Part 2

SECTION THREE
SURVIVING A CRISIS
What could be the personal consequences of your company’s insolvency?
How do you preserve your relationship with the bank manager when the
money isn’t coming in?
This section will help you recognise the signs of financial crisis in time to
ensure rescue is more of a possibility than burial. It will help you understand
your lender’s point of view and outlines the kind of rescue options that may be
open to you.
Finally, it helps you determine who to turn to for advice and outlines how you
can complain effectively if you deal with a licensed insolvency practitioner
and your case is badly handled.
CLOSE TO HOME
YOUR RIGHTS AND RESPONSIBILITIES AS A DIRECTOR OR
OWNER OF A BUSINESS IN CRISIS
It’s Always Your Problem
As a director, the law says it is up to you to keep a finger on your company’s
pulse and to call for help if necessary. Directors of limited liability companies
are personally liable for the debts of a company if trading continues after there
is no longer any reasonable prospect of avoiding insolvency.
Since 1986, the Company Directors’ Disqualification Act has raised the
spectre of disqualification for directors who do not take their responsibilities
seriously. This is no idle threat. 1767 directors were disqualified in the two
years up to 1997. Most were disqualified for periods of between two and five
years but nearly 30 per cent were banned for more than six and up to 15
years.
Company failure does not automatically lead to being disqualified as a
director, to being criminally charged or to the enforcement of personal liability.
The likelihood is still that the vast majority of the unaware or incompetent will
not be penalised while resources are concentrated on cases where other,
more serious offences appear to have been committed.
A lawyer will tell you that your potential liabilities may arise due to either
wrongful trading, fraudulent trading, preferences, transactions at an
undervalue or misfeasance. As a director you may have considered your
actions were justified at the time and you may be able to defend that position.
However, the responsible director should not ignore the problems until either
they go away or the company is forced into liquidation. The other extreme,
that of ceasing to trade as soon as problems appear may seem low risk – but
is hardly going to appeal to the determined, but struggling entrepreneur.
Fortunately, as this booklet shows, there are other options.
Do not forget that you may be personally liable for some debts. Personal
liability can often occur when personal guarantees have been given by
directors either solely or jointly. Bank borrowings, leases on properties and
HP/lease agreements often require personal guarantees. Sometimes, a
personal guarantee is the only way that a creditor will supply goods. It is not
uncommon for a director to have forgotten that these guarantees exist, only
for them to re-emerge – as a rude shock – post insolvency. Their effect can be
shattering: more than one in six of 1996’s personal insolvencies were caused
by personal guarantee liabilities.
Copyright ã 2002 R3 Association of Business Recovery Professionals
– DO NOT FORGET THAT YOU MAY BE PERSONALLY LIABLE FOR SOME
DEBTS. PERSONAL LIABILITY CAN OFTEN OCCUR WHEN PERSONAL
GUARANTEES HAVE BEEN GIVEN BY DIRECTORS EITHER SOLELY OR
JOINTLY.
These responsibilities apply to all directors – not just those with a stake in the
business. And, it’s no excuse if you are ‘just the
sales/manufacturing/personnel director’: all directors have a legal
responsibility to be aware of their business’s financial position.
However, for business owners, it is even more important to keep one eye
always on the business’s financial health – financial failure means losing your
investment. For those with personal guarantees, it could even mean losing
your home. For some, the prospect of personal bankruptcy could be looming.
The difficulties facing directors and business owners need not be faced alone.
Financiers and trade creditors are often willing to assist and government
creditors (e.g. Inland Revenue & Customs and Excise) are not always totally
uncompromising. Advisors, such as lawyers and accountants, also have a
vital role to play, especially when a director’s actions can lead to personal
liability.
If you think your company could be heading towards insolvency, seek early,
professional advice, both on your responsibilities as a director and on your
personal position.
The success of any rescue attempt is dependent upon early identification of
the problems. It requires honesty and openness from everyone involved and it
requires a commitment to enlightened self-interest.
