PAST SOLUTIONS TO SPECIFIC BUSINESS PROBLEMS...
We have had great fun in selecting just 20 cases from the many business problem cases that we have helped our clients with during the large number of years that we have been in business ourselves. Why 20 business problem cases you may ask? Well, too few and we could not possibly demonstrate the depth of our specialist skills and past achievements. Too many and you would be bored to tears.
Problem 1 (BANKING): Directors of a company were under pressure from their banker to offer more security for the continued support of an overdraft facility. Trading difficulties had arisen because of recession.
Advice: Talking with the directors, we got to know that they had installed, at their expense, a first floor and so doubled the area available to run their business. On examination of the lease and other documentation, it became apparent that this was a tenant's improvement. Since no rent can be charged on tenant's improvements for 21 years, following such works, no rent could be charged by the Landlord for the extra space; in effect, their factory had a hidden value, since they only had to pay half the market rent for an equivalent area. During negotiations to assign the benefit of the lease and relocate, the company received a takeover bid, the value of the improvement being a crucial aspect in obtaining a good price; the company was finally sold, the directors' liabilities irrevocably cancelled at a stroke and each offered contracts of employment and generous payments for their shares.
Problem 2 (TENANCY): A Landlord was trying to impose onerous harsh renewal terms on a client because he had granted a sub-tenancy, contrary to the terms of his lease.
Advice: On looking at the sub-tenancy agreement, although it contained the wording "tenancy at will", it was, in our opinion, an agreement that gave the sub-tenant protection under the act. Since the tenant would have had to give 3 months notice to the Landlord to withdraw his application from the court, for a new tenancy, it was agreed that the original agreement should be rescinded and the sub-tenant should be granted a new lease for a period of 3 months, subject to 3 months' notice, by either party, at any time from the commencing date. The provisions of security of tenure, under the Landlord tenant act, were excluded. Thus the onerous Landlord's terms could now be contested, particularly since it was spotted that the landlord had installed a sign written advertising board promoting the names of the two tenants, and in so doing, had taken positive action to acknowledge and accept a breach in the head lease, prohibiting any sub-letting!
Problem 3 (CONTRACT): A client had raised a £20,000, via a mortgage on his house , to invest (as a sleeping partner) in a friend's business; the agreement was that the business proprietors would promptly repay the client's monthly mortgage payments, but they only ever reimbursed the first instalment. The only documentation setting out the deal was a photocopy of a single paragraph written on the back of an envelope acknowledging the terms of the loan, no addresses or any other information was included, just the signatures of the parties. The Client could not get anywhere with his associates to keep their part of the deal and threatened to bankrupt them, they challenged him that it was not possible. A couple of days prior to the court proceedings, the client was asked to produce evidence that he had indeed received the first repayment of his mortgage instalment promptly, to prove the validity of the deal.
Advice: A copy of the cheque paid in by the client was obtained from his banker, in fact we were aware that some banks are keeping copies of cheques banked by their customers and this information was invaluable. Our client succeeded in obtaining the order to bankrupt his associates on the strength of the photocopied cheque and the single paragraph, referred to above. As a consequence, he was able to receive part repayment of his money through the selling of the assets following the closure of the business.
Problem 4 (ARBITRATION): A builder, who had renovated a 17th Century cottage using 17th century materials and work skills, where possible, was paid £37,000 of the £40,000 quoted costs, by interim payments, as the job was progressed. When the job was completed, the owner claimed the builder had overcharged him and demanded a substantial refund. The builder's solicitor agreed to arbitration on any defect work as provided for under the terms of the contract signed by his client. The arbitrator extended his terms of reference to cover ALL aspects of the contract and sent copy agreements to both parties for signature but the builder refused to sign and the arbitration proceeded on the assumption that the variation was acceptable; the builder was faced with overpowering complex legal arguments put forward by specialist "building litigation" lawyers within a bulky report; since legal aid is not available for arbitration, the builder tried to conduct his own defence but did not have the mental capabilities or the funds to pay to be represented and put up a credible defence, he turned to us in desperation.
Solution: Since the builder had not signed the agreement to extend the Arbitrators terms of reference, only an "Oral Agreement to Arbitrate" existed. If this could be successfully argued and the arbitration limited to defective work only as per the contract, ( minimal portion of the claim since work was of the highest standard), then the other aspects would have to be determined by the courts and the builder would thus qualify for legal aid. With the written permission of the copyright holder, sections of "The Handbook of Arbitration Practice" were photocopied and submitted to the arbitrator as submissions to prove that an "Oral Agreement to Arbitrate did indeed exist"; the other side did not wait for any ruling, they withdrew all claims and paid all arbitration expenses involved on the understanding that neither party would pursue any other claim against the other.
