1 Dealing with financial problems in your business - a guide for directors
2 Introduction Despite a nationwide fall in the number of corporate failures, for many businesses, insolvency remains a real and pressing concern. However, economic difficulties don t happen overnight, and by taking action early on - supported by sound legal advice - directors may be able to avoid insolvency altogether. If you are facing the threat of corporate insolvency, this short guide contains pragmatic advice to help steer your business to a sound financial footing. Key stats l 1,790 administrations were recorded in England and Wales during 2014; a fall of 24.3% compared with l 14,040 companies were liquidated during l While voluntary liquidations fell by 9.3% in 2014 compared with 2013, compulsory liquidations grew by 2.9%. l The number of receiverships and company voluntary arrangements fell by 21.1% and 2.4% respectively in 2014 compared to l The total number of corporate insolvencies fell by 9.2% in Source: https://www.gov.uk/government/organisations/insolvency-service
3 What is corporate insolvency? In very basic terms, insolvency means running out of money. A company becomes insolvent when it is no longer able to meet its debts and/or when its liabilities exceed its assets. According to the Insolvency Act 1986, a company is deemed unable to pay its debts where: l the company has not paid, secured or compounded a claim for a sum due to a creditor exceeding 750 within three weeks of having been served with a written demand in the statutory form (known as a "statutory demand"). l a creditor has attempted execution or another enforcement process against the company in respect of a debt without success. l it is proven to the satisfaction of the court that the company is unable to pay its debts as they fall due. l it is proven to the satisfaction of the court that thevalue of the company's assets is less than its liabilities, taking into account contingent and prospective liabilities. A business can, therefore, be cash insolvent but still have assets that exceed its liabilities. In such circumstances, companies may be required to liquidate these assets to meet any outstanding debts. Unfortunately, just because a business is profitable does not mean that it won t become insolvent, and cash flow problems can arise when you least expect them.
4 How to avoid corporate insolvency For most businesses in financial dire straits, the preferred option is usually to rescue the company if at all possible. As such, keeping a close eye on your cash flow and current performance can provide an early warning where things do start to go wrong. Giving you the time you need to formulate a response and take action. Five top tips to avoid insolvency Review your business plan, budgets and credit control policies Discuss your company s finances with your finance director and accountant to establish how to generate sufficient cash flow to keep the business running, and stop its credit position from deteriorating. Ensure that your company performance is being accurately monitored against forecasts and that you have sound credit control policies and debt collection processes in place. For example you should: l invoice all customers on time l chase up any outstanding debts. l Negotiate regular payments from customers on long-term contracts. l re-negotiate with suppliers to see if you can secure more favourable terms. l reduce any unnecessary overheads. Speak to your bank / creditors The sooner your business begins a dialogue with its bank, funders and major creditors (such as HMRC) the better. You will need to prioritise your creditors to ensure you give the company the best possible opportunity to continue trading, rather than just paying those who shout the loudest. Each creditor needs to be owed at least 5,000 before they can take steps to wind up your business. You can also consider asking HMRC for a 'time to pay arrangement. This scheme allows businesses to pay VAT and PAYE in instalments over a set period. Most importantly, be open and transparent about your position and realistic about your plans for turning the business around and paying back what is owed. Very few (if any) creditors stand to gain financially from making you insolvent. Most will agree to an affordable repayment plan, even if over an extended period.
