil and criminal consequences for default. Directors may also be obliged to produce accounts for up to the three previous years and information concerning the promotion, formation, dealings, affairs and property of the company.

Directors and former directors, whether resident in the jurisdiction or abroad, can also be required to attend court for public examination.

It is the responsibility of the liquidator to take the company’s property into their possession or control.  The directors and certain other third parties are under a duty to cooperate with the liquidator and must therefore hand over the company’s books, papers and records. 

The liquidator can apply to the court to require the attendance of any person within the jurisdiction known or suspected to have in his possession any property of the company or who is supposed to be indebted to the company, or any person who the court considers capable of giving information concerning the business dealings, affairs or property of the company, and to produce any records in their possession or control relating to such matters (s. 236 IA).  In making such an application, the liquidator will be acting as agent of the company, such that a legal adviser of the company prior to the winding up is unlikely to be able to resist on the grounds of privilege.

Directors’ Liabilities in Insolvency Proceedings

Liquidators have the power to bring proceedings in the name of the company against directors for breach of fiduciary and other duties, to recover company property in their possession or control, or to recover debts owed to the company. Remedies are available for the following actions of directors:-

Wrongful Trading when insolvent liquidation is unavoidable – The court is given power to order a person to make a contribution to the company’s assets if (a) the company has gone into insolvent liquidation, (b) at some time the person knew or ought to have known that insolvent liquidation could not be avoided, (c) at that time, the person was a director and (d) the court is not satisfied that after that time the person took every step with a view to minimising the potential loss to the company’s creditors as they ought to have done (s.214 IA). Whether a director ought to have known that insolvent liquidation could not be avoided is treated as a question of objective fact.  However, the question is not to be approached with the benefit of hindsight.  The cases in which directors have been held liable are typically those in which they closed their eyes to the reality of the company’s position, or failed to maintain accounting records compliant with UK legislation.

Even persons who are “sleeping” directors are subject to the above test, which in effect requires  reasonable diligence.

Fraudulent Trading –This provision may be invoked in similar circumstances to the above, save that establishing the liability of the director is more onerous for the liquidator, who must satisfy the court that the individual concerned was knowingly a party to carrying on the business of the company with intent to defraud creditors, or for any other fraudulent purpose (s.213 IA).  A finding of actual dishonesty is required.  

Unlike the provision for Wrongful Trading, the provision for Fraudulent Trading was not temporarily suspended during the covid pandemic.

Transactions at an undervalue – Under this provision, the liquidator may apply to the court for an order where the company, within two years of the onset of insolvency and at a time when the company was unable to pay its debts, entered into a transaction with any person at an undervalue (ss.238-41 IA).  There is a presumption of inability to pay debts where the transaction was with a ‘connected person’.   However, the court may not make such an order if it is satisfied that the company entered into the transaction in good faith for the purpose of carrying on its business and at the time there were reasonable grounds for believing that the transaction would benefit the company.  An example of this might be selling a property at less than its full value to raise working capital.

The finding that a company was unable to pay its debts at some earlier time than its entry into liquidation has additional consequences for directors.  They will have been required to take account of the interests of creditors at that earlier stage (s.172 Companies Act 2006) and may not have the effective protection of a resolution of the members ratifying their conduct.

Preferences – Under this provision, the liquidator may apply to the court for an order where the company has, within two years prior to the onset of insolvency in the case of a connected creditor, or six months in the case of other creditors,  done anything which has the effect of putting that creditor into a better position in the event of insolvency than they would have been in if the action had not been taken (s.239 IA).  However, the court may only make such an order if the company was, in so acting, influenced by a desire to produce this effect.  This is presumed in the case of connected persons, other than employees.

Public policy to facilitate the pursuit of claims for the benefit of unsecured creditors – Where there is a floating charge relating to property of a company in liquidation and the liquidator brings a claim under any of the provisions mentioned above, or assigns (i.e. sells) a claim of such a nature, the proceeds of the claim or assignment are not to be treated as part of the net assets available to satisfy the claims of holders of debentures secured by floating charges (IA s.176 ZB). In terms of calculating the level of contribution to be made, the starting point is to ask whether, as a result of the director’s wrongful act, there was an increase or reduction in the net deficiency of the company as regards unsecured creditors – Re Ralls Builders Ltd (2016).

The “misfeasance” provision – Under this provision, if, in the course of a winding up, it appears that a person who is, or has been, an officer of the company has misapplied or become accountable for any money or other property of the company, or been guilty of any misfeasance in the nature of a breach of trust, or negligence or other breach of any duty in relation to the company, the court may, on the application of the liquidator, a creditor or a contributory examine into the conduct of the person and compel them to restore the property with interest or contribute to the company’s assets by way of compensation (s.212 IA).  Misfeasance applications can potentially be available where the complaint is that there was a failure to have regard to the interests of creditors.

There is the possibility of pursuing this remedy on a shortened procedural basis. Liquidators may assign this power to anyone willing to pursue the claim.

