Your Free Guide to Business Recovery and Turnaround

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1 Your Free Guide to Business Recovery and Turnaround

2 Contents Introduction Is my business insolvent? danger signs How BCR can help Dealing with HMRC A Winding Up Petition Every director s worst fear Company Voluntary Arrangement (CVA) Administration Pre-pack Administration Liquidation the different types Potential liabilities for Directors Finance and Funding Options for a distressed business The team at BCR receive dozens of calls each month from those seeking help with companies in distress. Many of these calls come from the accountants acting for those businesses, and we work with numerous firms who know that they can rely on us for impartial, reliable and speedy advice. Often though it is the directors themselves who are seeking information and guidance. There are many different options for their company and for that reason we have created this Free Guide which we hope will explain the facts about different insolvency and restructuring procedures, so that we can work with you to find the right solution for your business. 2

3 Introduction Very many congratulations, the fact that you re reading this guide means that you have taken the first massive step to sorting out your company s financial affairs. Quite often our clients describe how they are on the verge of an emotional as well as a commercial breakdown, even though the position is often not one of their own making, often being driven by circumstances totally outside their control. As a result they can completely lose their confidence and their ability to make decisions. When you are frightened of answering the telephone in case it is a creditor chasing money, when you stopped opening the post because it is just more bills and when knocks on the door make you think of bailiffs you feel you re letting everybody down, your customers and suppliers, your employees and your family but more than that, you feel like you are letting yourself down. Our role, as licensed insolvency practitioners, is to bring a fresh pair of eyes to review your situation and to help you deal with it correctly and in a positive manner. We at BCR can help relieve you of the burden you are carrying. We take control of the situation, ensure that your assets are protected and realised in accordance with relevant legislation and that your creditors are dealt with correctly and professionally. Once BCR are involved, the bailiffs will be called off and creditors barred from harassing you. Our clients regularly say that a massive weight has lifted from their shoulders after a free initial consultation with BCR. All this means that you regain the ability to think more clearly, to make decisions and to see the light at the end of the tunnel. The fog lifts and you can make choices once again. You regain your self esteem and start to rebuild your life. 3

4 Is my business insolvent? / 10 danger signs Is my business insolvent? There are 2 Tests of Corporate Insolvency: 1. The Cash Flow Test - the company is unable to pay debts as and when they fall due 2. The Balance Sheet Test - the company s assets are exceeded by its liabilities (including contingent and prospective liabilities) Furthermore, a company is deemed unable to pay its debts and therefore insolvent if there is an unsatisfied Court judgement or if there is an unpaid statutory demand in excess of danger signs Your bank refusing to honor your cheques - despite being only slightly over your agreed overdraft limit Paying suppliers a round sum on account rather than the full balance due for the month Constantly being at or close to your overdraft limit Delaying payment of suppliers because monies expected from customers is late coming in Under declaring your PAYE or VAT liability this time, with a view to catching up next time Not filling your VAT returns and paying the estimated assessments because they are a lot lower Having to prioritise some suppliers over others rather than paying them all as they fall due Receiving solicitors letters demanding payment of overdue amounts, or even worse, having Court action taken against you Having to borrow more money just to stand still Making losses 4

5 How BCR can help How BCR Can Help In order to help decide the best route forward for your business one of our team will take a thorough look at your finances: What exactly is the state of your finances? Why you have a poor cash flow? Where can changes be made? When did the problem start? How did this happen? Can it be fixed? We assess all options in each case rapidly and realistically and give clear practical and commercial advice. 5

6 Dealing with HMRC debt Dealing with HMRC debt Dealing with HMRC can be a daunting prospect to many company directors. If you are late paying your taxes or are unable to pay in full, there can be monetary consequences which will continue to escalate. The taxman does not need to apply to court to seize your possessions for unpaid taxes. He can issue a distraint notice, enter your premises and take possession of your property to be sold at public auction to compensate for what you owe. This, unfortunately, is just the beginning of what HMRC can do. They can also petition to wind up the company (as can any creditor who is owed more than 750) should they not recover sufficient funds to write off their bill. BCR are regularly called out to businesses whilst HMRC Field Officers are making an inventory of property to seize. We ve been able to successfully intervene to ensure nothing was taken, by negotiating a solution that was acceptable to the taxman. 6

