What Every Director Needs to Know

Cash flow issues, slow-paying customers and unexpected liabilities can place even successful companies under significant financial pressure. However, if your company is struggling to pay its debts, it is important to understand when financial difficulties become insolvency, and what that means for you as a director.

When Does Financial Pressure Become Insolvency?

Under section 123 of the Insolvency Act 1986 (“the Act”), a company may be insolvent if it is unable to pay its debts as they fall due (exceeding £750.00), or if its liabilities exceed its assets. However, Insolvency does not automatically mean that a company must cease trading immediately. What it means is that directors must be increasingly mindful of the interests of creditors, rather than focusing solely on shareholders/dividends and the growth of the business.

Can Directors Be Personally Liable?  

Many directors mistakenly believe that the protection of limited liability means they cannot be held personally responsible for decisions taken whilst a company is insolvent.

Whilst that protection is fundamental, it is not absolute. Once insolvency becomes a realistic prospect, a director’s actions may later be scrutinised by a liquidator, administrator or the court.

Preferences, Transactions at an Undervalue and Phoenix Companies

A director whose company is facing insolvency may repay a loan from a spouse, family member or another company whilst leaving other creditors unpaid. Whilst this may seem understandable, such payments can later be challenged as preferences under section 239 of the Act. Similarly, transferring a company vehicle, stock or equipment to a connected company for less than market value may be challenged as a transaction at an undervalue pursuant to section 238 of the Act.

Particular care should be taken when dealing with company assets. Transactions entered into before insolvency may later be challenged as transactions at an undervalue under section 238 of the Insolvency Act 1986, where assets are transferred for significantly less than their true value. Likewise, repayments made to connected parties, directors, family members or favoured creditors may constitute preferences under section 239 if they put one creditor in a better position than others in the event of insolvency.

Wrongful Trading and Misfeasance

Perhaps the best-known risk is a claim for wrongful trading under section 214 of the Insolvency Act 1986. If a company subsequently enters liquidation, a liquidator may seek a court order requiring a director to contribute personally to the company’s assets if they knew, or ought to have concluded, that there was no reasonable prospect of avoiding insolvent liquidation and failed to take every step to minimise losses to creditors.

Directors should also be aware of misfeasance claims under section 212 of the Act. This provision allows a liquidator to seek repayment or compensation where a director has misapplied company money or property, retained company assets, or breached their duties (pursuant to sections 171 to 177 of the Companies Act 2006). Common examples include payment of personal expenses through the company or transferring company funds or assets for non-commercial purposes.

The Risk With “Phoenix Companies”

The temptation to transfer assets into a new company can be especially dangerous. Whilst not all so-called “phoenix companies” are unlawful, any arrangement that seeks to move valuable assets or business opportunities away from creditors is likely to attract scrutiny from an insolvency officeholder. What may appear to be a sensible commercial decision at the time can later become the subject of litigation.

In more serious cases involving dishonesty, directors may face allegations of fraudulent trading under section 213 of the Insolvency Act 1986. Unlike wrongful trading, fraudulent trading requires an intention to defraud creditors and can have serious personal and financial consequences.

What Should Directors Do Next?

The good news is that insolvency does not necessarily mean the end of the business. Many companies successfully recover through restructuring, refinancing, investment, informal arrangements with creditors, Company Voluntary Arrangements (CVAs), administration or other formal insolvency processes. However, the earlier advice is sought, the more options are likely to be available.

Directors should seek professional advice if they notice persistent creditor pressure, unpaid tax liabilities, increasing arrears, county court judgments, threats of winding-up proceedings, or a reliance on borrowing merely to meet existing debts. These are often warning signs that a company’s financial difficulties require urgent attention.

The key message is simple: trading whilst insolvent is not automatically unlawful, but ignoring insolvency can be. Directors who recognise the warning signs, keep accurate financial records, take professional advice and make decisions with creditors’ interests in mind are far better placed to protect both the company and themselves.

