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.
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 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.
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.
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.
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.
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.
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 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
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.
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.