Making Employees Redundant To Save Your Business
Making Employees Redundant To Save Your BusinessBond Giant LC&F collapse, creating doubt for thousands of investors
Published on : 1st February, 2019
This article originally was published in February 2019
Bond giant, London Capital & Finance collapsed into administration, leaving more than 15,000 investors at risk and high in doubt.
More than £225 million was raised from investors, with attractive interest rates of 8%, encouraging many pensioners and small businesses to invest here. Some bondholders invested over £100,000.
However, it became apparent that the company’s products, which appeared to be independently marketed on price comparison sites, were actually ran by the director of Surge, the bond giants outsourced marketing partner. Mini-bonds were sold, yet unregulated by the FSCS. Following this, the Financial Conduct Authority began an investigation, just before Christmas 2018, which restricted them to raise any more money or touch any assets. The company were deemed to be misleading in its activities.
Smith & Williamson LLP were appointed joint administrators by the company directors, with this being filed by the High Court yesterday (30th January 2019). There was discrepancy over this appointing act; news spread that LC&F filed for administration first, rather than external creditors. This angered Jane Sanders of JSCS, unregistered barrister and claims handler, who demanded that bondholders should be able to choose their own administrator, at the first creditors meeting.
‘’We need to hire somebody who specialises in getting money back for investors, and it should be bondholders choosing them, not the company itself’’.
The amount bondholders will get back, if any, is a doubtful consideration.
Finbarr O’Connell, administrator stated: ‘’It is early days, but our role will be to work with LCF’s borrowers, staff, the Security Trustee for the Bondholders, the FCA and other stakeholders to ascertain what needs to be done in order to maximise the returns to the bondholders. We are especially focusing on the various loans made by the company to borrowers. At this juncture, regrettably we are not in a position to return any monies to bondholders.’’
All bondholders will be contacted, and a dedicated call centre and email system has been created. There is much work to be done, so administrators ask bondholders to ‘’bear with us in these early stages’’.
Readers Guide To the Administration Process
As London Capital & Finance entered insolvency stakeholders often face significant uncertainty. Here is a breakdown of the legal framework and what it means for those affected.
1. What is a “Basic” Administration?
Administration is a powerful statutory process governed by the Insolvency Act 1986. It is triggered when a company is insolvent and can no longer meet its debts. An independent Licensed Insolvency Practitioner (IP) is appointed to take control from the directors. A key feature is the statutory moratorium—a legal “shield” that instantly stops all legal actions, such as winding-up petitions or bailiff visits, providing the “breathing space” needed to rescue the business or achieve a better result for creditors than immediate closure.
2. Who Gets Paid First?
The law dictates a strict hierarchy for the distribution of funds. Fixed charge holders (typically banks with security over property) are paid first. Once the administrator’s fees are covered, preferential creditors are next; this includes employees (for specific arrears) and HMRC for taxes like VAT and PAYE. Following these are floating charge holders, and finally, unsecured creditors—which include trade suppliers and customers—who are at the back of the queue and frequently receive only a small fraction of their debt.
3. What Happens to Employees?
Entering administration does not mean all jobs are instantly lost. For the first 14 days, the administrator assesses the company’s viability and may make redundancies. If a member of staff is kept on past this 14-day window, the administrator “adopts” their contract, meaning their ongoing wages and rights become a priority expense. Those made redundant can claim for unpaid wages and notice pay via the Redundancy Payments Service if the company has insufficient assets to cover these costs.
4. What About Suppliers and Customers?
Suppliers and customers are generally unsecured creditors. Suppliers should stop granting credit under old agreements and negotiate “pro-forma” (upfront) terms for any new supply to the administrator. For customers, deposits and gift cards are rarely honoured. However, those who paid over £100 via credit card may be protected under Section 75 of the Consumer Credit Act and should contact their bank immediately to initiate a claim.
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