7 A Winding Up Petition A Winding Up Petition Every Director s Worst Fear A winding up petition is by far the most serious action that can be taken against your company. Often it arises because a creditor feels that they have no other way of recovering money owed to them. You may have tried hard to meet their payment deadlines, the trust has been broken and your creditor has taken this drastic action. Normally a creditor will issue a statutory demand and then 21 days must pass before they can apply to the court to issue a winding up petition. If you have received the Statutory Demand you therefore have 21 days to dispute the demand or to come to an agreement with your creditor over re-payment. If this hasn t happened and a winding up petition has been served against you, you have ten days to settle the debt, or agree a repayment plan with the creditor, before the petition is advertised in the London Gazette. The London Gazette is a published daily, in print and online and is fully accessible to the public. It is very common for your bank account to be frozen once the London Gazette advertisement appears. There is also the likelihood that your other creditors will withdraw credit facilities and make their own demands for payment. If a winding up petition has been served on your company, seek professional advice immediately. 7

8 Company Voluntary Arrangement (CVA) Company Voluntary Arrangement (CVA) A Company Voluntary Arrangement consists of a deal between the company and its creditors to repay them from future profits. It is a deal that is aimed to preserve the company, rebuilding sales and profits whilst paying something back over an agreed period of time. The company directors remain in control. A well structured arrangement can do much to ensure that the business has a good chance of survival. A Successful CVA is based on:- A commercially structured deal Appropriate levels of working capital in addition to debt restructuring A determination to make the Company Arrangement work. Directors must understand that the creditor s objectives are paramount when putting together the Arrangement. If the business has a viable future, there is an acceptance of the need for change, the directors are prepared to fight for survival and appropriate funding can be found, then a Company Voluntary Arrangement is an exceptional method of saving a business. 8

9 Administration Administration The aim of Administration is to protect companies from their creditors whilst a restructuring plan is completed. The process requires a licensed insolvency practitioner to act as the Administrator. The Administrator must perform his / her functions with the objectives of :- 1. Rescuing the company as a going concern should be the primary objective; or 2. If a rescue is not reasonably practicable, achieving a better result for the company s creditors than would be likely in a liquidation (possibly by trading whilst seeking a buyer for the business as a going concern) ; or 3. Realising property in order to make a distribution to one or more secured preferential creditors. This objective can only be pursued where it is not reasonably practicable to achieve either Objective 1 or 2. A company can be placed into Administration by either a Floating Charge Holder (i.e. the bank if they have registered a charge at Companies House); the company Director(s), or any creditor via Court. Once appointed, the Administrator will manage the company s affairs, business and property, submitting regular reports to all parties. If the directors initiate the process, then this may be done by means of a Pre-Packaged route. 9

10 What is a Pre-pack? What is a Pre-pack? A Pre-Pack Administration is a process where the deal to sell a business entering Administration is agreed prior to the Administration taking place. (i.e. it is pre-packaged ). Pre-Packs often involve the sales of businesses back to the existing management via a new company and this will allow a seamless transition between one business and the next. But the sale is not always to the existing management it can be to a third party. Utilising the Pre-Pack can be very useful where there are immediate threats to the business from creditors such as landlords, HMRC and banks. 10

11 Liquidation - The Different Types Liquidation The Different Types There are three ways that a company can be placed into liquidation; 1) Members Voluntary Liquidation (MVL) 2) Creditors Voluntary Liquidation (CVL) 3) Compulsory Liquidation Members Voluntary Liquidation This process enables shareholders to wind up a solvent company (i.e. its assets exceed its liabilities) and extract the remaining assets / cash at a lower tax rate than would normally be applied if this process wasn t used. Entrepreneurs Relief may be used against the Capital Distribution in order to reduce the personal tax rate down to 10%. Creditors Voluntary Liquidation This process is used when a company is insolvent and there is no other option other than the company ceasing to trade and is wound up for the benefit of creditors. The assets are realised with a view to paying a dividend to creditors if possible. Compulsory Liquidation This process is the result of the Court granting an order to wind up the company following the successful presentation of a petition by a creditor. To petition to wind a company up, the creditor must be owed more than 750. Once wound up, the case is passed to the Official Receiver who deals with the insolvent company and its assets. They call the director(s) into their offices to conduct an interview to discuss the affairs of the insolvent firm. 11