Copyright ã 2002 R3 Association of Business Recovery Professionals
A director of an insolvent company might be liable for:
– issuing cheques when it is clear they will never be honoured
– incurring credit when there is little or no prospect of payment:
– taking customer deposits when goods or services will not be supplied;
– returning goods to a creditor when the creditor has not retained title;
– selling goods at less than their true open market value.
– ACTION: make sure you know your company’s financial position. Take
professional advice. If you are unsure where you stand see a licensed
insolvency practitioner.
RECOGNISING AND DEALING WITH A FINANCIAL CRISIS IN YOUR OWN
COMPANY
A recent survey by R3 indicated the following main causes of company failure:
loss of market 29%
management failure 22%
bad debts 10%
lack of working capital 20%
Bad debt is, at least in part, a problem that is solved by effective credit control.
Well-run businesses find it relatively easy to obtain capital. Therefore, it is
probably reasonable that greater management acumen could help prevent
nearly two thirds of failures.
Copyright ã 2002 R3 Association of Business Recovery Professionals
THE KEYS TO AVOIDING FAILURE
– be aware of your business’s weaknesses and problems;
– be aware of the general business and economic environment;
– take action when there may be a problem, do not wait until the problem has
occurred.
Recognising a Problem
Any business can have a financial crisis: no business is immune from the
impact of recession. Survivors, however, know where they are and know
where they are going. They have a clear idea of the problems they face and
they have plans to deal with them. They know the market never stands still
and they constantly strive to improve the product or service they offer.
IF YOU ARE NOT SURE WHETHER YOUR COMPANY IS A SURVIVOR OR
NOT, ASK THE FOLLOWING QUESTIONS:
Do you have a current business plan?
Do you review costs and overheads as well as sales?
Was your last set of audited accounts more than 12 months ago?
Do you prepare regular management accounts?
Do you prepare annual projections and cashflow forecasts?
Is actual performance regularly reviewed against plan?
Do you prepare and use aged debtor and creditor lists?
Do you and your co-directors meet regularly to formally review progress? Or,
if you are on your own, do you set aside time just to understand your financial
position?
IF YOU ARE DOING ALL THESE THINGS, THEN YOU ARE LIKELY TO BE
IN A POSITION TO NOTICE THE SIGNS OF IMPENDING CRISIS. IF THEY
OCCUR. YOU’LL KNOW YOU ARE STANDING AT THE TOP OF A
SLIPPERY SLOPE IF YOUR PROCEDURES REVEAL THE FOLLOWING:
If any of the above makes you feel uncomfortable, try the list below. If any of
these statements are true, chances are you are over the edge of the slope
and heading downhill. It’s time to seek help if any of these statements apply.
Copyright ã 2002 R3 Association of Business Recovery Professionals
– FOUR PER CENT OF CASES WERE CAUSED BY THE BANK SAYING
‘ENOUGH IS ENOUGH’. RESEARCH INDICATES THAT 76 PER CENT OF
INTENSIVE CARE CASES ARE STARTED BY THE BANK.
Poor collection of debtor book (greater than 45 days is considered poor in
many business sectors).
Extended lines of credit – is exposure to key customers worsening?
Rising work in progress that is not billed on time.
Diminished cash balances – is the bank balance steadily reducing; are
planned purchases being put off or are they being made by expanding
payment periods, rather than cash?
Over reached overdraft facilities.
Poor cost control with too many people responsible for purchasing, leading to
lack of organised discount opportunities.
Lack of long standing relationships with suppliers: Are you giving up on them
– or are they giving up on you? Or are you widening your range of suppliers
simply to make more credit available?
Rising stock levels and static sales
Contract disputes
Final demands and writs being received
Your business is largely reliant on one or two customers – and those
customers are not paying as well as they were.
You are increasing borrowings just to keep the business running.
Your outstanding debtors or potential bad debts seem to have increased
suddenly.
