Want to get paid? Then, beware of groups.

The first question to ask yourself when you are thinking about making a claim is who you are going to claim against. And sometimes the answer might not be as straightforward as you think, and particularly when dealing with company groups.

Imagine the following common scenario. You are approached by a representative of a large and impressive business, say ‘XYZ Group Ltd’. They are established players in the industry and are known to have many assets. They give you a lot of work but, when it comes to time for payment, they say there were problems and refuse to pay.

You need to make a legal claim against them to get paid but, when you look closely at the paperwork, you realise that your contract wasn’t actually with whom you thought it was. There was no formal contract although the work had been agreed through a serious of letters. The correspondence from XYZ was written on letter headings with ‘XYZ Group’ written in large print at the top underneath their logo. But, when you look closely, you see that the small print at the bottom states ‘XYZ Trading Ltd’ and not ‘XYZ Group Ltd’.

You investigate and find out that XYZ Trading Ltd is one of many subsidiaries of XYZ Group Ltd. It’s a trading company with no assets of its own. Even if you made a claim and won, there is a real chance of never being able to enforce a judgment.

When dealing with groups, you need to be very clear about what legal entity you are trading with. Company groups are commonly set up so that one company has all the assets with other companies simply trading and passing profits back to a holding company. They are set up in this way to protect the assets of the holding company and often for tax reasons too.

If you need to make a claim, you can only do so against the company you actually contracted with and not any other companies in the group. If the company you contracted with has no assets, even if other group companies do, you cannot enforce your claim against any of these assets.

My advice:

1. Make sure you know exactly what legal entity you are contracting with. It’s best to get a written contract but, if that’s not possible, at least get a formal order clearly stating the name and company number of the company you are dealing with.

2. Undertake credit checks against the company you are dealing with.

3. If it’s a substantial contract and the company you’re contracting with has few assets, try to get cross-guarantees from other group companies and/or personal guarantees from the directors and/or performance bonds.

What it really boils down to is the need to know your customer if you want a realistic chance of getting paid if things go wrong.

Gary Cousins
Business Solicitor

For free advice on this topic please call us on 0845 003 5639.