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DIRECTOR Helpline Knowledgebase

Notes for further guidance:

Common symptoms in troubled companies

  • Will run out of cash with little chance of external financing
  • Falling into arrears with PAYE tax/NI and VAT
  • Not paying accountants and other service providers
  • Amassed a large debt and cannot make the monthly payments
  • Threatened with foreclosure (County Court Judgements, Statutory Demands and Winding Up Petitions)
  • Industry or sector downturn
  • Declining sales or flat when significant increases were expected
  • Weak order book
  • Lost a major customer; major customer in financial difficulty
  • Sudden increase in outstanding debtors or potential bad debts
  • Major supplier in financial difficulty
  • Staff are under-occupied or looking busy but are not productive
  • Too much non-essential administrative effort
  • Employee morale is poor; good people are beginning to leave
  • Management is dispirited
  • Costs are out of control
  • Utilising only a fraction of manufacturing capacity
  • Suffered major operating losses
  • Bankers and financiers are looking with increased scrutiny
  • Bankers and financiers have lost confidence in Management
  • Violated your debt covenants or will soon be out of compliance
  • Business or contractual disputes
  • Uninsured claim or significant liability you cannot settle
  • Competitors are taking business away from you
  • Lack of up to date and accurate financial data
  • Absence of planning and monitoring of performance
  • Relationship problems amongst owners and managers
  • The Board and investors are upset/angry

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Company Insolvency:
Factors which could cause you trouble

  • Have given personal guarantees for company debts
  • Have given a charge on personal property to secure company debts
  • Directors current/loan accounts show you owe the company
  • Have taken remuneration which has not been taxed and properly recorded
  • As a director you have been passive or uninvolved in running the company
  • Have acted as a shadow director or de facto director or non-executive director
  • Other directors have been in breach of their duties
  • The business has been subject to criminal investigation
  • Were previously involved as a director in an insolvent company
  • Have previously been subject to director disqualification proceedings
  • Have traded the company whilst it was insolvent
  • The company paid other creditors in preference to Crown Departments (PAYE & NI, VAT)
  • The company failed to supply goods paid for in advance
  • Have transferred any company assets to a connected person
  • Accounting and statutory records were not regularly kept up to date
  • Statutory accounts and returns have not been filed in time
  • This company is a phoenix and/or you plan to continue this business in a successor company using similar names.

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Insolvent Liquidation: Understanding the Proceedings

Waste of resources

Insolvency procedures (winding ups, liquidations, administrations and receiverships) are wasteful of resources and they usually fail to achieve anything meaningful for unsecured creditors and the directors/owners.

You have decided to put the company into Creditors Voluntary Liquidation (CVL).

The Insolvency Practitioner (IP) you have chosen is acting as your Nominee to make the necessary arrangements for liquidation. This usually involves assisting the preparation of documents (Statement of Affairs, a deficiency account, statutory information, a history of the company, an explanation of the deficiency and the reasons for failure) and arranging the necessary meetings.

The Liquidator is appointed by the Members in Extra-ordinary General Meeting and the appointment is ratified at a Meeting of Creditors, usually held on the same date.

You are facing Compulsory Liquidation (CL)

A creditor is petitioning the Court for a Winding Up Order.
The Official Receiver (OR) would usually be appointed a liquidator over the affairs of the company. If the company has assets the OR would later call a meeting of the Creditors and have an IP on his rota appointed Liquidator.

The Creditors Meeting

A Director of the company must Chair the Meeting at which the Statement of Affairs, history and explanations are made available to those attending, together with explanations.

It is customary for the Chairman of the meeting to answer any questions from the creditors present regarding the affairs of the company.

The formal part of the meeting is to appoint an Insolvency Professional as liquidator of the company and to appoint a Liquidation Committee if so required by the Creditors.

Voting is by value of debt. In order to vote secured creditors must either relinquish their security or value their security and vote only for the unsecured part.

Role of the Liquidator

The main duty of the Liquidator is to realise the assets and pay the creditors a dividend if funds are available.

The appointment of Liquidator vests all powers, rights and assets in him. Only he can deal with the assets, liabilities, bank accounts and employees of the company.

The first stage of administration of the liquidation includes collecting and protecting any assets and investigating the causes of the winding up. For this purpose you would be advised of any action urgently needed to protect the assets, asked to complete a Questionnaire and attend interviews.

