Part 1


Can financial crisis be averted? Are real business rescues possible? How
can you help yourself and other people survive the tough times in business?
This booklet is divided into three sections. This, the first section, describes the
rescue culture in Britain today. It looks at the facts behind business rescue
and describes how a philosophy of enlightened self-interest can help you and
the companies you do business with overcome financial crisis.
The second section helps you deal with customers whose financial problems
could affect your own financial health. The third and last section aims to help
you understand the steps you can take if financial crisis ever knocks on your
company’s door. We hope you never need it.

What’s the Problem
In the five years from 1991, an average of 23,294 businesses failed every
year. Our research shows that, if you have a customer that goes bust, you will
be lucky to get back more than 10p in the pound on any outstanding debts.
How many bad debts like that could your business cope with, before it too
became an insolvency statistic? And, if your business were to go bust, what
would happen to you? Would you lose your job? Would your house go to pay
the business’s debts? Could you be forced into personal bankruptcy? Could
your inaction lead to disqualification as a director? Might you find yourself
facing fines or even prison? Worst of all – would your relationships with those
near and dear to you survive the failure of your business?
Sadly, too many businesses fail because directors seem to believe it can
never happen to them. It can – many businesses find themselves in an
unexpected crisis. Hard choices may need to be made. But, if symptoms were
recognised early enough, many more businesses would find themselves in the
recovery ward – not the mortuary.
You may never face these problems. However, reading this booklet should
ensure you recognise the signs of crisis, whether it affects your business or
that of a client or supplier. We also hope that it will help you to act decisively
and appropriately, should the need arise.

Insolvency Definitions
A company is insolvent if:
– it is unable to pay its debts when they fall due: the value of assets is less than
the liabilities.
Be prepared
The majority of business insolvencies could have been prevented by early
management action. In many cases, managers just do not have the
information they need to recognise a crisis. The worst managers just ignore
the warning signs. Thinking the unthinkable might just make the difference
between weathering the storm and sinking without trace.
Who’s insolvent?
Cash is king when it comes to avoiding insolvency. Companies are often
plunged into failure because a creditor asks for money and cannot be paid.
You may be on target to make a profit at the end of the year, but, if you cannot
pay the tax man, the bank, or a big trade creditor when you should, you are
insolvent and your business may be wound up.
Businesses whose asset base has been worn down over time are often more
difficult to rescue than those that are merely strapped for cash.
It is not just current owings that determine whether you are technically
insolvent. Liabilities that only normally arise if the company stops trading or
goes bust are also taken into account. These include items like redundancy
payments and penalties for non-completion of contracts.
It’s up to every director to be aware of the company’s financial position and to
take action if insolvency is likely. The legal penalties for failure to act can be
harsh. Added to which, there is the waste of hard graft, hope and life that is
bound up in every company failure.
Tight financial management, good communication with creditors and a
willingness to ask for advice early would see far fewer businesses go to the
Successful Rescues – The Ground Rules
– consider supporting your customer, do not just turn off the lifeline of your orders
to your customer if this means the source of their income (and thus your
income) is restricted:
– be flexible with your debtors but don’t extend your exposure or allow endless
extensions of credit if they continue to default;
– renegotiate or pay your own suppliers on time;
– communicate with your bankers, suppliers and advisers, do not leave them in
the dark;
– take advice from a licensed insolvency practitioner if a problem persists for your
company or a customer.
What is The Rescue Culture?
Historically, British insolvency law and practice has always put the interests of
creditors first. This objective is often compatible with business rescue: a ‘going
concern’, revived or sold on, will almost always produce more for creditors
than one that is closed down and whose assets are sold off at auction. R3
research into the ‘intensive care’ work done by licensed insolvency
practitioners shows that an arrangement with creditors (or even a sale of a
business as a going concern) is likely to produce more than a liquidation or
fire sale.