Are you still unsure how much you owe, and how much you are owed?
You are more than one month adrift in payments to the Inland Revenue or the
Customs and Excise.
The bank is calling you to say you have exceeded your overdraft limit.
You have received a statutory demand for payment, which could lead to a
winding up petition.
Copyright ã 2002 R3 Association of Business Recovery Professionals
The Investigating Accountant’s Report is often a starting point for the business’s
route to recovery and should be embraced by the directors, especially when they
take into account their personal responsibilities. At a time of crisis professional help
should be sought.
Remember, the report is not a foregone conclusion. It is an independent review.
If things have got this far, you should seek professional advice immediately.
Getting On With The Bank
In many cases, a company insolvency will be triggered by the company’s
bankers finally giving up all hope of seeing the business keep up with the
terms of its facility. In nearly every case, this only happens after the bank has
explored every other avenue – or when the bank completely loses confidence
in the company. Company insolvency surveys show that only 4 per cent of
cases are caused by the bank saying ‘enough is enough’. Indeed, intensive
care research indicates that 76 per cent of intensive care cases are started by
the bank. In well over half (57 per cent) of these cases, a rescue is achieved
outside insolvency. In a further 14 per cent of cases, an insolvency procedure
(either administrative receivership or a Company Voluntary Arrangement) is
used to achieve rescue.
Bank rescues usually start with the appointment of an investigating
accountant (normally also a licensed insolvency practitioner). This figure is a
bit of a bogeyman simply because, if insolvency is inevitable, he often is
appointed as the administrative receiver. However, as we have shown, most
bank investigations end in an informal rescue or reconstruction – not
insolvency.
Part of the investigating accountant’s doom-laden reputation must be due to
the fact that, traditionally, his appointment is sudden and unexpected: if a
company is communicating effectively with its banks, this is much less likely to
be the case. The reasons for the appointment are more likely to be
understood and the outcome is much more likely to be a good one for the
business.
The British Bankers Association (BBA) has published a Statement of
Principles ‘Banks and Businesses: Working Together’, codifying banks’
policies concerning the treatment of companies in difficulties. It also shows
what sort of information banks usually look for.
This makes it clear that the banks will support a realistic rescue proposal, as
long as a client company communicates with them effectively and tries to
keep to its commitments to the bank. You can get a free copy of the statement
from the BBA by telephoning 020 7216 8846.
Copyright ã 2002 R3 Association of Business Recovery Professionals
A RESCUE CAN BE ACHIEVED BY A NUMBER OF METHODS, DEPENDING
ON THE PROBLEMS THAT NEED TO BE ADDRESSED.
Investigating Accountant Reports (or viability reports)
It’s not only a bank that can ask a company to put in an investigating
accountant. Occasionally larger trade creditors may do so.
When preparing the report, the investigating accountant relies upon the cooperation
of a company’s management- and one of the first things he will
notice is whether the directors are truly on top of their financial situation or not,
and whether they have a clear view of the future.
The investigating accountant’s report is a review of the current position, a
summary of future prospects and a recommendation of a way forward for a
continued relationships between the company and its financier.
These confidential reports are intended to provide an objective view of the
company. Although financial information is important (the report will normally
provide an opinion on the viability of the company – or, perhaps, part of the
company), these reports will usually include information about business trends
in the company’s marketplace.
The commissioning of the report is rarely the beginning of the end; more often
than not it is the beginning of a way forward. In most cases (80 per cent,
according to SPI research), this recommendation will not be the appointment
of an administrative receiver.
Most directors find that such reports add value to their businesses and some
may request a report to provide them with comfort that their company is
neither insolvent nor that there is a problem looming on the horizon. Such
formal ‘health checks’ are rare but may follow when a licensed insolvency
practitioner’s advice on the company is sought through a company’s other
advisers.
Even if a report is initiated by a third party (and must meet that third party’s
needs), it is the target business that is paying for it: the directors should
therefore ensure that the report is of benefit to their own company.
