What should businesses
do ‘when the light at the
end of the tunnel… is the
tax man holding a torch’?
In the first of three articles,
insolvency expert Peter
Windatt examines the role
insolvency practitioners
play when they take on a
new client.
Getting into financial difficulty is nothing
new. Those who start a business of their own – whether a sole trader, partnership or limited
company – are, by definition, optimists.
No pessimist would start off on this course – look at all the hurdles to be jumped, the
risks to family stability, the hours that most
sole traders / start-up directors have to
dedicate to getting their show on the road.
And then they discover that it isn’t enough
to be the best engineer, designer of websites
or whatever. In their spare time they have to
keep the books, sort out the payroll and PAYE,
account for the VAT and do the 101 other things
they don’t teach you, well, anywhere really.
Few companies fail because the founder
wasn’t a good enough engineer etc. Practically
all fail because of their inability to manage.
Whether through feast or famine.
One of the surprising facts of the insolvency
profession is that we generally get busier
coming out of recession than we do going in.
It is the large sales order that comes in when
they’ve been hanging on by the skin of their
teeth for so long. It looks like the answer to
their prayers, but they find that they can’t get
the supplies to service the order. They are
overtrading, pushing all credit limits and the
overdraft is at the limit.
Something has to give. A supplier refuses to
supply without cash on delivery, or a receipt
takes longer than expected, and they can’t
pay the wages. And then our phone rings
and we are asked if it is too late to help the
client out of trouble.
The earlier a business recovery and/or
insolvency expert is called in the greater the
options open to the client are likely to be.
Leave it longer and the scope for
implementing some type of rescue narrows.
It is probably the ‘I’ word that scares
people off talking to an insolvency practitioner
(IP). However, provided that the IP consulted
is from amongst the majority who will give
the best advice to the person they are
advising, irrespective of the fee outcome for
themselves, you can be certain of good, solid
and, essentially, practical ways to take the
business forward; hopefully without needing
the recourse of formal insolvency proceedings.
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‘I urge all accountants to form a relationship with an IP – get to know and trust someone before you need them.
What you are seeking is the survival of your own client base – not another job for the insolvency professionals.’ |
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initial meeting
So, how does an initial meeting with an IP
usually run? Clearly there will be different
approaches among firms and among
individuals within firms. I start by listening to
the proprietor/director explain where they
believe they are now and how they think they got there. I seek to dispel some of the myths
and legends that surround insolvency by
getting them to reflect on what the worst thing
that could possibly happen might be. By
looking at the worst case scenario I can deal
with some of the horrors the directors believe
might await them. They can then build from
solid and well-informed foundations. Only by addressing their fears and helping
them to understand what might happen, and
in what order, can they then take steps to
address the situation facing them. Nine times
out of ten the worst is not as bad as they fear.
And then informed consideration of the
alternatives gives the directors a purpose.
Against a backdrop of understanding the
various risks involved, this approach
undoubtedly helps free them up to make
plans for a better way forward.
The adage ‘if you fail to plan you should plan
to fail’ is often applied to businesses starting
up. This is doubly true at this early stage of
insolvency. Directors should document what
they are doing and why they are doing it.
They should also record, on at least a weekly
if not a daily basis, key events from each day
and the actions taken in respect of them –
demands received and how they were
responded to, conversations with key
investors/lenders, undertakings given to
suppliers and promises received from
customers which served to encourage their
continuation.
liability
One of the main fears of directors is that they
might be made personally liable for the debts
of their company. They believed that by
trading through a ‘limited liability company’
they were free from all liabilities should
things go wrong. Of course, if they are a sole
trader or partner in an unlimited partnership
their personal assets are always at risk if
things go awry.
Now, they have heard about ‘wrongful’
and ‘fraudulent’ trading. The lesser of the
two, and by far the more likely to be pursued
due to the lower burden of proof required, is
wrongful trading (S214 Insolvency Act 1986).
In brief, if a director causes a company to
trade after the time that he knew, or ought to
have known, that there was no reasonable
prospect of avoiding insolvent liquidation
s/he can be held personally liable (jointly
and severally with the company, and possibly
other directors) for the debts incurred after
that date.
But what was the date – who decides?
The liquidator may have a first attempt at
deciding upon the date. Of course, he is
coming to the events after they have happened.
Everything looks so much clearer and the
consequences of actions are laid out for all
to consider – the 20:20 vision of hindsight.
The courts might agree upon the date
determined by the liquidator and might order
that the director(s) become liable for the debts
incurred after that date, and for the costs,
and, while they are at it, agree to disqualify
the directors from being involved with a
company in the future for a number of years – thereby taking away the prospects of
generating the income to pay those sums.
disqualification of directors
Are directors automatically disqualified when
a company goes into liquidation? In most
forms of insolvency the IP has a duty, within
six months of appointment, to report to the
DTI on the conduct of the directors (including
anyone who was a director in the three years
immediately prior to the insolvency) and their
fitness to be directors again in the future.
Disqualification can be for up to 15
years. If disqualified the person can only be
involved with or concerned in the promotion,formation or management of a limited
company, without incurring further penalties
and personal liability, with the leave of the
court. These circumstances, while they do
happen, would be exceptional. A bankrupt is
automatically disqualified from directorship
whilst remaining undischarged or subject to
a Bankruptcy Restriction Order or Agreement.
One of the difficulties, for the defendant,
in disqualification proceedings is that the
proceedings happen so long after the event.
Actions have to be commenced within two
years of the insolvency and will generally
commence some 23½ months after the
insolvency started. Memories fade in that
time. Two years down the line the way that
events appear to have unfolded in the
business’s dying days may not actually
have been how they happened.
For example, a letter dated 1 May and
posted first class will be considered to have
been received on the second business day
after date of posting – ‘surely in the
knowledge of that letter the directors acted
rashly when on the 4 May they ordered…’.
The fact that a postal strike had taken place
around then, or the local post office suffered a
fire and the letter was not received at all or
until 10 May could well have been forgotten,
vague recollections of there being ‘something
up with the post’ around that time while
standing in the dock appear as lame excuses
rather than as sound reasons.
However, the well advised director will,
having met with a business recovery and/or
insolvency expert, have kept something like a
page a day diary recording, contemporaneously,
notes of significant happenings, decisions,
milestones achieved/missed following their
initial meeting with an IP. That diary will
serve to support a defence and assist in
showing that actions taken were reasonable
in light of what was actually known rather
than what is surmised long after the day.
Disqualification is certainly nowhere close
to being sought in all cases. However, the
number of disqualifications is rising and now
there is more emphasis on getting directors to
consent to disqualification – thereby avoiding
the estimated £10/£15/£20k+ costs of
losing any defence (let alone finding the
funds to defend yourself).
form a relationship
With all the recent legislative changes – and
with case law moving the goal posts for IPs
and others with an interest in this area – it
is always sensible to take advice at the first
signs of trouble.
To this end I urge all accountants to form
a relationship with an IP – get to know and
trust someone before you need them. What
you are seeking is the survival of your own
client base – not another job for the
insolvency professionals.
Peter Windatt is a licensed insolvency
practitioner and director of BRI Business
Recovery and Insolvency. Peter is a former
ACCA Council member and now serves
ACCA as President of the Bedford, Luton
and Northampton Members’ Network
and as a director of the Joint Insolvency
Examination Board and by sitting on
various allied committees. |