Problem 5 (SHAREHOLDING): A 20% Shareholding and 5000 10% convertible redeemable preference shares were acquired by sleeping partners in a company. The Articles of Association being altered by the investors solicitors. Three years later, the company continued to make losses, no preference dividends had ever been paid and further capital injection was required for it to survive. A trading partner was prepared to invest substantial funds for a 51% Shareholding, providing the sleeping partners agreed to sell their ordinary and preference shares in the company, but they insisted that the arrears of preference dividend due to them should be paid and they also received a substantial premium for their Shareholding. The deal looked doomed until the Managing Director turned to us for help.
Solution: Section 160 of the Companies Act 1985 states that redeemable shares may only be redeemed out of distributable profits or out of the proceeds of a fresh issue of shares made for the purpose of the redemption; the company could indeed redeem the preference shares at par out of the further equity injection, but it is not legally entitled to pay a dividend until the current deficit on the profit and loss account is extinguished ie it has distributable profits; since there were no prospects of any dividend, the company remained liable for arrears of the preference dividend and thus the sleeping partners could remain beneficiaries of the arrears if ever paid or could transfer or waive these rights. Section 178 of the Companies Act 1985 refers to a company's failure to redeem or purchase ie section (2) reads "The Company is not liable in damages in respect of any failure on its part to redeem or purchase any of the shares" and section (3) goes on to say "if sued for damages the court shall not grant an order for specific performance of the terms of redemption or purchase if the company shows that it is unable to meet the costs of redeeming or purchasing the shares in question out of distributable profit". Regulation 32 of Table A was not excluded from the Articles of Association when amended, consequently the company remained free to increase share capital by way of ordinary resolution. Since the injection of funds was necessary for the survival of the company, the resolution was not unfairly prejudicial to minority shareholders. The sleeping partners sold their ordinary shares at a realistic price and waived all rights to unpaid dividends on the preference shares, which were redeemed out of the new capital.
Problem 6 (ACQUISITION) : Over a number of years, a private school had allowed their sports facilities to be used regularly without a formal agreement for sports coaching. The sports trainer was transferred to another part of the country and on the basis that the classes were regularly well attended by paying pupils, the venture was going to be sold on, as a business, but the purchaser wanted to know if it could, somehow be protected.
Advice: To establish that the private school would allow the coaching to continue on the same basis, even if it was informal, and that attenders would continue to pay for coaching. More significantly, to obtain written agreement from the Vendor that "not together or separately on their own account or of any other person, firm or company carry on or be engaged concerned or interested in a similar business within 25 miles of the school, and that the vendor should use every endeavour to secure the full benefits of the business, and not to directly or indirectly induce any customer of the business to deal with any other person firm or company . In addition the vendor must remain solely responsible for all debts and liabilities of the business resulting from any act, default, transaction or circumstance occurring before the date of the sale and also indemnify the purchaser from and against all actions proceedings costs claims demands or liabilities of any kind occurring before the date of sale."
Problem 7 (NEGLIGENCE): Client invested £30,000 in a business on the strength of an accountant's letter showing company was making in excess of 40% gross profit; the letter included the following paragraph "We take this opportunity to remind you that any such reference is given on the understanding that, in accordance with normal commercial practise, although this reference is given in good faith, no financial responsibility can be accepted for the opinion expressed". The company went into liquidation within a year of the investment.
Advice: On examining the documents, it was noted that the same accountants had completed the audit of the companies' accounts within days BEFORE writing their letter and those accounts clearly revealed gross profit of only 17%. Client obtained legal aid to commence litigation against accountants for professional negligence and the accountants agreed an out of court settlement.
Problem 8 (VIABILITY): Four businessmen who ran successful local companies had decided to purchase a 50 acre lake and 30 acres of the adjoining land and to develop the locality for leisure and sporting activities. The lake had outline planning permission for leisure and the parties had agreed with a bank to borrow £340,000, the borrowing to be secured on each of their matrimonial homes and the documentation had been signed in preparation for exchanging contracts with the Vendors . They contacted us to discuss the basis of the contracts that should be executed in order to protect each others' interests, minimise the commercial risk and to distribute future profits equitably, should the venture be a success - contracts to purchase the lake were due to be exchanged the following day. However as a consequence of a consultation with us there was an unexpected outcome .
