There are a number of different types of commercial client and the requirements for each can be different. It is very important that you identify the specific type of business we are dealing with so that we can ensure cover is appropriate and the insured is correctly identified.
This may seem obvious, but we have had a number of incidents where there has been confusion over these details and these have largely come to light in the event of a claim and queries from the insurers. Sometimes even the client is unclear how to properly describe their business structure so it’s important to test the logic of statements made.
We are also seeing increasing focus from insurers on previous insolvency – either personal or commercial – resulting in declined claims and/or policy voidance. Again, these are often caused by misunderstanding what has to be disclosed – ‘it was a voluntary liquidation so it doesn’t matter.’
A sole trader describes any business that is owned and controlled by one person – although they may employ workers. Individuals who provide a specialist service like plumbers, hairdressers or photographers are often sole traders.
Sole traders do not have a separate legal existence from the business. In the eyes of the law, the business and the owner are the same. As a result, the owner is personally liable for the firm’s debts and may have to pay for losses made by the business out of their own pocket.
A sole trader is easy to set up as no formal legal paperwork is required and generally, only a small amount of capital needs to be invested, which reduces the initial start-up cost.
They face unlimited liability if the business fails.
We should ensure that we correctly capture the individual and the trading name and that this appears correctly on all documentation. For example:
Mr John Jones t/as Jones Building
Mr John Jones or Jones Building & John Jones or John Jones or Jones Building Limited
If the insured does not employ anyone, or only employs close family members, then the business does not need Employers Liability cover.
Partnerships are businesses owned by two or more people.
Doctors, dentists and solicitors are typical examples of professionals who may go into partnership together and can benefit from shared expertise. One advantage of partnership is that there is someone to consult on business decisions.
The main disadvantage of a partnership comes from shared responsibility. Disputes can arise over decisions that have to be made, or about the effort one partner is putting into the firm compared with another. Like a sole trader, partners have unlimited liability.
Partnerships & Sole Traders can often be viewed as having lessor insurance requirements than a limited company. In fact the opposite is true – they have all the same risks, but are exposed personally should there be a problem, and when claims can run into the millions, it is vital that limits are carefully considered.
A limited company has special status in the eyes of the law. These types of company are incorporated, which means they have their own legal identity and can sue or own assets in their own right. The ownership of a limited company is divided up into equal parts called shares. Whoever owns one or more of these is called a shareholder.
Because limited companies have their own legal identity, their owners are not personally liable for the firm’s debts. The shareholders have limited liability, which is the major advantage of this type of business legal structure. Limited Companies can own shares in other Limited Companies and where a company owns more than 50% of the shares (a controlling share), the company is called a ‘subsidiary’.
Two companies are Associated when the same person or group of persons can control both, either personally, or via their interests in other corporate shareholders. Control is usually determined according to % share ownership or Voting power.
Unlike a sole trader or a partnership, the owners of a limited company are not necessarily involved in running the business, unless they have been elected to the Board of Directors.
Limited companies in the UK are incorporated and dissolved by Companies House and each has a unique company number. Each company has to follow set rules regarding the management and reporting of the firm or face being stuck-off by Companies House.
Companies House records are public and so UK Limited companies are easy to identify and research.
There are two main types of limited company:
- A private limited company (ltd) is often a smaller business such as an independent retailer. Shares do not trade on the stock exchange.
- A public limited company (plc) is usually a large, well-known business. This could be a manufacturer or a chain of retailers with branches in most city centres. Shares trade on the stock exchange.
You will occasionally see a third type of company:
- A limited liability partnership is most often used by solicitors and refers to a partnership in which some or all partners have limited liabilities. In an LLP, one partner is not responsible or liable for another partner’s misconduct or negligence.
All employers need Employers’ Liability insurance unless they are exempt from the Employers’ Liability (Compulsory Insurance) Act.
Companies employing only their owner where that employee also owns 50% or more of the issued share capital in the company. A director of a limited company is classed as an Employee, so a limited company must have EL cover by law unless the director is the only employee and owns more than 50% of the business.
A Limited Company can trade as a different name or change its name:
Jones Building Limited t/as Honest John
Jones Building Limited t/as Honest John Limited (one limited company cannot trade as another – either the second company is a trading name or it’s a separate limited company but it cannot be both). Any change of name is recorded at Companies House and can be verified.
Insurance policies can cover a company and its subsidiaries and also occasionally other ‘related’ companies – where the directors are the same for example – but these companies must all be notified to the insurer and noted in the policy documentation.
Insurers should be notified of changes to the business or its legal structure including trading names, directors, or sale of the business (or a section of it) and transfer of assets.
An entrepreneur can opt to set up a new independent business and try to win customers. An alternative is to buy into an existing business and acquire the right to use an existing business idea. This is called franchising.
A franchise is a joint venture between:
- A franchisee, who buys the right from a franchisor to copy a business format.
- And a franchisor, who sells the right to use a business idea in a particular location.
Many well-known high street opticians and burger bars are franchises.
Opening a franchise is usually less risky than setting up as an independent retailer. The franchisee is adopting a proven business model and selling a well-known product in a new local branch.
