Advice for Directors

The number of businesses in administration soared to an unprecedented 54% in the first financial quarter of 2007 (Source: Insolvency Service, Official Office).

The number of companies being sued in court for non-payment of accounts has rocketed by 500%.

In the last two years, according to a study by the Credit Management Research Centre at Leeds University Business School, Professor Nick Wilson said "Firms are under a great deal of pressure. The prospect of a significant rise in corporate insolvencies is now a firm reality".

"It is widely accepted that in 2009 business failures will be the highest since the dot com bubble burst. This trend will continue throughout 2010 and the retail, construction and transport logistics industries will be most affected" (Source: BDO Stoy Heywood Industry Watch, 16th June 2008).

The ever increasing financial restrictions being placed upon companies by banking institutions in their efforts to retrieve some of their heavy losses that they have incurred during the "Buy now pay later", easy lending periods are now coming home to roost.

Banks are reluctant to lend on an unsecured basis. Overdrafts linked to directors' properties are being reduced in line with the decrease in equity values which are being experienced throughout the UK.

Companies are consistently unable to pay their own accounts due to slow paying debtors.

Directors must monitor their sales ledger and be mindful of how much they can afford to lose before it affects their balance sheet. A £50,000 loss against a gross profit of 10% means turnover would have to increase by £500,000 to retrieve losses. Not easy in these turbulent times.

Should a creditor petition for the liquidation of a company, or the company file on their own behalf, this will result in the intervention by the Official Receivers Office. The liquidator has a duty to inspect and investigate the affairs of the company and report any offence committed under the Company Directors Disqualification Act 1986.

The directors of a limited liability company are not always as protected as they may think. We can advise them fully of their rights and protect them to the extent of which the law allows.

Two very important questions to be addressed:

Can the company pay its accounts/debts as and when they fall due? (Cashflow Test)

Would liquidated assets be sufficient to pay all liabilities in a liquidation? (Balance Sheet Test)

Should the answer be no to either question, this is the point at which a Company has established it is insolvent.

To continue to obtain credit is “Wrongful Trading.” Directors need to be aware that they are jointly and severely responsible for the debts and are unable to claim protection under the Ltd liability status. Sections 213 & 214 Insolvency Act, 1986: Wrongful and Fraudulent trading.

Obtaining credit is also obtaining goods from suppliers or services they they do not pay for at the time.

An insolvency practitioner can and will go back 3 years through all the company records to ascertain this information.

Before a creditor can present a winding up or a bankruptcy petition, the outstanding debt must be at least £750.00. There is a judicial process that has to be followed.

By obtaining an order from the courts to stand down litigation in process, we can gain the time to defend these actions.

Directors that have personal guarantees pledged against the company along with overdrafts, must look at their options when the company's future is not secure. This must be done before the bank or hostile creditor exercises their right to litigate to obtain a Charging Order against a Director's property.

What options are available for a stricken company?

A Company Voluntary Arrangement.

A "Statement of Affairs" is produced indicating "Assets & Liabilities" and "Income & Expenditure." This is circulated to all creditors who will have an opportunity to vote for or against the proposal. An affordable monthly amount is payable into an account on behalf of the creditors and is supervised by one of our professional insolvency practitioners.

Unless a 100% dividend is on offer, the duration of the arrangement will be for 5 years. For an application to be successful, the overall amount to be received must be greater than would be available via a liquidation. It is normal to offer at least 40% of the liabilities. (indicated on the Income & Expenditure forecast).

The advantages of a Company Voluntary Arrangement are to the benefit all concerned.

Creditors will receive more monies than they would in a liquidation.

The debtor is given the time to trade through the problem without the fear of litigation. The directors continue to control their company.