If you are concerned that your company may be insolvent, obtaining advice at an early stage can often make the difference between a successful turnaround and personal exposure to claims from a future liquidator.

If your company is experiencing financial difficulties, early advice can often make all the difference. At Wellers, we advise directors and businesses on insolvency risks and creditor claims. To discuss your situation, please contact James Day at james.day@wellerslawgroup.com or on 01732 457575, or another member of the Dispute Resolution team for a no-obligation initial discussion.

Understanding Trademark Infringement (statutory) and Passing Off (tortious)

Would the Average Customer Be Confused?

Most business owners understand that they cannot simply copy a competitor’s logo/brand and services and expect to avoid trouble.

But what is the difference between trademark infringement and passing off? They are the two ways in which English law protects brands.

Trademarks (protect registered rights)

The Trademarks Act 1994 (“the Act”) gives registered trademark owners statutory rights. Section 9(1) of the Act confirms:

“The proprietor of a registered trade mark has exclusive rights in the trade mark which are infringed by use of the trade mark in the United Kingdom without his consent.”

Section 10(2) of the Act goes on to explain that a person infringes a registered trade mark if he uses in the course of trade a sign (logo) that is:

“…identical or similar to the [registered] trade mark and used in relation to [similar] goods or services…”

and

“…there exists a likelihood of confusion on the part of the public…”

Imagine you stop at a roadside burger van called “McDonaldz”. The logo features two large yellow curves/breadsticks. The menu boasts the “Big Quack”, the “McChicken-ish”, and the “VERY Happy Meal”.

The owner proudly explains that it is perfectly legal because he has not copied the name McDonald’s exactly. But that is not the test. The correct question to ask is whether:

“…there exists a likelihood of confusion on the part of the public…”

The wording is important. The law is not limited to exact copies. It is concerned with situations where consumers may believe there is some commercial connection between two businesses, even where the branding is not identical.

The courts assess this through the eyes of the average consumer. This is not a meticulous lawyer comparing two logos side-by-side under a microscope. It is an ordinary customer scrolling on their mobile phone, driving past a shopfront, or making a quick purchasing decision.

This is why attempting to circumvent liability by making small changes does not always solve the problem. Customers may not sit down and conduct a forensic comparison. They may simply assume the businesses are linked.

However, it is important to note that where two logos/brands may be the same/similar, there will not be an infringement if the services differ.

For example, if our friend at “McDonaldz” were in the business of supplying kilts (and not burgers), there would be no likelihood of confusion by the public, so unlikely to constitute an infringement.

However, where two companies are similar, it may be possible for them to keep the logo/branding if they can negotiate a “co-existence agreement”, which is where they agree to limit their respective services so that neither feels there would be any likelihood of confusion by the public.

However, not every business has a registered trade mark. That is where the law of passing off comes into play.

Passing Off (protects established goodwill)

The common law tort of passing off, which protects the goodwill a business has built up over time (applicable where that company has an established logo/brand, but it is not registered). Whilst the legal routes differ, both are ultimately concerned with preventing businesses from gaining an unfair advantage through customer confusion.

Imagine a village pub called The Red Fox, which has become locally famous over twenty years.

A rival publican opens across the road under the name The Red(er) Fox. The signage, menu, and websites are similar. A customer books Sunday lunch at one pub and turns up at the other.

At that point, the original owner may have a passing off claim.

Both, however, are fundamentally concerned with preventing confusion in the marketplace.

A Quick Guide

Remedies

Most commonly, the court may grant an injunction preventing the continued use of the offending name, logo, branding or marketing material. For many businesses, this can be the most damaging remedy because it may require an urgent rebrand, replacement signage, amendments to websites and social media accounts, and the destruction of existing stock and marketing materials.

The court may also award damages to compensate for losses suffered. Alternatively, the claimant may seek an account of profits, requiring the defendant to surrender profits that have been generated through the infringing activity.

In appropriate cases, the court may order the delivery up or destruction of infringing goods, packaging, advertising materials and other items bearing the offending branding.

