Ask H&H: bankrupt client

  • Q: I am an equestrian web designer and I recently set up a website for a horse dealer who has since ceased trading and gone bankrupt, owing me payment for my work.

    I believe the client knew he was struggling back in June, but still kept me on — I even sub-contracted some of the work to another designer, and paid her myself.

    Can I recoup my losses? I have been told it is unlikely as the company owes so many people.

    I don’t have a specific insurance policy to cover this incident and work as a sole trader.
    CK, Midlothian

    According to Colin Davison, author and chartered accountant, the losses you suffer on your bad debt are treated as a cost against your business.

    “They will reduce your tax bill,” he said. “As a basic tax payer, you will receive 20 per cent reduction in the tax and eight per cent reduction in national insurance contributions (NIC), but of course not full recovery for your losses.

    “A company being insolvent and then leading to an administration process is not like personal bankruptcy,” said Colin.

    “This is because it offers a potential legal recoup to you from any directors under specific situations. If the director of the company took on your services when they knew the business was insolvent and could not make its debts, the director could be personally liable. You could then chase the director for their own assets — their nice countryside retreat,
    for example.

    “While I would always recommend seeking legal advice, often it is the crafty methods — such as arranging to meet up with the director and threatening legal action — that will see you getting paid,” he said.

    “They will be keen not to go to court, as public knowledge of this could see everyone being paid and most people in this position will simply write the lost payment off. I would, however, recommend you take a senior advisor with you if you do choose to meet with the director.”

    Stuart Farr of Laytons solicitors concurs, and added: “A close look at any contractual documents in your possession may provide you with avenues to pursue the directors in their personal capacity, particularly if you can show wrongful or even fraudulent trading.

    “Contractual documents are often not watertight, so you may find yourself in a position to argue that your contract was not, in fact, with the company, but rather the private individual behind it.”


    Cranleys, tel: 01256 830000 www.cranleys.co.uk

    Laytons solicitors, tel: 0161 834 2100 www.laytons.com

    This Q&A was first published in Horse & Hound (27 November, ’08)

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