Where informal rescues turn into formal insolvency, creditors get a great deal
less than when rescue is achieved. In 59 per cent of formal insolvencies,
returns of less than 10p in the pound were likely to be achieved. Returns of
more than 50p in the pound were likely in only 9 per cent of cases. In rescues,
the returns to creditors are considerably better: in 70 per cent of cases
creditors got every penny they were due (even if they had to compromise and
accept some jam tomorrow). Liability write-offs higher than 75 per cent (i.e. a
return to creditors of less than 25 per cent), were reported in just one per cent
of cases.
Rescues can only work where creditors are convinced they will get a larger
return than would be achieved through insolvency. However, creditors must
be prepared to compromise too.
It is easy to place blame on the company in difficulty, but the rescue culture is
based on us all having an active role in identifying and solving problems
without destroying our own position. Licensed insolvency practitioners can
assist – with or without the aid of formal insolvency procedures.
Copyright ã 2002 R3 Association of Business Recovery Professionals
Rescue Facts
– 98,000 jobs saved in 1995-6, 800,000 jobs saved between 1990-96:
– 1600 – 1900 informal company rescues in 1996:
– Receiverships – 50 per cent rescued:
– CVAs – 75 per cent rescued.
How Successful Is The Rescue Culture
In 1995-1996, insolvency practitioners rescued around 50 jobs for each
member of the profession – about 98,000 in total. This, in a year when the
economy was growing and business insolvencies had fallen far below
recessionary levels.
Outside formal insolvencies, the intensive care process rescues many
businesses and saves thousands of jobs, largely as a result of the banks’
willingness to play an active part in allowing businesses to be reconstructed,
rather than just cutting their losses. Contrary to the view of many business
people, the banks are very reluctant to force businesses into insolvency and
will be patient and constructive if they are kept informed and presented with a
viable rescue plan.
However, companies still continue to fail in significant numbers. In 1995 – 96
companies were being liquidated at a rate of around 3,500 per quarter. This is
a far cry from the dark days of the recession – in 1992 liquidations reached a
peak of 6,200 in three months. Some of these were failures which no one
could have prevented. But, management failure is a major contributory factor
in the majority of all insolvencies.
Copyright ã 2002 R3 Association of Business Recovery Professionals
A Surprisingly Common Story
The morning post includes a notice that a long-standing customer is insolvent, or a
phone call chasing an overdue account is answered with details of the licensed
insolvency practitioner who is now dealing with the company’s affairs. This is the
first you have heard of any problem!
Questions are asked immediately. Why did the salesman allow them further credit
when the account was overdue? Why didn’t the credit controller put the account on
stop? Are we going to get any more money?
Answering these questions may help you learn from the experience. But,
recriminations are useless – and you have passed the point where you can have
any real influence on when and if you get paid.
Be careful you don’t get the wrong answers too. If you ask what went wrong and get
told the following (usually with a shrug of the shoulders) you can be sure your
company has no real strategy for minimising bad debt problems:
– In the commercial world failure is bound to happen.
– We take account of bad debts in our profit margins.
– We were just unlucky.
Too few people really understand the implications of insolvency and the simple
steps that can be taken to avoid some of the risks of other people’s business failure.
When do you get tough with someone who owes you money? When should
you believe the hard luck stories and help out?
This section aims to help you deal with customers whose financial crisis
could hurt your business – perhaps fatally. You will find practical steps you
can take to reduce the risk of a bad debt to the minimum.
This section also gives advice on dealing with the terminally ill customer and
helps you make the choice between tough and tender. If the worst happens,
and your customer goes bust, this section outlines your rights and how to
exercise them.
Copyright ã 2002 R3 Association of Business Recovery Professionals
Other people’s problems are your problem too. A bust customer who owes
you money could mean the end of your business. A supplier you have failed to
pay on time might cease trading – leaving you short of vital stock or services.
To work, the rescue culture relies on business understanding that effective cooperation
is as important a success factor as effective competition.