Conclusion

The lesson is straightforward. Before launching a new business, product or rebrand, ask yourself:

Would the average customer think this is connected with somebody else’s business?

If the answer is anything other than a confident “no“, it may be worth taking advice before investing further in your brand.

Likewise, if you believe a competitor is trading off your reputation, adopting confusingly similar branding, or causing customers to believe there is a connection between your businesses, early legal advice can often prevent a dispute from escalating.

If you think that your business is a victim of trademark infringement or passing off, please contact James Day at james.day@wellerslawgroup.com or on 01732 457575 or another member of the Dispute Resolution team for a no-obligation initial discussion.

How Can Businesses Avoid Copyright Infringement?

The Copyright, Designs and Patents Act 1988 (“the Act“) confirms that “copyright” is a legal right that gives the owner exclusive rights over their original works.

But what constitutes a person’s original work under the Act?

The Act – An introduction

Section 1 of the Act confirms that copyright subsists in original literary, dramatic, musical or artistic works, sound recordings, film and/or broadcast. The Act does not provide an exhaustive list, but some additional examples include website content, software code, (architectural) drawings, brochures, videos or photographs.

Many may initially struggle with the concept of establishing copyright, but it may be simpler than first thought.

While a musician cannot copyright the note of E, when put together in a unique order alongside other notes to make a piece of music of his creation, copyright subsists for the musician in that piece of music and immediately upon its creation (it arises automatically).

Similarly, if a company published a children’s book about a Dragon who struggled to control his fire-breathing impulses, that company cannot assert copyright over the existence of a Dragon in a similar children’s book released by a competing company, but could establish copyright in its expression of the idea (the illustrations, structure, characterisation, and the specific creative choices made).

Section 16(1) of the Act confirms that the owner of the copyright in a work has the exclusive right to copy, publish, rent, lend or license, perform or play (in public) and/or make adaptations.

Section 16(2) of the Act confirms that an infringement occurs when a person does, or authorises another to do, any of the acts mentioned in section 16(1) without a licence agreed by the copyright owner. This section further confirms that the Act should apply to the whole of the work, or “any substantial part of it” (i.e. you cannot change a detail here and there and obviscate copyright infringement).

How to Avoid a Copyright Infringement Dispute

The simplest way to avoid copyright infringement disputes is by asking yourself the following questions before using material or content:

“Did we create this, purchase a licence, or obtain permission to use?”

Unless the answer is “yes” to all, you should pause and take advice.

How to Protect Your Copyright

Copyright arises automatically, at the moment of creation. However, the challenge is most often proving ownership should a dispute arise.

But how do you prove ownership?

An individual or business can strengthen its copyright position by good record maintenance (keeping original drafts, retaining emails, metadata, suitable written agreements with third parties, etc.). Ask yourself the question:

“What document(s) could I put in front of a judge to prove the idea originated with me?”

Remedies

Most commonly, the court may grant an injunction preventing the continued use of infringing material.

For many businesses, this is often the most damaging remedy. It may require website content to be removed, advertising campaigns to be withdrawn, brochures to be reprinted, software to be amended, or marketing materials to be destroyed at short notice.

The court may also award damages to compensate the copyright owner for losses suffered.

Alternatively, a claimant may seek an account of profits, requiring the infringer to surrender profits generated through the infringement.

In appropriate cases, the court may also order the delivery up or destruction of infringing materials.

Conclusion

The lesson is straightforward.

Before publishing content, using an image, launching a website or distributing marketing material, ask yourself:

“Did we create this, purchase a licence for it, or obtain permission to use it?“

If the answer is anything other than a confident “yes“, it may be worth taking advice before pressing publish.

Likewise, if you believe a competitor is using your photographs, website content, marketing materials, software or other original works without permission, early legal advice can often prevent a dispute from escalating.

If you think that your business is a victim of copyright infringement, please contact James Day at james.day@wellerslawgroup.com or on 01732 457575, or another member of the Dispute Resolution team for a no-obligation initial discussion.