Transactions defrauding creditors – Rather than assisting the pari passu distribution of the company’s property, the purpose of this provision (under s.423 IA) is to protect creditors from fraud.  Upon an application by a liquidator or a victim of the transaction, the court may set aside the transaction or otherwise protect the interests of the victim, where it is satisfied that a purpose of the transaction was to put assets beyond the reach, or otherwise to prejudice, the interests of the victim. Rather than the shorter time periods in the case of the remedies referred to above, the time periods under the Limitation Act 1980 apply.

If a director causes the company to dispose of property in circumstances to which s.423 applies, it is likely that they will have breached their duties to the company and will be liable to compensate for any loss.

For more information contact Wendy Miles, Chris Earl-Anderson or William Sturge at Lovetts.

At Lovetts Solicitors, we recognise that mental health is important, not just in the workplace but throughout society. That is why we are proud to support Oakleaf, a Guildford-based mental health charity providing essential services to those in need.

Since 2020, Lovetts has been a committed corporate partner of Oakleaf, helping to fund mental health support and raising awareness about the challenges individuals face. Our partnership has directly contributed to funding the equivalent of 210 counselling sessions, offering crucial support to people who may have otherwise struggled to access professional help.

Jen Clay, Head of Partnerships at Oakleaf, commented:

“We are hugely grateful to Lovetts Solicitors, who have been a committed corporate partner of Oakleaf since January 2020. The direct donations they have provided since then could fund the equivalent of 210 counselling sessions for Oakleaf clients, making a profound positive impact on so many individuals managing their mental health in the Surrey community. Thanks to Lovetts’ ongoing support, people who may have otherwise struggled to access counselling have found a safe space to build resilience, improve their wellbeing, and regain confidence in their daily lives. Lovetts has been invaluable in helping Oakleaf sustain and grow the many vital services the charity offers.”

The Mental Health Founders Network

As part of our commitment, Lovetts is a member of Oakleaf’s Mental Health Founders Network, attending quarterly meetings to discuss workplace mental health and encourage more open conversations on the topic. Businesses play a vital role in ensuring that employees have the support they need, and through this network, we are helping to drive real change.

Ongoing Support and Sponsorship

Lovetts was also proud to be the headline sponsor for Oakleaf’s Annual Quiz Night in March 2025, an event attended by 170 guests. By sponsoring this event, we ensured that 100% of ticket sales and funds raised can go directly toward supporting Oakleaf’s mental health services.

Michael Higgins, Managing Director of Lovetts Solicitors, shared:

“It was a pleasure to sponsor Oakleaf’s annual quiz night. We are proud to be associated with Oakleaf, who provide vital mental health support and give people within the community self-belief through work-based skills training. The quiz is always a really enjoyable evening, and I am pleased that we were able to raise funds for such a great charity.”

We are also supporting several upcoming initiatives:

A Shared Commitment to Mental Wellbeing

Mental health is a growing concern in the business world, and organisations must take an active role in supporting their employees. At Lovetts, we are proud to be working alongside Oakleaf to ensure that individuals in our community receive the help they need.

For more information on how you can support Oakleaf and contribute to mental health initiatives, visit www.oakleaf-enterprise.org/support-us.

For small businesses, late payments can have a serious impact on cash flow. With business to business transactions where no terms have been agreed or you do not have a contractual provision for late payment, the Late Payment of Commercial Debts (Interest) Act 1998 can step in to imply late payment terms into your contracts.

This means you may be entitled to charge interest on late payments, seek compensation on overdue invoices, together with reasonable legal costs. This helps businesses to recover losses caused by late payment and encourage prompt payments. Here’s what you need to know:

Statutory Late Payment Charges

Under the Late Payment of Commercial Debts (Interest) Act 1998 (“the Late Payment Act”), where applicable, businesses can charge the following:

Interest on Late Payments

Under the Late Payment Act you are entitled to seek:

Compensation

In addition to interest, you can also claim a fixed sum of compensation for each invoice, as follows:

Recovery Of Reasonable Costs

You are also entitled to seek to recover an additional sum towards your reasonable costs if where the interest and compensation under the Late Payment Act do not cover all of your expenses in recovering the debt. Such expenses would include legal fees, debt collection agency charges or administrative costs.

How Lovetts Solicitors Can Help

At Lovetts Solicitors, we specialise in commercial debt recovery, helping small businesses:

  1. Sending Letters Before Action which can include interest and compensation under the Late Payment Act;
  2. Issuing legal proceedings to recover the debt, together with interest, compensation and reasonable costs if payment is not received; and
  3. Enforcing judgments obtained against debtors.

Late payments should never be accepted as the cost of doing business. If you are struggling with overdue invoices, take action today.

 LIFESTYLE EQUITIES V AHMED  

[2024] UKSC 17

The Facts

Kashif Ahmed and his sister, Bushra Ahmed, were directors of two “Juice Corporation” group companies and in that capacity arranged for the manufacture and distribution of clothing displaying the logo of “Santa Monica Polo Club” and the image of polo players on horseback.  

