The Warning Signs

ALARM BELLS SHOULD BE RINGING IF:

Bank:

Your overdraft is always at the limit

Your bank is returning cheques

An increase in your overdraft has been refused

A loan application has been refused

The bank has requested increased security

Personal guarantees are requested

Reporting:

You have failed to file company accounts on time and have incurred penalties

You have failed to file the annual return

Creditors:

Paying creditors is difficult as cash flow is tight

You are failing to obtain new credit

You cannot extend existing credit

You are receiving warning letters

There is the threat of legal actions

You receive a visit by the Sheriff or Bailiffs

Debtors:

Don’t pay on time

You don’t have a dedicated debtor collection function

Factoring:

Disallowable debts/invoices

Monthly draw down is difficult

Management:

Lack of planning

Poor communication

No future strategy

Little or no time to discuss important issues

Autocratic leadership

If some of these warning signs have a familiar ring then it is time to talk to an independent, objective third party in order to discuss what options are available to you.

The Options

It is vitally important to establish the company’s position when considering the options available.

Remember:

If you have signed security documents on behalf of the company, given personal guarantees to support the company, then you potentially face the loss of your business, your home and personal bankruptcy.

Business Survival with you in control:

Trading Out

Refinancing

Company Voluntary Arrangement

Business Survival with someone else in control:

Administration

Administrative Receivership

Closure of your business out of your control:

Creditors Voluntary Liquidation

Other:

Compulsory Liquidation

Dissolution

Doing nothing is simply not an option.

Creditors Voluntary Liquidation (CVL)

Creditors Voluntary Liquidations are the most common form of liquidation in the UK. This occurs where the shareholders, usually at the directors’ request, decide to put a company into liquidation because it is insolvent. Either the company cannot pay its debts as they fall due or it has more liabilities than assets. The purpose of the liquidation is to appoint a responsible person who has a duty to collect the company’s assets and distribute them to its creditors in accordance with the law. That person is the liquidator, who must be a licensed insolvency practitioner. A meeting of creditors must be held within 14 days of the shareholders’ meeting (it is normally held on the same day) at a venue convenient for the majority of creditors. Notice of the creditors’ meeting will be sent to all known creditors at least 7 days before the meeting, which will also be advertised publicly. Creditors are entitled to inspect a list of names and addresses of the company’s creditors prior to the meeting. One or more of the directors will swear a Statement of Affairs of the company, which summarises the assets and liabilities (including details of creditors’ claims). Copies or a summary of the Statement of Affairs will be made available to creditors at the meeting. The insolvency practitioner whom the shareholders nominated as liquidator will assist the chairman of the meeting, who must be a director. A report of the company’s history up to liquidation will be presented, giving an explanation of the reasons for the insolvency, and creditors will be invited to question the directors. The creditors then vote to appoint a liquidator. The votes are based on the values of creditors’ claims. To be entitled to vote, creditors (other than those present in a personal capacity) must have lodged a form of proxy by the time and at the place stated in the notice of the meeting. (You may send your proxy by fax). Statements of claim may be lodged at any time before voting. Should the creditors’ choice of liquidator be different from that of the shareholders, the creditors’ choice prevails. A report of the meeting of creditors will be sent to all known creditors within 28 days.

Compulsory Liquidation

Compulsory liquidation (or winding up by the court) is a procedure by which the assets of a company are sold, and the proceeds are distributed to the company’s creditors. A court order is required to put a company into compulsory liquidation. At the end of the liquidation, the company is dissolved.

The process starts when a winding up petition is presented at court. The presentation of a winding up petition has serious consequences for a company.

The petitioner is often a creditor of the company. However the company itself, its directors and various other categories of people can seek to have a company put into compulsory liquidation. The most common ground for winding up a company is that it is unable to pay its debts.

The petitioner serves a copy of the petition on the company, and must, in due course, advertise the petition. There will then be a hearing in court at which the company has an opportunity to oppose the petition. The judge may make a winding-up order, or may dismiss or adjourn the petition.

When a winding-up order has been made, the Official Receiver is initially appointed as liquidator . The company’s creditors and contributories may appoint another individual, being a Licensed Insolvency Practitioner, to act as liquidator.

The liquidator is an officer of the court. As such, he has a duty to act fairly and impartially.

What does compulsory liquidation mean for a director of the company?