Solution: The most pertinent aspect to minimise the risk was to establish that the proposed development was permissible. The local plan had been adopted and revealed that the lake was protected from commercial development because of its amenity and ornithological interest. The Vendor immediately reduced the asking price by two thirds to take into account potential planning expenditure the purchasers could be involved in. The purchasers though rejected this proposal and withdrew because planning existed only for swimming and sailing use and any restrictions on further development and use would not make their venture a realistic commercial proposition.
Problem 9 (TENANCY): A tenant was granted a licence to occupy office premises. Both the Landlord and Tenant were content and willing to execute a new licence but the Landlord's solicitor insisted that the tenant should sign a lease; the document contained onerous terms and was substantially different from that agreed during the licence period.
Advice: We stated that, if the new terms were not negotiable, then the tenant must make a commercial decision to either accept them or vacate. The alternative was to agree a new licence with an increased quarterly licence fee to reflect the additional costs the landlord envisaged, to cover potential future liabilities. The licence should also have contained a clause that stated "the Parties hereby declare that this agreement does not amount to a lease or tenancy or to an agreement to grant any lease or tenancy". The good news was that the tenant could leave without any of the bills that would be rendered if he had signed a lease, but this was unnecessary since the Landlord agreed to the compromise, accepting that he would not have a sitting tenant since the licence was outside the provisions of the 1954 Landlord/Tenant Act.
Problem 10 (VIABILITY): Client asked us to evaluate a deal to invest in a company that was turning over its stock every 4 weeks, he thought it was a licence to print money.
Advice: We thought that if things were as good as it was made out, the company would not be looking for an investor; client insisted we evaluated the project and prepare a report. This done, we strongly recommended not to go ahead for a variety of reasons. The company subsequently ceased trading for the very reasons we highlighted in our report.
Problem 11 (BEQUEST): Widow of a company's director needed help to dispose of the business and raise funds for a university scholarship in her late husband's name.
Advice: We started by rescinding (where-ever possible) contracts, acting in our agreed capacity as agent for the directors. We sold all of the company's assets and saleable contracts. We arranged for the purchase of a house on behalf of the widow and her sister at a substantial discount, since the sister was a long standing council tenant. By agreeing suitable wording of the wills of both sisters, it was possible to provide funds for the creation of scholarships in the late husband's name at both Oxford and Cambridge University . The widow passed on, a year later and Oxford University have established the first funds to provide scholarships in her husband's name, as desired.
Problem 12 (BANKING) : A client guaranteed a loan account on behalf of two friends who wanted to start a business venture. He was not personally involved in running the business. When the business ran into financial difficulties, the bank advised that they would not offer unsecured borrowing but would consider a further advance if a guarantor could be found to cover the extra borrowing; the client was approached with this information but declined to back the venture further and it subsequently ceased trading with a call under his guarantee.
Advice: The Bank's claim, following the bankruptcy, was for a far higher amount than they were claiming under the guarantee given by the client. The bank had advanced additional unsecured funding since no guarantor was found, Since this was a material variation of the principle contract, our client was advised that the amount of the liability could be contested and to avoid litigation, an offer was made to settle. This was accepted out of court with both sides paying their own legal costs.
Problem 13 (START UP): An employee was made redundant from a firm offering financial services and insurance; it was mutually agreed that the employee could use existing office facilities and take over the insurance agencies directly and operate an insurance broking business on a profit sharing partnership with his original employer. At this point the employee consulted us for ideas to help him develop his new enterprise and be accepted as a "local insurance source"
Advice: Although he was already pointing out to potential clients that they could avail themselves of specialist knowledge at no extra cost whatsoever, the most important information he needed to develop the business, was to learn what policies "potential clients" already had and, more significantly, the date when they were due for renewal so he might offer better cover or a more competitive premium from an alternative insurer. The strategy was to write personal letters to the local residents (names from voting register & wording cleared by the insurance companies) and follow up with a survey to obtain data, diary the information and follow up when policies were due for renewal. His efforts to obtain the vital information also went a long way to establishing himself as the local point of contact and an advertising board, strategically placed outside the office entrance, made the "door to door"
campaign more productive. A similar strategy was adopted to obtain trade from local businesses ie learn when business policies were to be renewed and simply offer an incentive to handle the renewal business on more competitive terms through reliable established insurers.
Problem 14 (DISPOSAL): A client sold a division of his business on an "assets sale and purchase agreement". In so doing, he had overlooked the fact that the agreement had listed items that were subject to "lease purchase agreements" as being free of all liens & encumbrances.