Lifestyle Equities (“Lifestyle”), a company that owned registered trade marks displaying the logo of “Beverley Hills Polo Club” and a mounted polo player, successfully sued the Juice Corporation companies for infringement of Lifestyle’s trade marks. 

Under the relevant sections of the Trade Marks Act 1994, liability is “strict”.  To establish an infringement, there is no need to prove knowledge or fault – only that the defendant, without the consent of the owner of the trade mark, committed an act of the kind specified in the statute. Nor is it a defence that the defendant acted in good faith and without any improper motive. 

Neither Kashif nor Bushra Ahmed had themselves infringed the letter of the Trade Marks Act.  Nevertheless, Lifestyle sued the Ahmeds personally, as well as the Juice companies, on the basis that the individuals had (1) authorised or procured the Juice companies to do the acts complained of and (2) engaged in a common design.

The Ahmeds maintained that they had had no improper motive, had acted on advice and had delegated the design of logos to a professional design team.   The trial judge made no contrary finding of fact on these assertions but nevertheless found the Ahmeds jointly and severally liable with the Juice companies for the acts of infringement.  

Ultimately, the main issue for the Supreme Court raised by the appeals from this decision was: when are directors of a company liable as accessories for causing the company to commit a tort (i.e. a civil wrong) of strict liability – in this case, trade mark infringement?  In particular, is such liability also strict or does it depend on knowledge of wrongdoing or some other mental element?

The Supreme Court’s decision

The Supreme Court approached this question by explaining that, whilst the Trade Marks Act restricts various acts and imposes strict liability for infringement, it does not make authorising a restricted act an infringement in its own right. If the Ahmeds were liable, it could only be as accessories.  The test for whether a person authorising a wrongful act is liable as an accessory turns on principles of the common law, and the strict liability regime under the Act does not carry over to accessories who have not personally infringed the Act.

In relation to Lifestyle’s allegation that the Ahmeds had authorised or procured the Juice companies to do the acts complained of, the Court held that an accessory who knowingly procuresthe primary wrongdoer to commit an actionable wrong will be liable with the primary wrongdoer for the wrong committed.

Where the primary wrong is a breach of contract, this accessory liability takes the form of a distinct tort.

Where the primary wrong is a tort, the accessory is made jointly liable for the tort committed by the primary wrongdoer.

 What is required for liability is that the accessory acted in a way that was intended to cause the primary wrongdoer to commit an act which the accessory knew was a wrongful act.  Turning a blind eye would be sufficient for this purpose.

Turning to Lifestyle’s second allegation that the Ahmeds had engaged in a common design, under the common law the rule is that an accessory who assiststhe primary wrongdoer to commit a tort is made jointly liable for the tort committed by the primary wrongdoer if the assistance is given pursuant to a common design between the parties.  In order to be made liable, the accessory must have provided more than trivial assistance, must have had a shared intention that the act would take place and must have been aware of facts which made the intended act unlawful.

What is meant by requiring that the accessory must know that an act is unlawful? In the present case, this did not refer to a requirement that the accessories must have a sufficient knowledge of trade mark law – knowledge of the law is assumed.  What was required was to establish that the accessories knew or turned a blind eye to the essential facts which made the act wrongful.  These would have included knowing that the Juice companies needed to, but did not, own the relevant trade mark or have a licence to produce and sell the clothing to the public.

The Supreme Cout therefore held that the Ahmeds, who did not have the relevant knowledge and who had no intention that an unlawful act would be committed, were not personally liable to Lifestyle on the accessory principle.   

Position of directors – In the course of giving its judgment, the Supreme Court further explained, in terms of the personal liability of directors for wrongful acts, that there are no special rules protecting directors who commit civil wrongs.  For example, there is no “safe harbour” in the form of board resolutions ratifying the acts of a director.  Liability is decided by applying ordinary principles of the law of tort, including the principles concerning the liability of accessories explained above.

Normal understandings – However, the liability of a director can in some situations be restricted by various normal understandings of the common law.  Thus, a distinction needs to be made between the type of situation described above and the case where an agent (companies always act through agents), acting in good faith and within his authority causes his principal to breach its duty.  In a contractual situation, the normal understanding is that agents assume no liability for inducing a breach of contract and only the principal will incur liability to the other contracting party – Said v Butt (1920).  

An example of a normal understanding applying in the case of tort is the case of the director who in good faith procured that his company’s financial projections should be provided to the claimants, who he knew would rely on them.  The projections were subsequently found to have been negligently prepared.  However, the director was found not to be personally liable.  This was because the director’s company’s liability arose from the fact that it had assumed responsibility for the statements made and the claimants had taken on the commercial risk of relying on them.  It would have subverted this allocation of risk if the director could also be held liable in tort – Williams v Natural Life Health Foods (1998).

Lovetts’ comment

The Supreme Court has restated the law relating to when directors will be liable to third party claimants for civil wrongs committed by their companies.  The Court has clarified that, in order to make a director liable as an accessory to the company’s wrongdoing, it is necessary to establish that the director knew the facts which made the act of the company unlawful.  The case raises the bar to making directors personally liable in this type of case, as issues such as good faith, the entitlement to rely on professional advice and the reasonableness or otherwise of believing that no wrongful act was being committed will need to be considered.