Bad Debt Prevention
Joining the rescue culture does not exclude protecting yourself: your business
can be jeopardised if a customer fails. In a formal insolvency ordinary ‘trade’
or ‘unsecured’ creditors come last in a strict pecking order, after banks, the
government, employees, HP/lease companies (sometimes) and landlords.
Returns to unsecured creditors in formal insolvencies are usually very low. So
concentrating on making legal, ethical deals is likely to provide a better return
for you – as long as you continue to believe that the company that owes you
money can overcome its problems, with your support.
There are court processes to pursue intractable debtors including writs and
winding up petitions. To pursue these to the end may lead to the liquidation of
the debtor – so they may not be appropriate whilst some prospect of doing
business with a supplier still exists. The value of court processes cannot be
underestimated but they can take time and be costly. Some creditors, like the
taxman, the VAT man, landlords and chargeholders (e.g. banks) can act more
quickly and leave the unsecured creditor at the end of the queue.
Unfortunately, if a company is in difficulties, drastic action may trigger the
action of other creditors who are higher in the pecking order than you. So
what can be done to protect your own position?
Even bad news is better than no news. The more informed you are, the more
likely your actions will be realistic and successful. Talking and meeting with
your customers will ensure you understand their problems and requirements
and vice versa. An honest and open relationship with a trustworthy customer
cannot be underestimated. But, make sure all the appropriate people in your
company know what is going on too – and that you make your decisions
based on complete knowledge of your own company’s current financial
situation and prospects.
Credit Control
Copyright ã 2002 R3 Association of Business Recovery Professionals
Is Your Customer in Danger?
these are just some of the warning signs which may mean your customer is facing
financial crisis:
– late payments or non-payment of invoices:
– lump-sum payments on account:
– payments by post-dated cheques;
– old invoices cleared only on receipt of new deliveries;
– using disputes to delay payment
– ACTION: Where any one of these factors is present – talk to your customer and
consider reducing your exposure.
A clear credit control procedure should be in place which sets out the system
for dealing with overdue accounts. This should help identify problem
customers. Do not extend customers’ limits without due consideration and
discussions. Try to stick to this no matter how well you think you know the
Credit Checks
Check potential customers’ credit references before giving them a credit
account and regularly review credit limits. A company having difficulties may
get by on smaller deliveries, made and paid for on a just-in-time basis. For
larger customers whose payment period suddenly lengthens, why not
consider visiting to review their accounts and projections – are they as ‘blue
chip’ as they look?
Contract Terms
If your products are suitable, you may be able to include retention of title
clauses (RoT) in your terms of trading. These enable stocks of your product to
be repossessed from a customer in the event of non-payment, provided they
can be identified and that they have not become an integral part of the
customer’s product. For example, a brick supplier may be able to repossess
his bricks – but not if they have been cemented into a wall.
Whether or not you have RoT clauses in your business conditions, do not
assume you can just go along and pick up your products – it is not a
presumption in law that unpaid goods belong to the supplier. Seek
professional advice in any event.
Copyright ã 2002 R3 Association of Business Recovery Professionals
Credit Insurance
It may be possible to obtain insurance against a customer’s failure to pay. In
addition, if you are factoring your invoices, or invoice discounting, a nonrecourse
arrangement will cost more – but it will mean you get paid a known
proportion of every invoice.
Guarantees from directors or other group companies are sometimes available.
There may be circumstances where they are appropriate so their potential
should not be ignored. Apart from providing additional security they can help
focus the debtors’ minds in their obligations!
Know your rights; protect yourself – but plan your strategy carefully. All
businesses will have problem customers and should have a strategy to deal
with them. Customers who appreciate you have sound credit control
procedures are likely to respect them. Those that don’t – and who refuse to
communicate with you – are the candidates for drastic action.
Copyright ã 2002 R3 Association of Business Recovery Professionals
Dealing With Customers in Difficulties Or In Insolvency
So, you have done everything you can to protect yourself. You have taken
every reasonable step to ensure you are doing business with people who can
and will pay. But, things still look shaky – what can you do? Should help be
offered or a tough approach taken?