When a company goes into compulsory liquidation, the powers of its directors cease and they are automatically dismissed from office. As a former director of a company that is being wound up, you may be required to assist the liquidator and to provide a statement of the company’s assets and liabilities. If the liquidator believes that the conditions for disqualification are satisfied, he may report on you to the Secretary of State.

Company Voluntary Arrangement (CVA)

A company voluntary arrangement (CVA) is a procedure intended to assist in the rescue of a company in financial difficulties. A CVA allows a company to agree a composition or an arrangement with its creditors in satisfaction of some, or all, of its debts. The process for implementing a CVA is set out in Part I of the Insolvency Act 1986 (Act) and the Insolvency Rules 1986. While a CVA is implemented under the supervision of an insolvency practitioner, there is no statutory requirement that the company be insolvent or unable to pay its debts. To be effective, a CVA requires the approval of the requisite majorities of the company’s creditors and shareholders, being: • in the case of creditors, a majority in excess of 75 per cent in value of a company’s creditors present in person or by proxy and voting at a meeting to approve the CVA; and • in the case of shareholders, more than 50 per cent in value of the company’s shareholders present in person or by proxy and voting at a meeting on the resolution to approve the CVA. The CVA takes effect if approved at both the creditors’ and the shareholders’ meetings. If there is a difference of decision between the creditors and the shareholders, the decision of the creditors will take precedence, subject to any order of the court. Once the CVA is approved, it binds all the company’s unsecured creditors who were entitled to vote at the meeting (regardless of whether or not they voted) or would have been so entitled had they received notice of the meeting. This means that a CVA binds: • creditors who voted in favour of the CVA; • creditors who voted against the CVA; • creditors who attended the creditors’ meeting to consider the CVA but who did not vote; • creditors who did not attend the creditors’ meeting; and • creditors who did not receive notice of the creditors’ meeting (despite being entitled to be notified of the meeting). It should be noted, however, that a CVA cannot bind secured or preferential creditors without their consent.

Administration

The aim of an Administration is to protect companies from their creditors while a restructuring plan is completed. The process requires a licensed insolvency practitioner to act as the administrator, appointed by the court. At least one of the three objectives for the Administration must be satisfied, these are: – Rescuing the company as a going concern. (Note: this purpose is to rescue the company as opposed to rescuing the business undertaken by the company.) – achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being in administration). – realising property to make a distribution to one or more secured or preferential creditors. Holders of floating charges, normally banks, can make application to appoint their own choice of administrator. In cases where speed is essential, the rules provide for filing a notice of appointment during times when the court is not open for business. The filing will bring into effect an interim moratorium on insolvency proceedings and other legal processes being taken against the company. Once appointed, the administrator will manage the company’s affairs, business and property in accordance with the proposals. The administrator must submit regular progress reports to all creditors, the court and the registrar of companies covering each six month period from the date of administration until the administration ends or until he ceases to act.

Administration The aim of an Administration is to protect companies from their creditors while a restructuring plan is completed. The company must have predictable cash flows and the ability to predict profitability. The process requires a licensed insolvency practitioner to act as the administrator, appointed by the court. At least one of the three objectives for the Administration must be satisfied, these are: – Rescuing the company as a going concern. (Note: this purpose is to rescue the company as opposed to   rescuing the business undertaken by the company.) – achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being in administration). – realising property to make a distribution to one or more secured or preferential creditors. Holders of floating charges, normally banks, can make application to appoint their own choice of administrator. In cases where speed is essential, the rules provide for filing a notice of appointment during times when the court is not open for business. The filing will bring into effect an interim moratorium on insolvency proceedings and other legal processes being taken against the company. Once appointed, the administrator will manage the company’s affairs, business and property in accordance with the proposals. The administrator must submit regular progress reports to all creditors, the court and the registrar of companies covering each six month period from the date of administration until the administration ends or until he ceases to act.

Members Voluntary Liquidation (MVL)

A Members Voluntary Liquidation (MVL) is a solvent liquidation, where assets are sufficient to meet liabilities.

Why is an MVL Tax Efficient?

A distribution to shareholders by a Liquidator is treated as a capital gain and not taxed as income.