For further information, please contact Wendy Miles, Chris Earl-Anderson or William Sturge at Lovetts.

Late payment is a growing concern for businesses of all sizes. As we look ahead to 2025, it is crucial to stay informed about the trends that could impact your cash flow and overall financial health. The evolving landscape of debt recovery is reshaping how organisations manage their finances, interact with clients and implement payment systems. With technology advancing rapidly, late payments are not just an inconvenience; they can threaten business stability.

The impact of late payments on businesses

When invoices are delayed, companies struggle to meet their own financial obligations. This ripple effect can lead to disrupted operations and missed opportunities.

Small businesses often feel the brunt of late payments more acutely than larger firms. You may lack the financial cushion needed to absorb unexpected delays in revenue. Every overdue invoice represents not just a loss of income but also time spent chasing payments.

The stress associated with late payments can impact employee morale as well. Teams may face uncertainty when budgets tighten, which can hinder productivity and innovation. 

Trend 1: Increase in the frequency of late payment

The frequency of late payment is on the rise, creating significant challenges for businesses. As economic pressures mount, companies are stretching their cash flows further than before. This leads to a higher likelihood of missed deadlines.

Customers might delay payments due to unforeseen circumstances or tighter budgets. The ripple effect can be damaging, especially for small and medium-sized enterprises that rely heavily on consistent cash flow.

Moreover, the trend is not limited to specific industries; it is becoming a widespread issue across various sectors. Companies that once maintained solid payment histories are now falling behind.

Trend 2: The rise in electronic payment options

With technologies like apple pay and instant bank transfers flexibility is at an all-time high. This convenience encourages prompt payments and minimises delays often linked with more traditional payment methods.

As consumers become more accustomed to these seamless processes, businesses must adapt quickly to meet expectations. Embracing this trend is not just about keeping up; it is about staying competitive in a rapidly evolving market where speed matters.

The surge in e-payments also fosters transparency during transactions. Clear records help both parties manage their obligations effectively while promoting trustworthiness within business relationships.

Trend 3: The introduction of automated late payment compensation

As businesses evolve, so do their strategies for managing late payments. Automated late payment compensation are enhancing efficiency by automatically applying fees when deadlines are not met. This reduces the administrative burden on finance teams and encourages prompt payments from clients.

No longer reliant solely on human oversight, organisations can now set parameters that trigger notifications and late payment compensation seamlessly. This not only streamlines cash flow, but also fosters accountability amongst customers.

With technology taking centre stage, companies can focus on building relationships instead of chasing payments. The ease of implementation makes these solutions appealing across various industries.

For more information about Late Payment Compensation and the sums you may be entitled to claim, see https://lovetts.co.uk/debt-recovery-information/late-payment-law/

Trend 4: Growing importance of credit scores in business transactions

Credit scores are becoming a crucial factor in business transactions. Companies increasingly rely on these scores to gauge the reliability of potential partners or clients. A high score often translates into trust, while a low score raises a red flag.

More businesses are integrating credit checks into their vetting processes. This trend helps mitigate risks associated with late payments and defaults. With financial stability being paramount, organisations want assurance before committing resources.

Additionally, lenders look closely at credit scores when extending credit lines or financing options. A strong score can lead to better terms and lower interest rates, directly impacting cash flow.

Conclusion

Staying informed about these trends will help companies mitigate the adverse effects of late payments while enhancing overall financial health through effective debt recovery strategies alongside solicitors who specialise in navigating complex collections scenarios.

If you are facing challenges with unpaid invoices or struggling with debt recovery issues, Lovetts are here to help. Lovetts solicitors specialise in UK & International debt recovery with 30 years of industry experience. 

If your business needs help recovering outstanding debts, contact us today.

Dealing with unpaid invoices can be a frustrating experience for any business owner. You have provided goods or services, but your hard work has not translated into cash flow. When reminders and negotiations do not generate results, it might be time to consider more serious measures, such as issuing a Court claim against your debtor. Knowing your options is crucial for maintaining healthy finances. 

When to Consider Issuing a Court Claim

If the debtor is refusing to engage with you despite multiple attempts to elicit a response, then it may be time to issue proceedings. Before issuing proceedings you should ask: is the debtor unable to pay or unwilling to pay? If they are unwilling to pay, but are refusing to engage County Court proceedings may be a good solution.

However, if your debtor is unable to pay, you may wish to consider insolvency action where appropriate.

The Steps to Filing a Court Claim

When it comes to filing a County Court claim preparation is key. You will need to gather all of the necessary documents that relate to your unpaid invoice. This includes: contracts, terms of business, invoices, payment reminders and correspondence with your debtor.

Money claims in the County Court are dealt with exclusively by the Civil National Business Centre. Claims under £100,000 can be issued online via Money Claims Online. Claims over £100,000 must be sent to the Court for issue by post. 

