Insolvency, Administration and Receivership
Oddly enough it does not follow that business failure spells ruin. Handled properly it could even provide an opportunity to make a fresh start, perhaps this time with more going for you than was the case when you first started.
There is only one reason for a business to fail and that is insolvency, which is simply another way of saying that it has run out of cash.
With flair and hard work you can do what you like and either reap the rewards or learn the lessons, but if you run out of cash you will go under - no ifs or buts. This is why in practically every article on this site the importance of well informed forward planning; (which is what figurewizard does for you) is constantly underlined. What follows here gives a few tips as to how best to deal with things when calling in the receivers is the only option.
The Companies Act
All businesses are subject to the company’s act. It is the single biggest and most complex piece of legislation in UK law. Mostly it is concerned with trading ethically and in the ordinary course of events should not trouble any company that is not engaged in suspect dealings.
One area where it does begin to impinge however is in the case of a business which is trading in ‘an insolvent manner’ and this is when the act ceases to be a background issue.
It is an offence under the act to continue to knowingly trade without having the means to settle any liabilities that may arise by doing so. The catch-22 here is that even though you may not actually have been aware of exactly how bad things were at the time, you cannot cite this as a defence. You will then almost certainly end up being banned from being a company director for several years notwithstanding. In such cases therefore, ignorance is not bliss.
Favouring certain suppliers with payment of their accounts over others ahead of administration or receivership is also in breach of the act. Your payments record will be scrutinised for this and any such transactions will be overturned. You could even find yourself personally liable in some circumstances. Once again a plea of ignorance will land on deaf ears.
If you are facing difficulties you should first either run new figures through figurewizard or check an existing report using the chart planners to see whether or not it is at all possible to change the position. Any such revised plan may well look good on the screen but will only work in the real world if you are prepared to take all of the tough decisions it will undoubtedly call for. If you believe that the risk of such a plan failing is too great then you must get ready to put the business into receivership. It is infinitely better to do so than to blindly carry on and end up by making matters worse.
Administrators and Receivers
These are usually specialised firms of accountants. Administration is the process of nurturing the company with the intention of selling it on as a going concern. If this is not considered to be viable then receivership is implemented. The business will then be run for just as long as it takes to sell off sufficient assets to clear the monies owed to the secured creditors before the file is handed over to the Official Receiver.
Administrators and receivers only concern themselves with the debts that are due to secured creditors.
In almost every case it is one of these secured creditors of the company which will call in the administrators / receivers and this is almost always the bank. It can however be a factoring or invoice discounting company or mortgage lender. It could even conceivably be you if you have made secured loans to the business in preference to bank borrowings.
Secured creditors hold a ‘charge’ on the business in one form or another. A secured charge means a formal contract under seal or a deed which you will have entered into in the past. This guarantees monies owing against the assets of the business. Such contracts are a matter of public record and are lodged with Companies House. Organisations or individuals holding such charges are termed as secured creditors and are always first in the queue where administration / receivership is concerned. You have a duty under the Companies Act to notify your secured creditors as and when it becomes clear that your business either is, or is likely to become insolvent.
Any other creditor is termed unsecured and they get a dividend or share of whatever is left once the secured creditors have been paid off. If there is nothing left then they get nothing. This part of the process is not carried out by receivers but by the Official Receiver’s Office and should be unlikely to involve you.
If you have given personal guarantees, have lent money to the business or are owed money in respect of outstanding expenses or salary, you too become an unsecured creditor.
The administrators or receivers are required by law to send a report of their findings both to the Official Receiver and to the DTI. This is when anything contrary to the Companies Act will come to light. Hence it is absolutely vital to seek your accountancy advisor’s advice as far ahead of events as possible, in order to rectify any potential conflicts or anomalies. You overlook this at your peril.
When Administrators or Receivers arrive
When they turn up on the doorstep things happen very quickly. For a start you no longer have any say in the business; your staff are now working for them, not you. There will probably be immediate redundancies with more to come. You will be one of the first to go unless they believe that your presence is crucial and then for only as long as they deem this to be absolutely necessary.