The Liquidator will investigate the company’s affairs and recover any assets which are missing or have been transferred at undervalue. He must also report on the conduct of the directors to the DTI (Department of Trade and Industry) and this is privileged between the Liquidator and the DTI.

Your duties

You are expected to assist the Liquidator deal with the company’s matters by giving your full co-operation and failure to do so could be a reason for disqualification from future involvement in company management.

Generally the more organised and orderly you are the more straightforward the process of liquidation would be.

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Warning: Consequences of Insolvent Liquidation

Whilst liquidations and some other insolvency procedures can provide quick relief from pressures arising from business failure, insolvent liquidation invariably opens the floodgates to a host of other problems including the following:

  • You and co-directors would no longer be able to direct and control the business and company assets
  • All the company’s rights of action and assets would vest in the  Liquidator/Administrator
  • The company’s legal claims would become difficult (and probably impossible) to pursue
  • Your livelihood may be lost unless the business can be continued
  • Liabilities under personal guarantees and charges on personal assets given to secure business debts would crystallise and become payable
  • Action may be taken by the Liquidator and creditors to attach personal liability upon you and co-directors for company debts and/or to seek a contribution
  • You and co-directors would be branded as "failed" and your personal credit rating could be damaged
  • You could face personal insolvency
  • The conduct of directors will be investigated by the insolvency practitioner and reported to the Disqualification Unit of The Insolvency Service
  • The Department of Trade & Industry may bring "disqualification proceedings" to debar you and co-directors from being involved in forming, managing or controlling companies or otherwise benefiting from limited liability.

Administrations and voluntary arrangements may seem a good alternative but they can be expensive to set up and administer and experience shows that unless they are very carefully and professionally managed, they seldom achieve their objectives. You know your business best and it is not a good idea to surrender control of it. 

In distressed times you need new and innovative remedies as the conventional approach does not work. You must turn around your business and only resort to insolvency procedures if you fail - you would not have lost anything and you would rest assured you tried your best.

Do not agree to an insolvency procedure without first carefully considering the implications with us.

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Solvency Crisis: What you ought to know

(published in First4Business, February 2005)

John Ram explains how insolvency procedures work and the danger areas

"There is a need for transparency and integrity in all dealings".

When crisis is looming, many business leaders fail to take stock and consider the implications. The implications are invariably unpalatable and it is easier to turn one’s mind away to more immediate and exciting propositions and aspirations.

In crisis, time and energies are taken up frenetically fire-fighting, whilst implementing alternative 'quick fix' solutions which it is hoped would turn the business around. These seldom work and the situation deteriorates further.

Entrepreneurs are tenacious 'triers' - they continue to fight until all options they see are exhausted. By then it is invariably too late and they become exposed to personal attack for wrongful trading – ie. trading whilst knowingly insolvent.

When the directors of distressed companies finally recognise they need help it is their professional advisers (accountants, auditors, lawyers, business advisers) to whom they turn.  Few advisers have the expertise to assist and the usual course taken is referral of the case to an insolvency practitioner known to the adviser.

The insolvency practitioner is friendly in his approach as he will be looking to such companies and their directors for a fee-paying instruction.  He will appraise the situation quickly and advise the best way forward - this service is invariably rendered free of charge.

The financial state of the company at the time the Insolvency Practitioner sees it is such that invariably the solutions advocated will be procedures that require the immediate cessation of operations or alternatively continuation of the business through an arrangement with its creditors.

The Insolvency Practitioner will always charge a fee for implementing the insolvency procedure agreed upon by the directors and this usually involves preparation of the necessary paperwork for convening meetings of shareholders and creditors and the statutory Statement of Affairs. In practice, they may also render advice, handle creditors’ enquiries and engage in preliminary discussions with creditors on behalf of the directors to facilitate the successful implementation of the objective, but all these services are generally undertaken behind the scenes for professional liability reasons.

The Insolvency Practitioner is thereafter often appointed to manage the procedure and will be known as Liquidator, Supervisor or Administrator, as appropriate.  Once appointed, the Insolvency Practitioner changes hats and stops advising the directors.  Instead he effectively changes sides and, in most procedures, one of his duties will be to maximise the return to the creditors.  So once he is appointed, he has no further obligation to the directors who instructed him in the first place and moreover he is generally duty bound to uncover potential actions against the directors and also report on their conduct as directors to the DTI. 