You must complete the claim form and provide particulars of your claim when you issue proceedings. The particulars of claim must set out the legal basis of the claim and explain why you say the money is due. Provision should also be included for any interest, compensation or costs. It is important to ensure that this information is correct.

A Court fee is required to issue your claim. The amount of the fee will depend on the value of the claim and is set by the Court. Court fees are updated periodically, search for the Court document EX50, for the most up to date fees.

After the claim has been submitted to the Court, the Court will issue proceedings and arrange to serve these upon the debtor. The debtor will then have 14 days from the date of service to file a response to the claim. If no response is filed by the debtor within this time you will be able to apply for judgment in default.

Alternative Options for Debt Recovery

When facing unpaid invoices, you might not always need to resort to a Court claim. Exploring alternative options can save time and money.

Mediation is one effective approach. This involves a neutral third party helping both sides reach an agreement without escalating the matter legally. It’s often quicker and more cost effective option than Court proceedings and indeed may be preferable, particularly where you are trying to preserve the relationship with your customer.

It is worth noting that for disputed claims under £10,000, the Court provide a free mediation service to help try to resolve disputes.

Negotiation directly with your debtor can also yield positive results. Open communication may reveal reasons for non-payment, allowing for payment plans or extended deadlines.

The Role of a Debt Recovery Solicitors in Issuing a Court Claim

Debt recovery solicitors play a crucial role when it comes to issuing a court claim and handling the litigation process. Solicitors can streamline the often complex process of litigation and provide you with invaluable advice, experience and support throughout your case.

If you are not sure how best to proceed solicitors will be able to offer advice and guidance from the outset to help you decide how best to proceed and support you in making the right commercial decisions for your business.

Conclusion

It is important that before embarking on legal proceedings that you know how the procedure works and how to properly prepare and present your case to maximise your chance of success.

It is worth exploring alternative dispute resolution options, before issuing proceedings as you may find this is a quicker, more cost effective option that allows you to preserve any ongoing relationship with your customer.

If you are facing challenges with unpaid invoices or struggling with debt recovery issues, Lovetts are here to help. Lovetts solicitors specialise in UK & International debt recovery with 30 years of industry experience.

If your business needs help recovering outstanding debts, contact us today.

 JOHNSON V FIRSTRAND BANK, WRENCH V FIRSTRAND BANK, HOPCRAFT V CLOSE BROS  

[2024] EWCA Civ 1282

These three appeals, which were heard together, concerned the common situation of buying a car from a motor dealer who also arranges finance for the purchase.

The structure of each transaction was that, once the claimant had agreed a price for the vehicle, the dealer would approach a prospective lender, or a panel of lenders, for terms of credit.  The dealer then put forward a single proposal to the claimant for the financing. Once the terms of the loan were agreed, the dealer sold the car to the lender and the claimant then entered into a hire purchase or other credit agreement with the lender.  

Separately from this transaction, the lender also had a side agreement to pay a commission to the car dealer, funded from the interest payments made by the claimants. 

In the first of the three cases, Hopcraft, the commissions were not disclosed to the claimant at the time of the transaction.  

In the second case, Wrench, the hire purchase agreement that the claimant signed did incorporate standard terms, albeit in “very small print”.  These provided amongst other matters that the lender “may” pay a commission to the broker who had introduced the transaction.  The standard terms did not explain how this commission would be calculated, or who “the broker” might be. 

In the third case, Johnson, the claimant was given what he described as “an enormous amount of paperwork” and asked to sign the agreement then and there.  The hire purchase agreement he signed incorporated standard terms in substantially the same form as Wrench, above.  However, in addition, the claimant signed a “Suitability Document” which stated amongst other matters that the dealer made no charge for handling his application for consumer credit, but may receive a commission from the product provider. 

In all three cases, the claimants assumed that the dealer was deriving its income from the sale of the vehicle.  The claimants were in fact unaware of the commissions and said that, if they had known about them, they would have shopped around, rather than proceed with the transaction. 

The fact that the lenders had paid commission to the dealers subsequently came to light.  For example, in Johnson, the commission paid to the dealer was some 25% of the total amount advanced by the lender, FirstRand, to the claimant.  It further emerged that FirstRand required its dealers to give FirstRand first refusal in every case where finance was required.  This was not disclosed to Mr Wrench or Mr Johnson.

On discovering the true position, the claimants sued the lenders, seeking the return of the commissions paid to the dealers.

The decision

The Court of Appeal held in favour of the claimants, who were found to be financially unsophisticated “consumers”.  

The court held that, in each of these cases, the dealer had two roles, first as seller of the car and second as a credit broker acting as the consumer’s agent for the purpose of finding a potential lender who could offer a deal suitable for the consumer’s requirements. Pursuant to the nature of this role, the dealer owed the consumer a duty to provide information, advice and recommendation on an impartial and disinterested basis.  Separately, the dealer owed the consumer a fiduciary duty, that is, a duty of loyalty in the performance of its duty to find financing on competitive and suitable terms, reflecting the repose of trust and confidence by the consumer in the dealer in relation to the transaction.  The dealers were in breach of both these duties, as a result of receiving the commission.