A franchisee will be one of the other business types as well – a sole trader for example – and the same implications apply. In addition, they may need to consider the insurance requirements of the Franchisor or include them as a joint insured or interested party depending on the franchise arrangement.
Checking Company Details
There are lots of websites on which you can check the details for a limited company and some of these will include sole trader details as well. Beware sites that want to charge a fee – all information is available free of charge if you know where to look.
Companies House – This site allows you to check details and view all filed documents for a company – very useful if you need filed accounts information, details of a liquidation or a list of directors.
Company Check – This site contains the same information as the Companies House site, but makes it easier to identify the subsidiary companies and shareholders and can make complex lists of directors easier to understand. Refer to the ‘Structure’ section of the listing.
You can also use these sites to review the history of an individual director – to identify any involvement in previously liquidated companies. Be aware that a single person can have multiple listings so just because you have found an entry that you can confirm is your target, doesn’t mean that you have all of their information so do carry our further searches if you are unsure.
Understanding Companies House Information
Insolvency or bankruptcy?
Insolvency is a general term which can apply to both individuals and companies. Bankruptcy, meanwhile, only applies to individuals (including sole traders); it does not apply to limited companies or partnerships (although partners or company directors may become bankrupt if the partnership or company becomes insolvent). Bankruptcy is just one type of personal insolvency; there are other forms such as individual voluntary arrangements (IVAs) or debt relief orders.
What are the different types of liquidation?
Limited companies (but not individuals) which become insolvent may be put into liquidation (also known as “winding-up”). This will result in the cessation of trading, the sale of any assets to pay creditors and being struck off from the companies register. There are two types of liquidation relevant to insolvency:
- Creditors’ Voluntary Liquidation (CVL) – this is the most common type of liquidation and needs to be proposed by directors and agreed by 75% (by value of shares) of shareholders.
- Compulsory Liquidation – a company with debts of £750 or more can apply to the court to be liquidated. A director can ask the court to wind up the company, as long as 75% (by value of shares) of shareholders agree.
Liquidation, voluntary or otherwise, should be declared to insurers. Included in the declaration should be further information relating to the cause of the liquidation and the monies outstanding.
What is a winding up application?
A company which is unable to meet its payment deadlines and is unable to achieve any sort of compromise agreement or arrangement, may end up facing a winding-up application from its creditors. This entails a creditor applying to the court to shut down and liquidate the company. If the court issues a winding-up order, an “official receiver” will be put in charge of managing the liquidation process, including freezing the company bank account and selling its assets.
What is the position of company directors upon company insolvency?
Once a liquidator is appointed, company directors cannot act on behalf of their company and no longer have any control over it. If there is a CVL or compulsory liquidation, they will be banned for five years from forming, managing or promoting any business with the same (or similar) name to the liquidated company (subject to certain exceptions).
If company directors are found to have been negligent in their legal responsibilities and contributed to the company insolvency through “wrongful trading” (ie allowing a company to trade when it cannot pay its debts), they may be held personally liable for company debts. If their conduct is deemed to be unfit, they can also be disqualified as a director for up to 15 years.
What is the position of sole traders?
Sole traders are personally responsible for all the debts of their business, whereas directors of a limited company are generally cushioned from the liabilities. Sole traders cannot go into liquidation; instead they must either apply for bankruptcy or enter an Individual Voluntary Arrangement (IVA). An IVA is a legally binding agreement to repay debts over a period of time; it must be agreed to by creditors holding 75% of overall debt and must be declared to insurers.
‘Phoenix’ refers to a business that ‘rises from the ashes’ of a previously liquidated business, usually to start afresh leaving any debts with the original company. A Phoenix business will have a number of elements from the previous business – any combination of workforce, directors, shareholders, premises or other assets. The Insurance Act requires the insured to make a fair presentation of the risk and that should include every material circumstance which the policyholder knows or ought to know so a connection to a previous business must be disclosed to insurers. Insurers could require details of previous claims and full details of the liquidated business history. For example:
Business A is liquidated leaving substantial debts to suppliers and HMRC. The assets, including a fleet of vehicles, are sold to newly formed Business B. Business B is run by former employees but has different directors to Business A and has the same employees driving the same vehicles. Even though the new directors have no formal connection to the previous business, Insurers should be made aware of the previous business and the circumstances of the liquidation and the formation of Business B. They may also require the claims history for Business A.
A business identified as Dissolved on the companies house register has ceased trading and closed down. Dissolving a company is not the same as liquidating one and insurers do not normally need to be notified if a director has a previous involvement with a dissolved company. BUT it is possible to liquidate a company and then dissolve it so the latest status would be ‘Dissolved’ but the liquidation must still be declared.
Insurers will not normally need to be notified of any previous Directorship roles that the insured (or its Directors) have held.
Sometimes insurers or finance companies will request details regarding the Beneficial Owners of a business – usually when the business is a subsidiary or ultimately owned off-shore. A beneficial owner is an individual who ultimately owns or controls more than 25% of a company’s shares or voting rights, or who otherwise exercise control over the company or its management. Where such an interest is held through a trust, the trustee(s) or anyone who controls the trust will be registered as the beneficial owner(s) and full details of the trustees will be required.