ADVICE: An exchange of letters between the parties was agreed to correct the contract errors, in accordance with a clause that allowed this to be done. It was also necessary to send letters to the finance houses to waive a clause in their contracts that prevented any assignment. The position was regularised to that which the parties had verbally agreed to, so that the revised contract reflected the negotiated deal and was corrected at a time when good relations existed between the parties, which might have deteriorated with the passage of time.
Problem 15 (SHAREHOLDER): Two directors ran a company; one held 75% of the shares and the other 25%. For a number of years, they had each taken a basic salary, then voted themselves a bonus and allocated the amounts on a 75% - 25% split. The controlling director dismissed his co-director but parties failed to agree on a valuation on the 25% holding and extensive legal and accountancy fees were being charged to both parties whose opinions were contrary.
Advice: In order to satisfy the statutory test of unfair prejudice, it must be shown that the interests of some members, including the petitioner, have been prejudiced unfairly. Following the Ebrahimi v Westbourne Galleries case, in 1972 Lord Wilberforce speaking in the House of Lords established that a limited company is more than an entity, with a personality in law of its own and that there is room in company law for recognition of the fact, that behind it are individuals with rights, expectations and obligations which are not necessarily submerged in the company structure; in the case of a small private company in which two or three members have invested their capital by subscribing for shares on the footing that dividends are unlikely but that each will earn his living by working for the company as a director, the distinction may be more elusive. The member's interests as a member who has ventured capital in the company's business, may include a legitimate expectation that he will continue to be employed as a director and his dismissal from that office and exclusion from the management of the company may therefore be unfairly prejudicial to his interests; the valuation on the 25% interest had to reflect the anticipated bonuses and not simply the asset value of the shares on the balance sheet and a deal was agreed to reflect this.
Problem 16 (TENANCY): A tenant was negotiating terms for a new lease for shop premises which had remained empty for some time but appeared to be a suitable location from which to establish a new retail outlet for the sale of specialist products. The Landlord had produced a lease but insisted that any agreed variations should be covered by means of a "series" of side-letters.
Advice: The way to proceed was to point out that to incorporate "important points" in such a way is unacceptable. Side letters have proved to be a very rich source of litigation. There are instances where side letters are acceptable; however fundamental points should not be included in a side-letter. If they deal with proposals which all parties accept, there is no reason why they should not be included in the lease. Side letters give rise to two problems, Firstly, whether they are binding at all. Secondly, when a property is sold, "a series of side letters" may not bind anyone to whom the Landlord sold the freehold to or to any new tenant, should the business be sold to them. Clearly every lease normally favours a landlord over a tenant and the objective of negotiations is to draw an equitable balance and incorporate the terms in a single document, preventing any potential costly disputes and misunderstandings. If the Landlord is willing to accept variations in the form of side letters, there is no logical reason why such variations could not be incorporated in the lease document.
Problem 17 (INSURANCE): An aerobics teacher agreed with a college to offer courses and queried duplication of the insurance cover . The college provided the Sports Hall, booking and payment facilities and advertising. The teacher had to provide qualified instructors and be responsible for paying instructors and running the courses. The course fees were to be split between the college and the teacher.
Advice: In the event of any insurance claim from students attending the course, claims could be delayed whilst the respective insurance companies agreed the limit of their client's specific liability. The simple solution was to extend the "College's Policy" to provide the necessary cover and record the aerobics teacher's particulars in the policy document, so that in the event of any claim, only one insurance company would be liable for negotiating and settling potential claims.
Problem 18 (SHAREHOLDING): A director had a dispute with his co-directors, resigned from the board and left his employment with the company but still retained his 25% Shareholding in it. Long drawn out and potentially precarious litigation seemed a distinct possibility. The director had guaranteed the company's overdraft and had also agreed to be surety for a lease. He wanted to start a new company but needed a means to protect the new venture, should litigation force him into bankruptcy.
Advice: The interests of the new business can be protected by the utilisation of a single member company, with the shares being allocated to members of the family. It is important that it is accepted that none of the shares are held in trust or as nominee for the director involved in the litigation. If he were the beneficial owner of the shares (as he would be under the Declaration of Trust), should he be made bankrupt, his interest under the Declaration of Trust could be recovered by a trustee in bankruptcy. Since the ex-director had no shares or any interest in the shares of the new company, should litigation not take place or be successfully defended, then shares are simply "gifted" to the director; if litigation results in bankruptcy, the ex-director can be employed by his family and the new company's assets, providing no funding has been injected by the director involved in the litigation, cannot be touched by creditors.