Dr. Jekyll or Mr Hyde?

It is not surprising that many directors observe a change in the Insolvency Practitioner’s attitude towards them - he is no longer friendly because of the duties he is forced to perform.   From this point in time the directors ought not to look upon the Insolvency Practitioner for guidance and assistance as he is conflicted.

Where a secured creditor is involved, the insolvency practitioner’s fees are as agreed with him; in other cases the fees are as agreed with the creditors. In all cases the insolvency practitioner’s fees, his legal costs and other disbursements, reduce the funds available. Preferential creditors are paid first and any balance is then distributed as a dividend to unsecured creditors.

In order to maximise realisations, the Insolvency Practitioner will arrange the sale of fixed assets and stock, pursue the recovery of book debts and any other assets such as directors’ loan accounts, overturn transactions at undervalue and preferences, and where appropriate attach personal liability on directors for misconduct of the company’s affairs.  At this stage, transactions entered into by the directors before the Insolvency Practitioner’s involvement come under scrutiny and even seemingly innocent transactions could be attacked.

The directors may wish to continue the business through a phoenix company under the same or similar name, having acquired the name, goodwill and assets. This is not only permissible but also preferable to the insolvency practitioner as directors are likely to pay higher prices for company assets. However the necessary compliance is often not dealt with properly and this exposes directors to actions for breach of company law as to prohibited names.

As stated above, in every insolvency apart from Voluntary Arrangements, the practitioner is required to report to the DTI as to the history of the business, the reasons for the insolvency and conduct of the directors. This Report is confidential and it may lead to proceedings being issued by the DTI under the Company Director Disqualification Act 1986 to debar the director/s from in any way being involved in the promotion, formation, management and control of a company anytime up to two years following the commencement of insolvency proceedings - a double whammy just when you are finding your feet again!

So, whilst liquidations and some other insolvency procedures can provide quick relief from pressures arising from business failure, insolvent liquidation invariably opens the floodgate to a host of other problems including the following:

  • The directors are no longer able to direct and control the business and company assets.
  • All the company’s rights of action and assets before liquidation vest in the Insolvency Practitioner.
  • The company’s legal claims against third parties become difficult (and probably impossible) to pursue.  Even if they are pursued, the Insolvency Practitioner often accepts far lower settlements because he is one step removed from the original claim.
  • Your livelihood may be lost unless the business can be continued.
  • Liabilities under personal guarantees and charges on personal assets given to secure business debts crystallise and become payable.
  • Action may be taken by the Liquidator and creditors to attach personal liability upon the directors for company debts and/or to seek a contribution.
  • The directors are branded as "failed" and their personal credit rating could be damaged.
  • As a result of the above, directors could face personal insolvency.
  • The conduct of directors will be investigated by the Insolvency Practitioner and reported to the Disqualification Unit of The Insolvency Service.
  • The DTI may bring "disqualification proceedings" to debar directors from being involved in promoting, forming, managing or controlling companies or otherwise benefiting from limited liability.

Some factors which could cause personal difficulties for directors are:

  • Personal guarantees given for company debts.
  • Charges on personal property given to secure company debts.
  • Directors current/loan accounts show money owed the company.
  • Remuneration taken but not taxed and properly recorded.
  • Passive or uninvolved in running the company and yet still personally responsible/liable.
  • Acted as a shadow director or de facto director or non-executive director.
  • Other directors have been in breach of their duties.
  • The business has been subject to criminal investigation.
  • Directors were previously involved in an insolvent company.
  • Directors previously been subject to director disqualification proceedings.
  • Traded the company whilst it was insolvent.
  • The company paid certain creditors in preference to others, eg. Crown Departments (PAYE & NI, VAT).
  • The company failed to supply goods paid for in advance.
  • Company assets transferred to a connected person at an undervalue or for no value.
  • Accounting and statutory records were not regularly kept up to date.
  • Statutory accounts and returns have not been filed in time.
  • This company is a phoenix and/or directors plan to continue the business using a similar name.

Given the gravity of the foregoing implications it follows that business leaders must always take independent and enlightened advice and formal insolvency procedures should only be resorted to after all alternatives have been explored and the implications understood. With forward planning and timely action the risks can be minimised.

The foregoing gives readers a quick appraisal of how insolvency procedures work but each situation is different and requires quick, useful and impartial advice.

©JohnRam2005

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