The Critically Ill Customer
This will depend upon your customer and the impact your actions may have
on your own business. Aggressive action by you made lead to the downfall of
a valued customer. However, this is one area where you must lead with the
head, not the heart: too many businesses have found themselves critically
injured because they continued to extend credit for the sake of a friendly
relationship with a long established customer.
The Customer in Formal Insolvency
It may seem ludicrous to supply a company that is in a formal insolvency
procedure – especially if monies are already due to you.
In an administration or administrative receivership, when trading continues,
payment is not guaranteed. However, the administrator or administrative
receiver is acting as the insolvent company’s agent and he should ensure that
any creditors incurred by the company with his authority are paid – even
before his fees.
This normally is enough guarantee for a supplier to make further supplies!
In a company voluntary arrangement (CVA – see below) or in an informal
arrangement, terms of supply are normally strict, but will usually include some
credit period. The arrangement will usually fail if the company does not stick to
its supply terms. As this would almost certainly mean the end of the road for
the company, this is a strong incentive to pay on time. There is always scope
for terms to be altered as time passes.
An insolvent company that is unable to gain any supplies will not survive.
There is less chance of an enhanced realisation value for the assets through
either continued trading or a successful sale of the business – so, failure to
supply could mean an even smaller return on the debts the company owed to
you at the point of insolvency. Continuing to supply, after carefully considering
whether you will be paid for future deliveries, could increase the chances of a
better return on a bad debt and might provide future trade from an otherwise
defunct customer.
Copyright ã 2002 R3 Association of Business Recovery Professionals
Tough or Tender?
Use this checklist to help decide whether to support a customer in trouble:
– is the customer trustworthy?
– are the customer’s problems short term of long term, resolvable or
– do I need to maintain business from this customer?
– is my continued support critical to my customer’s business?
– are there contractual reasons for me to continue supplying?
– can I help and cut my exposure over time?
– what is the downside if the customer fails?
– is my customer being professionally guided?
– What are my rights?
– ACTION: keep the answers to these questions under review until you are
certain your customer’s crisis has passed. If you cannot answer these questions
for yourself, you should take professional advice.
Yours Rights as a Creditor
The best way to protect your rights as a creditor is to take an active role in the
case. There is obviously commercial judgement involved as to whether time
and effort spent chasing old debt is worth more than the same time spent
prospecting for new business. Attending, or being represented at the initial
creditors’ meeting, will help you to make that judgement.
Sometimes, prospects of a reasonable return exist, but considerable effort
may be required by the licensed insolvency practitioners to realise that return.
It is particularly in these cases that an active creditors’ committee can do
much to ensure that good money is not spent chasing bad. Sadly, few
creditors take up the challenge of representing their peers on creditors’
committees. Were more to do so, there would certainly be less ignorance of
what happens to insolvent companies and, given the specialist market and
industry knowledge creditors are able to bring to bear, there would probably
also be better and earlier returns for all.
The committee of creditors is entitled to detailed information about the cost of
liquidations, administrations, voluntary arrangements and bankruptcies, under
Statement of Insolvency Practice 9 (SIP9), published by the Society of
Practitioners of Insolvency (SPI).
SIP9 ensures that those charged with agreeing insolvency costs (generally
the creditors’ committee) have the information they need, including details of
time spent, work done, expenses incurred, monies recovered and distributions
made to creditors.
Licensed insolvency practitioners must provide creditors’ guides explaining
how fees and costs are charged and what creditors should do if dissatisfied.

This information should be made available to every identifiable creditor before
any resolution is passed to fix or approve a licensed insolvency practitioner’s
Finally, licensed insolvency practitioners acting as receivers of companies are
required on behalf of unsecured creditors to provide the liquidators, who will
eventually replace them, with reasonable justification of the fees they have

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