On 1 March 2012, the ESC C16 legislation was enacted. The legislation stipulates that where a company has surplus cash or assets available to distribute of £25,000 or less, the concession would be automatic under the new legislation and such distributions can be treated as a Capital Receipt by the Shareholder. But where the Company distributes more than £25,000, it will be taxed as a dividend unless the company is placed into Voluntary Liquidation. A solvent liquidation instigated by the directors and approved by shareholders is known as a Members Voluntary Liquidation (MVL). A distribution to shareholders by a Liquidator is treated as a capital gain and not taxed as income.

Trading Out

Most businesses will suffer a downturn at some stage in their existence just as they are likely to face cyclic cash flow problems.

If you believe that the business does have a future then Trading Out can be a particularly useful tool. The key is to achieve some breathing space.

Informal

Contact your key creditors and explain that cash flow is tight but repayment can be achieved in an affordable timeframe. A planned approach is essential.

Formal

The formal approach will require the services of a turnaround specialist to achieve a deal on your behalf. The specialist will need to see evidence that the directors have a planned approach to recovery. Some creditors may accept write-downs of debt if they can be convinced the business will survive and prosper in the longer term.

New Finance

Introducing new money can be a strong indicator that you are serious about the future of the business in the longer term.

Remember:

There is no time to lose.

You must not wait until legal actions are taken against the company:

Plan cash flow

Keep records of all contact with creditors

Regularly review the situation

Consider other options if plan becomes unworkable

If some of these warning signs have a familiar ring then it is time to talk to an independent, objective third party in order to discuss what options are available to you.

Refinancing

 

Refinancing is part and parcel of everyday business life, whether negotiating new bank facilities, renewing overdrafts or factoring.

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 ways to raise finance and it is necessary to consider the products carefully before making any decision. Contact Sanderlings Business Services on  0121 706 9320 or at info@sanderlings.co.uk to discuss these.

Administrative Receivership

 

Not to be confused with Administration, an administrative receivership is a remedy of a secured creditor, usually a bank, to allow for the realisation of assets subject to security. Prior to the Enterprise Act 2002, administrative receivership was available to a creditor who had a floating charge over the whole (or substantially the whole) of the assets of the company. The holder of a floating charge could put the company into administrative receivership by appointing an administrative receiver. Since 15 September 2003, the Enterprise Act 2002 effectively abolished administrative receivership in all but a few limited exceptional circumstances. For floating charges created on or after 15 September 2003, administrative receivership is no longer available as a remedy. Instead, a qualifying floating charge holder can put the company into administration by appointing an administrator. The Act does not apply to floating charges created prior to the Act coming into force, however, where such floating charges exist, holders can still appoint an administrative receiver to enforce their security.

Dissolution

 

This is a provision in the Companies Act to allow the removal of a company from the companies register.

A company may apply to the registrar to be struck off the register and dissolved. The company can do this if it is no longer needed. For example, the directors may wish to retire and there is no one to take over from them; or it is a subsidiary whose name is no longer needed. Some companies who are dormant or non trading choose to apply for strike off. This procedure is not an alternative to formal insolvency proceedings where these are appropriate.

The registrar can strike a company off the register on his own initiative, if it is neither carrying on business nor in operation. The registrar may take this view if, for example:

  • he has not received documents from a company that should have sent them to him;
  • mail that the registrar has sent to a company’s registered office is returned undelivered
  • the company has no directors

Before striking a company off the register, the registrar is required to write two formal letters and send notice to the company’s registered office to inquire whether it is still carrying on business or in operation. If he is satisfied that it is not, he will publish a notice in the relevant Gazette stating his intention to strike the company off the register unless he is shown reason not to do so.   A copy of the notice will be placed on the company’s public record. If the registrar sees no reason to do otherwise, he will strike off the company not less than three months after the date of the notice. The company will be dissolved on publication of a further notice stating this in the relevant Gazette

.

The Options

It is vitally important to establish the company’s position when considering the options available.

Remember:

If you have signed security documents on behalf of the company, given personal guarantees to support the company, then you potentially face the loss of your business, your home and personal bankruptcy.

Business Survival with you in control:
  • Trading Out
  • Refinancing
  • Company Voluntary Arrangement

Business Survival with someone else in control:
  • Administration
  • Administrative Receivership

Closure of your business out of your control:
  • Creditors Voluntary Liquidation

Other:
  • Compulsory Liquidation
  • Dissolution

Doing nothing is simply not an option.