Lenders’ liability for paying a secret commission – The court held further that the lenders were under a primary liability to compensate the consumers for the consequences of the brokers’ breaches of duty.  Primary liability arose in this situation because the payer of a secret commission is regarded in the same way as the payer of a bribe, such conduct being actionable in its own right.  

As stated above, in Hopcraft, the commission was found to have been secret.  In Wrench, the court held that the disclosure had been insufficient to negate secrecy. Therefore, in these two cases, the lender was held liable to pay compensation as a primary wrongdoer.

Lenders’ liability as accessories to the brokers’ breach of fiduciary duty – Turning to Johnson, here the consumer accepted that the possibility that the dealer might receive a commission from the lender had been sufficiently drawn to his attention, so as to negate secrecy.  

However, the very limited information (referred to above) provided at the time of the transaction had constituted only a partial disclosure.  The court held that the dealer, who was the consumer’s agent, had breached its fiduciary duty to the consumer by receiving a commission from the lender, without obtaining the consumer’s consent after making full disclosure of all material facts.  

From there, the court held that the lender was liable on equitable principles as an accessory because it had paid the commission, thus giving the dealer a conflict of interests, whilst aware of, but turning a blind eye to, the failure to obtain consent, thus procuring the dealer’s breach of fiduciary duty.  In this sense, the lender had been dishonest.  The lender was accordingly liable to compensate Mr Johnson for the full amount of the commission paid to the dealer, plus interest.

The court also found that the relationship between Johnson and his lender was unfair for the purposes of sections 140A-C of the Consumer Credit Act 1974.

Lovetts comment

Subject to any appeal, the effect of this decision is that both dealers and lenders in the huge motor  finance sector have been breaching the civil law by keeping commissions hidden from buyers. Some large figures may be involved in compensation.  The decision comes on top of the Financial Conduct Authority’s ban of discretionary commission arrangements in 2021 and their announcement in January 2024 of a review into potentially unfair motor finance commissions going back to 2007.  The FCA aim to publish their findings in 2025.

For further information, please contact Wendy Miles, Chris Earl-Anderson or William Sturge at Lovetts.

Dealing with unpaid invoices can be a frustrating experience for any business. Late payments not only disrupt cash flow but also create uncertainty in your financial planning. When it comes to recovering commercial debts, understanding the legal landscape is crucial. Whether you’re facing a particularly stubborn client or simply want to know your rights and options, navigating the debt recovery process can feel overwhelming.

Understanding Commercial Debt Recovery

Commercial debt recovery is the process of reclaiming money owed to your business from your customers. It’s more than just chasing a late payment; it involves understanding your rights and the legal frameworks in place.

The law provides various tools for recovering debts, including negotiation tactics, legal claims, and enforcement actions. Each option has its own set of procedures and potential outcomes.

Understanding these elements allows businesses to take informed steps toward resolution. Whether you’re handling small amounts or larger sums, grasping the essentials of commercial debt recovery equips you with knowledge that could save time and resources down the line.

Steps to Take Before Initiating the Legal Process

Before jumping into the legal process, it’s crucial to take a few preliminary steps. Start by reviewing your records thoroughly. Gather all documents related to the unpaid invoice, including contracts, emails and payment history.

Next, communicate with the debtor. A friendly reminder can sometimes prompt immediate payment. If that does not work, consider sending a formal letter before action. This document notifies them of your intention to pursue debt recovery if they fail to pay.

Assess whether the amount owed justifies legal action. Sometimes it may be more efficient to explore alternative options or negotiate directly with the debtor.

Keep in mind any specific terms outlined in your contract regarding late payments or dispute resolution processes. Documenting everything meticulously can strengthen your position should legal claims become necessary down the line.

The Legal Process for Commercial Debt Recovery

The legal process begins with the formal Letter Before Action, which notifies your debtor of their outstanding payment and urges them to settle the unpaid invoice within a reasonable time, typically within 7 days where you have already gone through your credit control process.

If this approach fails, you may proceed with a court claim to recover the outstanding sums. It is important that you provide us with details of the outstanding invoices and your terms of business to avoid any delays.

Once filed, the court will issue a claim and serve this directly on your debtor. They must respond within 14 days to the claim, which may be extended by a further 14 days where an acknowledgment of service is filed. If no response to the claim is made within the requisite time frame, you may then apply for a default judgment against the debtor for the sums claimed.

Once judgment has been obtained the debtor has 14 days to pay, after which enforcement options will become available to you. Each option has its own procedure and you should ensure you understand the implications of each option thoroughly before proceeding with enforcement.

Common Challenges Faced During the Legal Process

Navigating the legal process for debt recovery can be fraught with challenges. One common hurdle is the complexity of legal procedures. Many businesses find themselves overwhelmed by paperwork and jargon.