Problem 19 (TENANCY): A tenant had paid a substantial premium for the residue 4 years of a 21 years lease. At the end of the term, a new lease could not be agreed so the tenant withdrew his application for a new lease from the County Court and decided to vacate. The Landlord responded by serving a 72 page schedule of dilapidations, detailing works to rectify, amounting to about £65,000. To save business rates, the Landlord had asked the tenant to stay in the shop paying just a peppercorn rent if demanded, plus rates and general expenses, whilst negotiations on the dilapidations were progressed and he found a new tenant. The tenant was sent a "Tenancy at Will" which he refused to sign in case it should be interpreted that, by doing so, he had agreed to the Landlord's dilapidations claim.
Advice: This was one of the largest and most complex files we have ever been called upon to comment on and the client was not sent to us until after more than a year of failed negotiations whilst he remained in the shop, rent free. As the market improved, the Landlord was seeking vacant possession whilst still maintaining that the tenant must pay for rectifying all the dilapidations. We advised the tenant's solicitor that, in our opinion, an "oral tenancy" existed and, ironically, the tenant could claim security of tenancy under the Landlord Tenant Act, which would be turned down by the court (because no rent payable) but would at least provide 6 months for us to see if the file contained a solution, so that the tenant did not have to file for bankruptcy, this appearing to be the outcome if the Landlord succeeded in convincing a court that the Landlord did have a valid claim.
Pre-contract enquiries to the previous tenant's solicitor, at the time of the assignment, revealed that the Landlord was not aware of any outstanding breaches of the covenants. A letter was also on file from the Landlord confirming that essential remedial works had been completed but that he could not speak for repairs accrued since those works were done. The sales particulars produced by the Estate Agent also at that time, stated that the fabric of the building had recently been substantially upgraded. We pointed out that something cannot be "kept" in a particular condition (as required under the lease terms) unless it is already in that condition; consequently the "damage or deterioration" requiring repair may not simply be that occurring since the date of the lease, but might be that which has occurred at some earlier date at which the property was in a particular better condition. The standard legal textbook says "that condition which, having regard to the age, character and locality of the property at the date on which the lease was granted, would make the premises reasonably fit for occupation by a reasonably minded incoming tenant, of the class who would likely to take it". In the absence of "A Schedule of Condition", as in this case, the onus must be on the Landlord to prove the property has deteriorated since the date of the lease.
The Landlord threatened court action and now claimed £47,000 to be the cost of rectifying the Dilapidations. The tenant responded by setting out a schedule, listing only those items that he believed he was responsible for. After over a year of wrangles, threats and rising solicitor's costs, the Landlord proposed, as a compromise, that the tenant should pay just £7,000 in full and final settlement for all claims for Dilapidations and vacate within 14 days. We advised the tenant to reply offering £4,000 in full and final settlement of all outstanding matters in connection with the tenancy, pointing out that the Landlord's letters have always been written under the heading "Dilapidations" and he didn't want to vacate and end up in litigation over surveyors bills or any other sums the Landlord thought he was entitled to. The Landlord finally accepted the £4,000 and the tenant vacated, much to the relieve of all parties in this dispute.
This said, there are many lessons to be learnt by avoiding what could have been potentially expensive litigation costs by the Landlord, (whose only achievement would have been the bankruptcy of his tenant), the main one being the importance of a schedule of condition at the start and after each and every assignment.
Problem 20 (VIABILITY): A husband and wife had ran a successful small transport business for many years. When the firm lost a substantial contract that had generated regular guaranteed income, the wife became very concerned that this could have a far reaching impact on the firm's profitability which might even result in the bank asking for guarantees and/or security to provide funds whilst alternative replacement contracts were found. The husband was adamant that the loss would be beneficial , since, although the terminated contract had provided regular work, profits had been pared to the bone and vehicles could now be used for more profitable contracts, although in discussions it was agreed that the lost contract had contributed towards "overheads".
Advice: According to us, the most prudent course of action was to form a limited company (at the time single member companies were not allowed), transfer the business into the new company (after looking at taxation implications), and let the husband and son become director and secretary. It was suggested that the wife should not be involved with the new company and, only as a last resort, should the matrimonial home ever be used for securing bank borrowings.
As a general rule, ALWAYS try to ensure that the bank agree an exit route, once borrowings are repaid or reduced to an acceptable level.