Creditors Voluntary Liquidation (CVL)

Creditors Voluntary Liquidations are the most common form of liquidation in the UK.

This occurs where the shareholders, usually at the directors’ request, decide to put a company into liquidation because it is insolvent. Either the company cannot pay its debts as they fall due or it has more liabilities than assets. The purpose of the liquidation is to appoint a responsible person who has a duty to collect the company’s assets and distribute them to its creditors in accordance with the law. That person is the liquidator, who must be a licensed insolvency practitioner.

A meeting of creditors must be held within 14 days of the shareholders’ meeting (it is normally held on the same day) at a venue convenient for the majority of creditors. Notice of the creditors’ meeting will be sent to all known creditors at least 7 days before the meeting, which will also be advertised publicly. Creditors are entitled to inspect a list of names and addresses of the company’s creditors prior to the meeting. One or more of the directors will swear a Statement of Affairs of the company, which summarises the assets and liabilities (including details of creditors’ claims). Copies or a summary of the Statement of Affairs will be made available to creditors at the meeting. The insolvency practitioner whom the shareholders nominated as liquidator will assist the chairman of the meeting, who must be a director. A report of the company’s history up to liquidation will be presented, giving an explanation of the reasons for the insolvency, and creditors will be invited to question the directors. The creditors then vote to appoint a liquidator. The votes are based on the values of creditors’ claims. To be entitled to vote, creditors (other than those present in a personal capacity) must have lodged a form of proxy by the time and at the place stated in the notice of the meeting. (You may send your proxy by fax). Statements of claim may be lodged at any time before voting. Should the creditors’ choice of liquidator be different from that of the shareholders, the creditors’ choice prevails. A report of the meeting of creditors will be sent to all known creditors within 28 days.

Administration

The aim of an Administration is to protect companies from their creditors while a restructuring plan is completed. The process requires a licensed insolvency practitioner to act as the administrator, appointed by the court. At least one of the three objectives for the Administration must be satisfied, these are:

– Rescuing the company as a going concern. (Note: this purpose is to rescue the company as opposed to rescuing the business undertaken by the company.)

– achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being in administration).

– realising property to make a distribution to one or more secured or preferential creditors.

Holders of floating charges, normally banks, can make application to appoint their own choice of administrator. In cases where speed is essential, the rules provide for filing a notice of appointment during times when the court is not open for business. The filing will bring into effect an interim moratorium on insolvency proceedings and other legal processes being taken against the company.

Once appointed, the administrator will manage the company’s affairs, business and property in accordance with the proposals. The administrator must submit regular progress reports to all creditors, the court and the registrar of companies covering each six month period from the date of administration until the administration ends or until he ceases to act.

Company Voluntary Arrangement (CVA)

A Company Voluntary Arrangement consists of a deal between the company and its creditors to repay them from future profits and is a deal based on preserving the company, rebuilding sales and profits and paying something back over a period of time to be agreed. The company directors remain in control and personal guarantees do not get called in. A well-structured CVA 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 voluntary arrangement work

Directors must remember that the creditors’ objectives are paramount.

Appropriate advice must be sought from experienced turnaround advisers.

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 a powerful tool indeed.

A Company Voluntary Arrangement can be proposed by the directors of the company.

When a company is in liquidation or administration, then the liquidator or administrator can propose the Arrangement.

Remember:

A Company Voluntary Arrangement can only be proposed if the company is insolvent or contingently insolvent.

Compulsory Liquidation

When a creditor has exhausted all avenues to recover a debt, he/she will appoint a solicitor or debt collector to collect the debt. The debt must be over £750 and undisputed with the creditor having notified the debtor of intent to collect. If the debtor fails to pay the statutory demand within 21 days and does not dispute the debt, the creditor may then issue a winding-up petition.

The application for a petition will be granted where it can be proven to the court’s satisfaction that the debt is undisputed, attempts to recover have been undertaken and the debtor remains non-compliant. A petition will be issued and a court hearing date granted. Once the petition is served on the company, it is given a period to pay the debt or to defend the action. As the action is channelled through the High Court, a barrister will be required to defend. If the case is found, the company is wound-up by the court.

The petition is advertised in the London Gazette whereupon banks will monitor the situation carefully. Accounts will be frozen immediately and all trading will cease ensuring that assets cannot be sold.

Compulsory liquidations are most often utilised by the Crown Services.