It is unlikely that a third party will commission such a report without good
reason. However, sadly, a number of investigations are carried out each year
simply because the directors have been unable (or unwilling) to come up with
the financial information requested by their bank.
Often the report will make recommendations which may involve further
monitoring of the position by the licensed insolvency practitioner to review the
effectiveness of the proposals when enacted. Some of these
recommendations may involve a voluntary or contractual arrangement.
Copyright ã 2002 R3 Association of Business Recovery Professionals
Sometimes corrective action is necessary within the company. This might
entail cutting costs, strengthening the management team, raising additional
capital or selling the company or merging with a third party to provide the
financial resources necessary to overcome the difficulties. Sometimes a
formal insolvency procedure is recommended, but it will only be suggested if
that is the appropriate way forward: that procedure itself can enable the
rescue of a business.
Rescues
A rescue can be achieved by a number of methods, depending on the
problems that need to be addressed and on the attitude of the company’s
creditors, particularly any secured creditor – such as the bank.
A company can negotiate with its lenders to reschedule debt or allow
additional facilities. Banks will have an intensive care programme for these
circumstances. This will often involve the use of a licensed insolvency
practitioner to investigate the company’s affairs. This investigation may lead to
a report for the lender. As we have said, and contrary to popular belief, the
end result of such a report more often than not leads to a rescue strategy
without any formal insolvency.
Negotiations with government and trade creditors to reschedule payments.
This aims to avoid action, like winding up petitions, which might force a
company into insolvency. This involves communication with creditors, often
assisted by a licensed insolvency practitioner acting as an intermediary to
form an understanding (usually not binding to any party) between debtor and
creditors. Using an intermediary often helps to ensure the debate remains
objective and is not clouded by the emotional issues and hot tempers that
often come to the fore in a crisis. The larger the number of creditors, the less
likely that such an informal arrangement will work. Instead, a licensed
insolvency practitioner may recommend a CVA which, once agreed, is binding
on all parties.
The options outside formal insolvency are often put together with the
assistance of a licensed insolvency practitioner acting on behalf of either
debtors or creditors. Such options have no formal framework and are often
unreported. If they became public knowledge, particularly in the case of
quoted companies, then the company’s ability to rescue itself would be
instantly- and savagely- diminished.
Informal procedures will only work if the rescue culture attitude of ‘enlightened
self-interest’ is adopted by the debtor and creditors involved. A licensed
insolvency practitioner can assist in helping all parties to see the need for
careful co-operation and by ensuring that everyone is satisfied that the
proposed actions are within the law.
Copyright ã 2002 R3 Association of Business Recovery Professionals
CVA’S ARE NEVER AN EASY OPTION FOR THE COMPANY, AS THE
CREDITORS ARE UNLIKELY TO AGREE TO ANYTHING THAT DOES NOT
OFFER SUBSTANTIALLY BETTER TERMS THAN A LESS RESCUEORIENTATED
INSOLVENCY PROCEDURE.
The End?
Sometimes a formal insolvency is unavoidable. But, this does not
automatically mean a rescue is impossible. Once a business is in any form of
formal insolvency procedure, the licensed insolvency practitioner’s first
responsibility is to the company’s creditors. However, as we have pointed out,
rescue (in whole or in part) is still likely to be the best possible option for
creditors as well as for the business. The options in each form of insolvency
can be summarised as follows.
Liquidations
Liquidations are not normally rescue procedures. The liquidator only has a
limited power to continue the trade of a company. Therefore, a going concern
sale of the business is uncommon- although possible if done almost
immediately. The liquidator can sell the assets piecemeal to enable a new
business to be established speedily, and this can include the sale of the name
if it has value.
