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Landmark ruling for struggling SMEs

Date Added: 09/12/2013  

The late 2000s has seen many small to medium-sized enterprises (SMEs) fold and crumble because of the crippling economic crisis brought on by the recession. 

News stories of companies “going into administration” fill broadsheets and tabloids alike. These businesses, no longer able to cope in the faltering financial climate, are forced to allow their qualifying floating charge holders (QFCH) to appoint administrators.

Administrators attempt to rescue the insolvent company, but if this isn’t possible it is within their power to sell off parts of the business to pay the debt owed to the QFCH. 

The director of the SME is almost completely helpless and at the mercy of the decisions the administrators make. However, a landmark ruling from the High Court could change this.

Earlier this year, the administrators were called in to Closegate Hotel Development (Durham) Limited. The company had experienced substantial financial difficulties in 2011 - their final accounts showed that they lost £2.4 million for the year and there was also there was also a deficiency of shareholders’ funds totalling £13.2 million.

Barclays Bank PLC, which was the QFCH in this instance, decided to appoint administrators after assuring the directors of Closegate Hotel Development (Durham) Limited that they would not do this while negotiations were ongoing. The company took their case to the High Court as they believed the QFCH should not have proceeded to appoint administrators in enforcement of the charge.

The High Court ruled in their favour, decreeing that directors have the authority and power to cause a company to apply to court to challenge the validity of the appointment of its administrators. This means that directors no longer have to accept that their QFCH is bringing in administrators, they can challenge this in court putting some power back into their hands.

This is big news for SMEs that are struggling to stay in business as it gives them more control in deciding whether to go into administration or not and some power in standing up to QFCH, who may only be interested in the debt owed to them rather than the future of the business.

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