Furthermore, timelines can stretch out longer than expected. This delay often leads to frustration, especially when dealing with late payments or unpaid invoices.

Another challenge is the potential for disputes. Debtors may contest claims, leading to protracted negotiations or court hearings that divert resources from core business activities.

Enforcement actions add another layer of difficulty. Securing a favourable judgment doesn’t guarantee payment, as collecting on that judgment can prove equally challenging.

Alternative Options for Debt Recovery

When traditional legal methods feel daunting, businesses can explore alternative options for debt recovery. These strategies may offer a faster and less costly route to resolve unpaid invoices.

Mediation can be an effective option. This involves bringing in a neutral third party who facilitates discussions between both parties. Mediation often leads to productive outcomes without the need to escalate matters and bring formal legal proceedings.

Arbitration is a non-judicial process for the settlement of disputes where an independent third party makes a decision that is binding upon the parties to a dispute. The arbitrator can be chosen by the parties for their particular expertise. A decision is reached by an arbitrator either on a documents only basis, or following hearings that take place at an agreed venue. The process is confidential and is usually a quicker and more cost effective process than taking the matter through County Court proceedings.

Exploring these alternatives before engaging in more extensive legal processes can prove advantageous for many businesses facing outstanding payments.

Undoubtedly you will have heard about the discussions in parliament about getting rid of “no fault evictions” as this has been going on for quite some time now.

The so called “no fault evictions” actually arise from section 21 of the Housing Act 1988 which permits landlords to repossess their residential property when the assured shorthold tenancy (“AST”) has come to an end and no further AST has been entered and where the landlord has provided the tenant with at least two months’ notice in writing.

The section 21 process is there to ensure that if a tenant remains in the property after the expiry of the AST without agreeing to a new one that there is a mechanism by which the landlord can get their property back.

However, over the last few years there have been reports of landlords using section 21 notices for so called “revenge evictions” when tenants have complained of issues of disrepair or refused to agree to a substantial increase in rent.

The increase of these “revenge evictions” has led to the government looking at the legislation and trying to work out how to prevent this going forward.

It appears that successive governments have indicated a desire to make changes, but landlords and tenants had been left in limbo about the prospective changes.

The Kings Speech following the election in 2024 set out that the government planned to abolish section 21 of the Housing Act 1988 in favour of a new Renters (Reform) Bill. This Bill is currently going through parliament, but at the time of writing has not yet received Royal Assent and therefore is not yet law.

Currently, the Renters (Reform) Bill is with the House of Lords for the second reading. It will still need to go through the committee stage, report stage and third reading after this, before there is any consideration of amendments and Royal Assent given.

The Bill in its current form introduces several key changes to the grounds for possession that a landlord may utilise. The Bill is set to abolish section 21 evictions altogether and introduce new grounds requiring private landlords to have a prescribed reason for seeking possession of their property, which are set to include:

Landlords will not be able to seek to take possession of their property within the first 6 months of a tenancy and will need to provide two months’ notice to the tenants.

There will also be a ground which will allow landlords to evict tenants, where the tenants have been in arrears with their rent for two months on three separate occasions within a three year period. The notice period for which will be four weeks rather than the two weeks typically seen with the current section 8 process.

24 October 2024

Hamilton Corporate Member v (1) Afghan Global Insurance (2) Anham USA 

[2024] EWHC 1426 (Comm)

Summary

Where insurance covers property damage only, consequent upon political violence risks, and “seizure” is excluded from cover, this exclusion has been held to extend to both belligerent and non-belligerent forcible dispossession, either by a lawful authority or an overpowering force.   

Moreover, such insurance protects against property damage and has therefore been held not to extend to protect the insured against being deprived of its property consequent upon political risks.

The facts

Anham owned and operated a warehouse in Afghanistan, which was used to distribute foodstuffs for the US military.  During 2021, US forces were withdrawing from Afghanistan and the Taliban were active.  It was common ground between the parties that the warehouse was lost in August 2021 as a result of armed seizure by the Taliban. 

The insurance

Anham made a claim of some US$ 41m in respect of its loss of the warehouse under its policy of political violence insurance placed with Afghan Global Insurance (“AGI”).

Hamilton reinsured AGI in respect of the policy.  These reinsurers maintained that the loss of the warehouse fell outside the scope of cover on two grounds, as follows.

Ground 1: “seizure” was an excluded cause of loss – Any loss directly or indirectly caused by seizure was excluded from cover.  As stated above, it was common ground that the loss of the warehouse was caused by its seizure by the Taliban.  Therefore, the reinsurers maintained that there was no cover for this loss.

Ground 2 – Under the reinsurance, there was only cover for property damage, not for where the insured was deprived of its property consequent upon seizure, which was the position in the present case.

The dispute

The reinsurers brought proceedings against AGI and Anham, seeking a declaration of non-liability. They did so by seeking summary judgment, i.e. a shortened court procedure which they contended was appropriate because there was no need for a full trial in that the insured had no real prospect of succeeding on the claim.