Administrative Receivership
Normally, the administrative receiver has all the powers he needs to decide
whether to continue to trade the company and attempt to achieve a going
concern sale. Around half of all administrative receiverships end in rescue of
all or part of the business. In many cases the business is sold back, free of
debt, to its existing managers. So, receivership need not necessarily mean the
end of a director’s connection with a business – management buyouts are
often the best solution for all concerned, including the creditors. Most
administrative receivers are appointed as agents of the company and can
exercise contracts on behalf of the company. The administrative receiver has
wide powers to sell the assets and goodwill of the business but it is usual that
the liabilities will remain with the company to be settled from the proceeds of
sale.
Copyright ã 2002 R3 Association of Business Recovery Professionals
Company Voluntary Arrangement (CVA)
In a CVA, proposals are drawn up which may involve delayed or reduced
payments of debt, capital restructuring and an orderly realisation of assets.
Creditors must usually agree to accept less than they are owed and, usually,
to be repaid over a longer period of time. CVAs are never an easy option for
the company, as creditors are unlikely to agree to anything that does not offer
substantially better terms than a less rescue–orientated insolvency procedure.
A meeting will be held to present the directors’ proposals to creditors, 75 per
cent (by value) of creditors present or by proxy must vote in favour of the
arrangement for it to be binding on all parties. The arrangement is supervised
by a licensed insolvency practitioner who, in many cases, will have advised
the directors on the structure of the arrangement. However, on successful
completion of the CVA the company’s legal entity will remain substantially
unaltered and the directors will be free to grow the business in whatever way
they choose. Putting a CVA in place, however, does not necessarily tie the
directors to the company: it can provide a vehicle to sell a business to new
management too.
Administration
An administration order is an order of the court and an administrator is an
officer of the court with similar powers to an administrative receiver. An
administration order will only be granted if one or more of the following is
possible: survival of the business (or part of it); better realisations than from a
winding up; a CVA or arrangement with creditors that the court is satisfied has
a realistic prospect of success.
Other Procedures
Schemes of Arrangements and Members’ Voluntary Liquidations can also be
used to ensure the survival of part of the business. Within the context of a
rescue these procedures are usually only used in specific circumstances – for
example, schemes of arrangement are often used as an alternative to
liquidation for insurance companies.
Copyright ã 2002 R3 Association of Business Recovery Professionals
WHO CAN HELP?
Getting Professional Advice from The Right Source
Your existing accountant, auditor or solicitor may be in a position to provide
you with the advice you need. The provision of advice on insolvency matters
invariably requires involvement of licensed insolvency practitioners and it is
important to ensure that your existing advisors have this expertise (if formal
insolvency is inevitable, your existing advisors will not be able to help, but may
be able to point you in the right direction). If existing advisors cannot help, you
are best advised to contact a licensed insolvency practitioner. Most, if not all,
will offer you an initial free consultation. And, if your concern is not with your
own insolvency but with that of a customer, a licensed insolvency practitioner
will, in many cases, represent you free of charge at any creditors’ meeting.
Details of licensed insolvency practitioners close to you can be found in R3’s
annual directory.
Any Port in A Storm?
Reading this booklet means you are unlikely to be one of the many directors
who, every year, are duped into taking advice from unregulated advisors who
claim to be able to remove all the worry of insolvency. You will be fully aware
of your company’s financial position, you will talk to your bankers and you will
take advice from professionals before it is too late. If crisis is inevitable, you
will be prepared to make the right move towards the best possible resolution.
The unregulated advisor’s typical victims are usually those who, having seen
financial crisis creeping up on them, month after month, do nothing even when
county court judgements and winding up petitions start piling up. Then,
seemingly out of the blue, a letter will appear from a company offering
salvation.
Whilst there are some genuine, skilled and professional company doctors who
operate this way, the best that is likely is that the directors are charged a fee
for the advice that they consult an insolvency practitioner. The worst is that
the directors may be promised the moon, charged the earth and see nothing
for it – they certainly won’t escape their creditors.
Only licensed insolvency practitioners can take formal insolvency
appointments (other than Law of Property Act (LPA) receiverships, which are
only used to take control of mortgaged property). They also have enormous
experience in the arena of informal rescue and reconstruction.
