Credit, Collections & Insolvency News
Despite consumer confidence rising from the lows reported during the 2007-8 financial crisis, the number of corporate insolvency cases is steadily rising with no signs of slowing down.
The post-Christmas and New Year period is particularly difficult for businesses that often attribute a downturn in business as a seasonal trend.
It is often observed that just one slow month can create cashflow issues which can lead to owners fully utilising the company and their own credit lines just to keep the business ticking over.
In doing so, they are not only putting their personal wealth at risk but also their employee’s futures by artificially keeping an insolvent company afloat. It is clear that a prudent owner would seek advice at this stage, however many choose not to and bury their heads in the ground.
Individuals often wait too long to seek professional advice which would have provided them with a solution that would not have impacted upon their personal finances and kept the business running.
In other cases, signs of business stress and insolvency are simply missed as owners are focused on running the business and plough on through the quiet period with no thought to the finances of the company until creditor action occurs or annual accounts are prepared.
Unfortunately, the above scenarios are very common with owners ignoring or not recognising signs of business stress. However, there are different types of insolvency arrangements that can be implemented to ensure a return to creditors.
A Company Voluntary Arrangement (“CVA”) is one of the arrangements that can be used to help ensure a company’s survival whilst guaranteeing fair treatment for its creditors. The key benefits of a CVA include:
– Ensures that the directors of the company remain in control of their business and the shareholders retain ownership of its assets
– The detailed commercial terms can be very flexible. The scheme can simply provide for payments out of future cash flows, or perhaps the sale of assets or less usually to exchange debt for new shares and allows for a review of all contracts
– In some cases, a legal freeze on creditors’ claims may be necessary through a Moratorium which protects assets and prevents recovery or legal action until the creditors meeting is held
When the proposal for a CVA has been agreed, it is filed with the Court and with Companies House and is legally binding on all parties. The key factor is that it enables the business to continue to trade, so increasing the chance of a turnaround. The proprietors of the company can retain their positions and roles and may safeguard their assets if personal guarantees had been given to creditors.
Another option available would be the implementation of an administration order, hereafter referred to as an administration. This is better suited to when a compromise cannot be agreed with creditors. It allows the Administrator to trade the company’s business whilst being protected from creditor action whilst the sale of the business, or part of it can be arranged.
Directors are able, to take appropriate advice and procedures, to buy part or all of the business and assets of a company. If certain criteria are met this can be completed very quickly which retains the goodwill created by a business and prevents any temporary closures.
It is possible for a creditor or the company’s directors to apply to the court for an order to place the company in Administration. An insolvency practitioner takes control of the business and assets of the company, and the creditors’ claims are frozen whilst a solution is worked out and proposals are made to the creditors.
Ultimately, on the filing of the appropriate documents at court, a legal stay against actions by creditors is granted and breathing space is obtained in which to develop further proposals saving jobs and maximising returns to creditors.
Finally, a company director can choose to voluntarily bring the business to an end by appointing a licensed insolvency practitioner to commence the winding up process. The process realises the company’s assets to pay off its debts – with any money left over being paid to its shareholders.
If a business is unable to pay its debts, it is imperative for directors to act fast to prevent putting themselves at risk of facing action for wrongful trading or fraudulent preference. In some cases, particularly if no action is taken, the company may be forced into compulsory liquidation which often results in poor or nil distributions to unsecured creditors.
Unfortunately, many business owners extend their own credit lines to fund their business or enter into personal guarantees for company debts which in turn affects their personal finances. It is not uncommon for an Individual Voluntary Arrangement to be administered in conjunction with a corporate insolvency procedure such as an Administration or CVA.
An IVA is similar to a CVA, however, it is tailored to an individual’s finances rather than a company. The Nominee would take the terms of any other arrangements the individual is party to and negotiate with creditors to provide the individual with breathing space and time to pay their liabilities with lower administration costs when compared to a bankruptcy.
Furthermore, an IVA allows a company director to continue running their business and continue with their work in the public sector. Bankruptcy prohibits an individual from acting as the director of a company and bars the individual from working in many public sector roles.
Ultimately, the return to creditors from an IVA is generally maximised and the business owner is able to continue running their business – a more positive outcome when compared to bankruptcy and compulsory liquidation which often results in poor returns to creditors.
A similar remedy known as a Partnership Voluntary Arrangement which can be more suited to partnerships is available and is often implemented alongside an IVA.
Bankruptcy is an extreme option and not one to be taken lightly, as it will impact upon an individual’s eligibility for certain professional roles including acting as a director and reduce the chance of obtaining credit in the future.
Furthermore, any high-value assets will formally vest in the individual’s Trustee in Bankruptcy which can include any equity held in a property and vehicles valued over a certain amount. This would also extend to an individual’s businesses which may be closed, sold on or asset stripped as decided on by the Trustee.
An individual would normally receive their discharge from Bankruptcy after a year though this does not absolve them of their liabilities. The Trustee in Bankruptcy is allowed to realise assets such an Individual’s property up to three years after they are formally informed of the asset. It should also be noted that even after the conclusion of a bankruptcy, not all debt is written off, court fines and student loan debts are never written off.
Above all, if an individual is entering 2019 with fears about the amount of debt they owe in a personal or business capacity, they should seek professional advice immediately from a licensed insolvency practitioner.
People often ask us what advice we would give to someone in trouble with debt and our answer is always the same ‘act now, not later’.
Lynn Gibson, Insolvency Practitioner, Gibson Hewitt