5 Consider entering into administration Where a company is (or is likely to become) insolvent, it can enter into administration. Offering the breathing space needed for an emergency strategy to be formulated, administration provides time to rescue the company as a going concern, and/or to achieve a better result for creditors than if the business was wound up. If this result cannot be reached, then the administrators will seek to maximise the company s assets to distribute to secured or preferred creditors (often including employee claims and pension schemes). Administrators take over the day-to-day management and control of companies in administration and may be appointed by: l a court order on the application of company / directors, or one or more of its creditors. l the holder of a floating charge filing a notice at court. l the company, or one of its directors, filing a notice at court. Consider a Company Voluntary Arrangement (or CVA) A CVA allows the company to reach a binding agreement with its creditors regarding payment of all or part of, its debts over an agreed period. A liquidator, or the directors can apply to the court for a moratorium to prevent creditors from taking further action for 28 days. At least 75% (of the value of the debt) of the creditors must approve the proposal for it to be accepted and become binding. The implementation of a CVA, must be supervised by an Insolvency Practitioner. Seek early professional advice In a tough economic climate, it has never been more important to ensure that businesses receive the legal support they need to carry on trading wherever possible. The earlier specialist legal insolvency advice is sought, the more options are likely to be available to the business, and the more control you can exercise over the process and the future. Once a company is placed in administration, its creditors are prevented from starting any legal action (or continuing any existing action) to recover assets without express permission from the court. While complex administrations can last for several years, the period of administration tends to lasts for one full calendar year, unless the creditors or the court agree to an extension.
6 What happens during insolvency? Where insolvency cannot be avoided, an Insolvency Practitioner (IP) or Official Receiver (OR) will take control of the business assets. ORs are civil servants appointed by the Secretary of State. If your company enters insolvency, the Insolvency Service (an executive agency of the Department of Business, Innovation and Skills) will appoint an OR to oversee your case. Where the amount of money involved is considered small, the OR will administer the insolvency of your company. They also have a duty to investigate the affairs of companies in liquidation and will report to the Insolvency Service if they believe an individual is unfit to be a director. However, where there are significant assets or sums of money involved, the OR will appoint and IP from a rota. IPs are usually accountants or solicitors qualified in dealing with insolvency issues. They fulfil the same functions as ORs. An IP can also be privately appointed by creditors or nominated by the court. The primary objective of any insolvency procedure is to maximise returns to creditors and ensure that all creditors are treated fairly and equally in proportion to their claims. Following winding up, you will no longer have control of the business and most of your powers as a director will cease. However, you may have to help the OR or IP dispose of any assets. The OR or IP will arrange to interview you, and you will be sent a questionnaire (called a PIQ(c)) to complete. At that interview, you will be required to hand over the completed questionnaire, the company's books, and records in your possession. You will also be asked to give full details of the company's assets and may also be called upon to provide a sworn statement (a statement of affairs).
7 Protecting you and your business If you are a director of a company in financial crisis, as well as considering the position of the company, you also need to protect yourself as an individual. Directors of an insolvent business are required by law to act in the best interest of all the company s creditors. Failure to do so could result in substantial personal liability and/or you being prevented from running a business in the future. Director disqualification proceedings A disqualification order can be made by the court under the Company Director Disqualification Order The minimum period of disqualification is two years, and the maximum is 15 years. Conduct that can lead to disqualification proceedings being taken against you includes: l Trading that harms creditors once the company has become insolvent (e.g. if you continue to trade despite knowing that there is no realistic prospect of being able to repay debts). l conduct that deprives creditors of assets. l fraud. l failing to keep proper accounting records, or submit tax returns. l failing to co-operate with OR / IP. For example: l If you have misapplied company funds. l if you have traded wrongfully or fraudulently. l where you have made express or implied representations about the company s ability to pay, which were inaccurate or false. l if you are a shareholder of the company and your shares are not fully paid up. l if you have guaranteed any of the company s debts. Why Linder Myers? Our experienced financial restructuring team provides pragmatic support to directors and businesses facing financial difficulties. Early consultation enables us to advise you on the full range of options that are available to you. Helping you choose the most beneficial outcomes for you, your employees, your business and your creditors. Our services include advising on all aspects of business restructuring, debt management and cash flow improvement. We also provide advice and assistance with company voluntary arrangements, compulsory and voluntary liquidations, receiverships and administrations. We can also advise businesses on corporate restructuring and turnaround packages, the sale of business assets, director disqualification proceedings and misfeasance claims. Personal liability for company debts There are a number of situations through which you may find yourself potentially liable to pay some of the company's debts.
8 CLIT For a fuller explanation of how to protect your business from financial issues, including Insolvency and the threat of customers and suppliers going into administration, visit and download our complete guide. Alternatively, call us today on or