All of the company’s computer records are closed as if the financial year has ended on that day. These are then rendered inaccessible to any of the members of the company; directors as well as staff. If you want to keep a record of information on clients, suppliers or prices then your access to it stops at this point.
They will set up a new business to continue trading, usually using the company’s name with ‘in administration’ or ‘in receivership’ tacked onto the end. Stock is sold off aggressively at knock down prices as are fixed assets which are viewed as superfluous to the business and have some significant value; cars owned by the company usually being the first candidates on this list.
In short the receivers will act to pull in the maximum amount of cash in the shortest time possible. They will also charge handsomely for the privilege and you should know that their fees are added to the cash required to clear the secured creditors.
What Next?
Is all of this traumatic at the time? Yes. Is the future therefore bleak? No!
Ironic though it may seem given the above, the rules governing administration and receivership are there just as much for your protection as they are for the secured creditors. Once it is done with you cannot be pursued for any other debts, unless you have given personal guarantees or broken the law. They may also provide an opportunity for you to turn the clock back by allowing you to buy what’s left of the business at a serious discount and resume trading.
How this works is that once the secured creditors are paid off, the business as a going concern or its remaining assets are put up for sale. This is your chance to get things back on their feet as you should be the one most likely to make it run again. In most cases the key to such an exercise is stock.
Stock in trade is valuable only when it is ‘in trade’. When a company is in administration or receivership, the value of its stock is therefore seen to be very low, quite dramatically so, unless it happens to be bottles of scotch, high value antiques or similar.
It is therefore possible for you to buy the residual stock back as well as the remaining assets for a fraction of their true value in trade. What you have to realise is that you may not be the only one in the business who is aware of this. Any offer you may make could be challenged by ex employees or directors or, less likely outsiders, who are as well informed on this point as you are and want to seize the opportunities for themselves. There is no way round this. Even if they were to succeed and then subsequently fail, the damage will be done where you are concerned.
Jump Starting the Business
If you are successful in buying back the business however, you may face initial wariness, perhaps reluctance from key suppliers of goods and services to be too generous with credit facilities. Having acquired stock at a fraction of its true cost and having planned carefully will however give you the means of generating enough cash to live with this in the medium term and rebuild your credibility. You may need to find new suppliers in some cases but this should be the exception rather than the rule.
Remember that in business memories are short, as long as you have cash and can keep it flowing.
In some cases you may be tempted to make ‘goodwill’ payments out of your new found liquidity to smooth the path to dealing with them again. You should avoid doing this if at all possible. In any case it is more than likely that many of these suppliers will have insured their debts and recovered most of their losses. Clients going under is a natural hazard in the business world and insurance is always available to mitigate the effects of this.
If any supplier tells you they were not covered for this, you must regard it as being their problem, not yours.
Quite apart from the fact that you will be dissipating the cashflow you will need to rebuild your business, you will be falling foul of the Inland Revenue if you make goodwill payments. Such transactions are categorised as ‘distributions’ and are therefore subject to corporation tax. This makes them even less desirable in cashflow terms. Trying to conceal such payments by disguising them as legitimate transactions in order to avoid the tax is not recommended; it’s a criminal offence.
Conclusion.
You must prepare for administration or receivership. This means consulting with your financial advisors (your accountants) as soon as possible and then being guided by them. If you are in breach of any of the rules you must sort things out without delay.
The process is solely designed to clear up the mess that business failure inevitably causes as quickly and as practicably as possible. It is not designed to punish you.
If it is your intention to buy back either the business or its residual assets at the end of the process and start again, you must first investigate the financial viability of doing so. This is where figurewizard reports and chart planners will be important to you.
Do not let your head rule your heart here.
Whatever you decide you should not lose sight of the fact that you have done it before, so you can do it again. The difference is that you will be a whole lot wiser the second time around.
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