It is true that many people could advise and assist you with informal
reconstructions. You do not necessarily need to deal with a licensed
insolvency practitioner. Our advice, however, is to ensure you deal with a
regulated professional (such as an accountant, solicitor or even, in the case of
property-related insolvencies, a chartered surveyor) whose code of ethics and
discipline will ensure they deal fairly with your interests and those of your
Copyright ã 2002 R3 Association of Business Recovery Professionals
DEAL WITH A REGULATED PROFESSIONAL (SUCH AS AN ACCOUNTANT,
SOLICITOR OR EVEN, IN THE CASE OF PROPERTY-RELATED
INSOLVENCIES, A CHARTERED SURVEYOR) WHOSE CODE OF ETHICS AND
DISCIPLINE WILL ENSURE THEY DEAL FAIRLY WITH YOUR INTERESTS AND
THOSE OF YOUR CREDITORS.
creditors. At the very worst, if things go badly wrong, you will be able to
complain to their regulatory body and have the satisfaction of seeing action
taken against them if your complaint is justified. Deal with an unregulated
advisor and you have no guarantees or propriety, knowledge or skills.
Complaining Effectively
If you have a complaint about the way in which a licensed insolvency
practitioner has dealt with your case, you should, in the first instance contact
the practitioner concerned: most complaints are based on misunderstandings.
If you are still dissatisfied, you should contact the practitioner’s recognised
professional body (RPB). If you are unsure of this, contact the Association of
Business Recovery Professionals (R3), who will be pleased to point you in the
right direction.
Your complaint will be greatly assisted if you keep accurate notes of your
experience during the case (make them at the time – not later) as well as
copies of all correspondence received. It is as well to confirm critical details in
writing.
Insolvency law and practice is a hugely complicated area, further complicated
by the fact that a business crisis is normally an intensely stressful experience
for everyone involved. Complaints are rare (567) complaints against 18,297
insolvency cases in 1995) and most turn out to be misunderstandings. But,
they are always investigated and, if necessary, dealt with by the disciplinary
procedures of the practitioner’s licensing body who can reprimand, levy fines
and even take away a person’s license. In 1995, the RPBs received 567
complaints. Of these, 534 merited further investigation and 56 led to full
disciplinary hearings. As a result of this 51 practitioners were fined and 10 lost
their licence.
The insolvency profession is proud of its reputation and anxious to ensure that
all poor practice or, worse, malpractice, is eliminated.
Copyright ã 2002 R3 Association of Business Recovery Professionals
WE ESTIMATE THAT, IN 1995 – 1996, LICENSED INSOLVENCY
PRACITIONERS RESCUED COMPANIES WITH A TOTAL TURNOVER OF £23
BILLION AND SAVED 98,000 JOBS. WE HOPE YOUR BUSINESS WILL NEVER
NEED OUR SERVICES. BUT, IF IT DOES, HAVING READ THIS BOOKLET WILL
HELP YOU ENSURE THAT YOUR BUSINESS IS ONE OF THE ‘SAVED’-
RATHER THAN ONE OF THE ‘BURIED’.
About The Insolvency Profession
The insolvency profession consists of fewer than 2000 individuals who are
authorised to undertake or supervise company and personal insolvencies.
These licensed insolvency practitioners are all authorised by one of eight
recognised professional bodies (RPB), or by the Secretary of State for Trade
and Industry.
Because licensed insolvency practitioners come from a wide range of
professional backgrounds they are usually licensed by the body from whom
they obtained their first professional qualification. Any practitioner joining the
profession since 1986 has undertaken around three years further specialised
training and has had to pass the examination of the Joint Insolvency
Examination Board (JIEB) before he or she can be licensed.
All insolvency practitioners are subject to the same rules regarding their
conduct. They have a common ethical code and the same set of rules
concerning the information they must provide to creditors. Their work is also
subject to regular scrutiny and monitoring.

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