The terms of cover

The interest reinsured was described in the slip as in respect of property damage only, resulting from direct physical loss of, or damage to, the insured’s physical assets as declared to underwriters, caused by various perils in the nature of civil disruption (i.e. riots, strikes, civil commotion and malicious damage) or challenges to the state (i.e. political violence, terrorism and war),  the reinsurance responding only to claims admissible under certain AFB Political Violence wording which was attached to the reinsurance slip and deemed to be the wording of the insurance issued by AGI to Anham. 

This AFB wording was headed “Political Violence Insurance – Property Damage Wording”.  Under the insuring clause, cover was provided for physical loss or damage to the insured’s buildings and contents directly caused by various perils of the type referred in the preceding paragraph and also including, insurrection, revolution, rebellion and civil war.  

Meanwhile, a clause in the wording, headed “EXCLUSIONS”, provided as follows.

“This Policy DOES NOT INDEMNIFY AGAINST … (2) Loss or damage directly or indirectly caused by seizure, confiscation, nationalisation, requisition, expropriation, detention, legal or illegal occupation of any property insured hereunder, embargo, condemnation, nor loss or damage to the Buildings and/or Contents by law, order, decree or regulation of any governing authority, nor for loss or damage arising from acts of contraband or illegal transportation or illegal trade.“

The reinsurers were successful.  The court accepted that the loss fell outside the scope of cover.  This was because, although an insured peril (such as civil war) may have been operating at the time of Anham’s loss, this was irrelevant because Anham’s loss of the warehouse was not caused by such a peril, but by seizure by the Taliban.  The unsuccessful arguments raised by the insured, and the court’s approach in dealing with these, included the following.

Ground 1: whether the loss was caused by the excluded cause of seizure

  1. Whether it was only seizure by a governing authority that was excluded – The insured submitted that, on proper construction of the exclusion clause quoted above, the words “by law, order, decree or regulation of any governing authority” qualified all the preceding wording, including “seizure”. The result was that the only situation where loss consequent upon seizure was excluded was where the seizure was by “any governing authority”, whereas, at the time of the loss, the Taliban were not a governing authority, but in direct conflict with the de jure governing authority. 

However, the court found that, as a matter of grammar and syntax, the exclusion clause was clearly  to be broken down into three separate parts, the second and third parts each beginning with the word “nor”.  The words “by law, order, decree or regulation of any governing authority” were in the second part of the clause.  The draftsman had not related these words to loss caused by seizure, which was in the first part.  Therefore, properly construed, and subject to the meaning of the word “seizure” itself, the first part of the clause dealt with loss or damage by reason of dispossession by anyone and the second part dealt with loss or damage by reason of acts of a governing authority.

As for the meaning of the word “seizure” itself, the court held that there was settled authority that the word had the meaning ascribed to it in the Summary section of this note: the term extends to both belligerent and non-belligerent forcible dispossession, either by a lawful authority or an overpowering force.  Therefore, loss directly or indirectly caused by forcible dispossession by the Taliban was excluded from cover.

  1. Whether the meaning of “seizure” was determined by neighbouring words – The insured put forward an alternative argument to the effect that the word “seizure” took its meaning from its juxtaposition to the words “confiscation, nationalisation,” etc, which typically concern the actions of a governing authority.  However, the court held that the surrounding words had no such common characteristic.

  1. Relevant insurance market practice/ commercial purpose/ factual matrix – Further in support of the argument that the exclusion of loss caused by seizure was confined to actions of a governing authority, the insured put forward the arguments that (i) the clause as it appeared in the policy should be given the same effect as clauses in the Institute War and Strikes clauses from which the insured claimed that the clause had evolved; and (ii) the exclusion clause should be construed by reference to the distinction drawn in the insurance market between the risk of loss flowing from action by a governing authority  (such as expropriation and nationalisation) which is insured under political risk policies, and the risk of loss flowing from challenges to the state, which are insured under political violence policies.  As this was a political violence policy, the court should approach the wording as not excluding cover for seizure where the seizure was not by a governing authority. 

However, the court did not accept that these matters affected its findings as to the clear meaning of the policy.  The effect of an insurance contract is not to be determined by what may be regarded as paradigm examples of the risk, but by the actual words used.  

Ground 2: whether there was only cover for property damage, and not for loss by deprivation – The insured relied on sections 57 and 60(1) of the Marine Insurance Act 1906 in support of the argument that there is an actual total loss where the insured is irretrievably deprived of his property, and a constructive total loss where the insured is deprived of possession of his property and it is unlikely that he will recover it. Accordingly, the insured submitted that the warehouse was lost when the insured was irretrievably deprived of possession of it.

The court accepted that a person can lose property as a result of either the physical loss of property or by being irretrievably deprived of it.  However, the cover in the present case, on its clear wording, was only for the former, namely the total physical loss of the property. 

Thus, as stated above, the reinsurers successful established that they were not liable under the political violence cover for loss caused by the Taliban’s seizure of the warehouse.

For further information, please contact Wendy Miles, Chris Earl or William Sturge at Lovetts.