Remember:

Under the Company Directors Disqualification Act 1986 you could be banned as a director for up to 15 years. You could face criminal proceedings under the Social Security and Administration Act 1992 and the Criminal Justice Act 1988.

Under the Income Tax (Employment) Regulations 1993, the Revenue is entitled to recover unpaid PAYE from directors where wilful failure is proven.

It is essential that all responsible steps be taken to protect assets, to conform to the liquidator’s wishes and act responsibly.

Members Voluntary Liquidation (MVL)

A Members Voluntary Liquidation (MVL) is a solvent liquidation, where assets are sufficient to meet liabilities.

Why is an MVL Tax Efficient?

A distribution to shareholders by a Liquidator is treated as a capital gain and not taxed as income.

On 1 March 2012, the ESC C16 legislation was enacted. The legislation stipulates that where a company has surplus cash or assets available to distribute of £25,000 or less, the concession would be automatic under the new legislation and such distributions can be treated as a Capital Receipt by the Shareholder. But where the Company distributes more than £25,000, it will be taxed as a dividend unless the company is placed into Voluntary Liquidation. A solvent liquidation instigated by the directors and approved by shareholders is known as a Members Voluntary Liquidation (MVL). A distribution to shareholders by a Liquidator is treated as a capital gain and not taxed as income.

Trading Out

Most businesses will suffer a downturn at some stage in their existence just as they are likely to face cyclic cash flow problems.

If you believe that the business does have a future then Trading Out can be a particularly useful tool. The key is to achieve some breathing space.

Informal

Contact your key creditors and explain that cash flow is tight but repayment can be achieved in an affordable timeframe. A planned approach is essential.

Formal

The formal approach will require the services of a turnaround specialist to achieve a deal on your behalf. The specialist will need to see evidence that the directors have a planned approach to recovery. Some creditors may accept write-downs of debt if they can be convinced the business will survive and prosper in the longer term.

New Finance

Introducing new money can be a strong indicator that you are serious about the future of the business in the longer term.

Remember:
There is no time to lose.
You must not wait until legal actions are taken against the company:
  • Plan cash flow
  • Keep records of all contact with creditors
  • Regularly review the situation
  • Consider other options if plan becomes unworkable

If some of these warning signs have a familiar ring then it is time to talk to an independent, objective third party in order to discuss what options are available to you.

Refinancing

Refinancing is part and parcel of everyday business life, whether negotiating new bank facilities, renewing overdrafts or factoring.

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 ways to raise finance and it is necessary to consider the products carefully before making any decision.

The Options
  • Government backed small firms loans and grants
  • Factoring
  • Bank Overdraft
  • Asset Refinance
  • Stock Finance
  • Materials Finance
  • Venture Capital
  • Directors Loans

Administrative Receivership

Not to be confused with Administration, an administrative receivership is a remedy of a secured creditor, usually a bank, to allow for the realisation of assets subject to security. Prior to the Enterprise Act 2002, administrative receivership was available to a creditor who had a floating charge over the whole (or substantially the whole) of the assets of the company. The holder of a floating charge could put the company into administrative receivership by appointing an administrative receiver. Since 15 September 2003, the Enterprise Act 2002 effectively abolished administrative receivership in all but a few limited exceptional circumstances. For floating charges created on or after 15 September 2003, administrative receivership is no longer available as a remedy. Instead, a qualifying floating charge holder can put the company into administration by appointing an administrator. The Act does not apply to floating charges created prior to the Act coming into force, however, where such floating charges exist, holders can still appoint an administrative receiver to enforce their security.

Dissolution

This is a provision in the Companies Act to allow the removal of a company from the companies register. If a company serves no useful purpose, its dissolution removes the need for filing annual returns and accounts.

Dissolution can only be utilised if:

  • The company has not traded for 3 months
  • There are no assets or cash at the bank
  • Creditors must be circulated requesting permission for dissolution
  • Creditors must be given 3 months to consider the request and can reject it
  • The company cannot change its name during the period
  • The company is not allowed to dispose of either assets or property

Should any insolvency procedure be in place, a company cannot be dissolved.

Remember:

Dissolution cannot terminate leases, HP agreements or contingent creditors. Where such creditors exist, Receivership, Administration, CVL or CVA need to be used.

Directors must seek professional advice before taking steps to dissolution.

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