12 Potential Liabilities as a Director Potential Liabilities as a Director Once your company is placed into the hands of an insolvency practitioner, he or she has to follow very clearly laid down guidelines in terms of the investigation of your conduct as a director of your company. He will review your actions, and those of your fellow directors (and this will include anyone who has been a director at any time within the last three years including anyone who has acted as a de-facto or shadow director in that time. De-facto or Shadow director anyone who acts as or holds themselves out to be a director or one in accordance with whose instructions the directors are accustomed to act. What is the Insolvency Practitioner looking for? Well, evidence of wrong doing, under one or more of the following headings: Transfers at an undervalue Transactions intended to defraud creditors Illegal dividends Preferences Wrongful trading Fraudulent trading Report to the Directors Disqualification Unit OK, so what does this mean for you? Well not a whole lot if you haven t committed any of these heinous crimes, but just to be sure, let me explain in a little more detail what each of these phrases mean and what remedies are available: 12

13 Potential Liabilities as a Director continued Transfers at an undervalue Have you, in the last three years, gifted or sold at less than full value, any of the company s assets for example a car, a property etc.? If so the Insolvency Practitioner can apply to have that transaction reversed and the loss the company suffered re-instated. Transfers intended to defraud creditors Have you made a transfer at an undervalue in the past with the intention of putting assets beyond the reach of creditors or otherwise prejudicing the interests of the victim. There is no relevant time limit as regards the date in which the transaction must have taken place. The Court can order that the position be restored or an action may be taken against the directors for misfeasance. Illegal dividends In recent years it has become quite standard practice for directors who are also shareholders in their business to be remunerated partly, or even primarily, by way of dividend to avoid having to pay hefty National Insurance charges, both as an employee and as the employer, together in excess of 20% ON TOP OF any income tax advantages. This works really well, so long as the company is making profits and has distributable reserves. The problem arises when the business takes a downturn, losses eliminate any profits but dividends continue to be paid these dividends are illegal under the Companies Acts and are repayable to the company. 13

14 Potential Liabilities as a Director continued Preferences A potential preference occurs when a company puts a creditor in a better position than the majority of other creditors. Various factors are taken into account when establishing such claim, including, whether the company was Insolvent at the time of the transaction, whether the parties were connected and whether the company was influenced by a desire to prefer that creditor ahead of others. A successful action by an Insolvency Practitioner will result in the transaction being overturned and the situation reverted to what it would have been had the transaction not taken place. Wrongful trading This situation can occur when the business is allowed to carry on trading, and particularly taking credit, when the directors (including de-facto and shadow directors) knew or ought to have known the company was unlikely to avoid formal insolvency. The Insolvency Practitioner can apply to Court for an order that the directors make a personal contribution to the company s deficit and the Court can also make an order disqualifying the directors from acting as directors of another limited company for the next two to fifteen years, depending on the severity of the case. Fraudulent trading This is a lot more serious and in detail is beyond the scope of this guide. It basically covers the situation where a business has been set up for fraudulent purposes, as opposed to a genuine business which has fallen on hard times. This is a criminal charge and the penalties include imprisonment. If it is suggested to you that you may be guilty of this, you need to take professional advice from someone knowledgeable in this field and fast! 14

15 Potential Liabilities as a Director continued Report to the Directors Disqualification Unit This unit is the team in the Department for Business, Innovation and Skills (in old money, the DTI) that is responsible for monitoring the conduct of directors of failed companies. The Insolvency Practitioner has to submit a report to the department on every director in every case they deal with, highlighting any deficiencies in that director s conduct that they have discovered. Whilst this would certainly include all the matters mentioned above, it will also cover a much wider spectrum. Again, if you are threatened with this scenario, take professional advice immediately. 15

16 Finance and Funding Options Finance and Funding Options for a Distressed Business Refinancing is part and parcel of everyday business life, whether it entails negotiating new bank facilities, renewing overdrafts or entering into a factoring agreement. If the company is under pressure then the directors must consider whether raising additional finance against assets is the right solution to the problem. There are a number of different finance and funding options and it is necessary to take advice and consider the pros and cons of each before making any decision. Your finance options include:- Small Firms Loan Guarantee Scheme Factoring or invoice discounting Bank overdraft Asset refinance Stock finance Venture Capital Directors Loans We will work with you to help you to decide the most appropriate finance option for your business. 16

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