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County Court, Legal & Litigation Finance HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery

The change to HMRC preferential creditor status v emphasising insolvent business restructure

HMRC preferential creditor status at the head of the queueThe Government’s proposal to restore HMRC preferential creditor status when a business becomes insolvent is, in my view, at odds with its desire to shift the balance in the insolvency regime towards helping more businesses to survive.
In September 2018 I welcomed the Government’s newly-published proposed changes to the insolvency regime, whereby there would be a moratorium, initially 28 days, from filing papers with the courts to give still viable businesses more time to restructure or seek new investment to rescue their business free from creditor action. Consultation on this and other changes to the insolvency regime was begun in 2016.
This year, in the April 2019 budget statement, the then Chancellor Philip Hammond included a proposal to restore HMRC preferential creditor status, something that had been removed as part of the Enterprise Act in 2002.The new preferential status will apply to VAT, PAYE income tax, employee National Insurance contributions, student loan deductions and construction industry scheme deductions and will rank ahead of both the floating charge and unsecured creditors.
Draft legislation has now been published and subject to Parliamentary approval of the Autumn Budget is due to come into effect in April 2020. Although it will only apply to businesses becoming insolvent after that date, it will apply without limit to the relevant historic tax debts, without time limit or cap.
According to the ICAEW (Institute of Chartered Accountants in England and Wales) after a relatively short consultation period between 26 February 2019 to 27 May 2019 the draft legislation appears to take little account of the representations made: “This proposal ….can be expected to deter lending and have other adverse consequences that have not been sufficiently considered…”
Given the current political uncertainty and obsessive focus on Brexit it remains to be seen when and if the new legislation appears in the eventual Finance Bill and when approval would be expected.
Nevertheless, the implications of the restoration of HMRC as a preferential creditor have been widely criticised for the effect it is likely to have on lending, given that it moves the floating charge of secured lenders down the pecking order in terms of getting their money back.
Purbeck Insurance Services, for example, has warned small businesses that the risks of Personally Guaranteed finance facilities are likely to increase and as a consequence more Guarantors will have to pay out.
In addition to the impact on loans, HMRC jumping up the queue for payments will mean less money is left for trade suppliers as unsecured creditors in future insolvencies, no doubt resulting in more insolvencies.
As a turnaround adviser and investor, I agree entirely with the ICAEW: “This proposal is at odds with government efforts to foster an enterprise culture in recent years.”

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County Court, Legal & Litigation Finance HM Revenue & Customs, VAT & PAYE

HMRC aggression and heavy handed use of powers

HMRC aggression when your house is burnt downThere is no doubt that the Government is putting pressure on HMRC (HM Revenue and Customs) to improve its tax collection rates.
Recently, it launched a consultation, very quietly it should be noted, into a proposal to increase HMRC information-gathering powers while removing some of the protections for those on the receiving end.
Justified as a measure to bring HMRC’s powers into line with those in other countries, the proposal would allow HMRC to demand tax payers’ bank account and other financial information without first having to get the permission of the Tax Tribunal.
Under one of a number of options in the consultation document, Amending HMRC’s Civil Information Powers, the information orders requesting this sensitive financial information could be demanded not only from banks but also from building societies, accountants, lawyers and estate agents.
Furthermore, these institutions could be banned from informing their clients that they have been ordered to provide the information and there would be no right of appeal.
The consultation closes on October 2, 2018 and already there has been criticism that if these powers were granted HMRC would be likely to use them more frequently than can be justified, despite assurances that they were not expected to be used in more than “a few hundred cases”.
This is an alarming development given that HMRC has already been seen to be increasing its willingness to litigate, according to the CIOT (Chartered Institute of Taxation), which has raised its concerns with the Government’s Treasury Sub Committee.
CIOT notes in its submission that there is already “an overwhelming number of cases in the tax tribunal system”.
It also argues that often these cases are about HMRC’s “categorising genuine errors as carelessness, or carelessness as dishonesty” and that there is a better alternative in resolving disputes via ADR (Alternative Dispute Resolution).
There is also concern about the cost of defending such claims where HMRC is likely to adopt an attrition strategy to force settlement without them having to prove their claim as this will be the only way for recipients to avoid incurring the significant costs of defending a claim.

The fightback against HMRC aggression

The law firm RPC has been monitoring legal challenges to HMRC for some time and reports that there has been a 184% increase in judicial reviews against HMRC in the last three years. The increase was 36% in 2017 alone.
According to RPC these judicial reviews generally relate to claims that HMRC has overstepped its authority or acted unfairly often because of its increase in the use of APNs (Accelerated Payment Notices) demanding payment of tax within 90 days without the right of appeal, where the recipients are suspected of tax avoidance.
RPC reports that many such cases are caused by “simple errors” by HMRC and a “dogged refusal to correct them”.
The costs of defending such claims are generally huge and unrecoverable.
Given the alarming proposals outlined above and the reported increase in HMRC’s willingness to pursue cases through the courts it would be no surprise if beleaguered SMEs already under pressure also turned to the courts for help.
It all seems like your house having burnt down and then having to spend years in court to pursue your claim.

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County Court, Legal & Litigation Debt Collection & Credit Management Finance Insolvency

Are creditors and their lawyers using Winding-Up Petitions for debt collection?

using courts for debt collectionI have written previously about short term thinking by businesses and the effect it has been having on their ability to plan ahead for the medium and longer term.
It has been affecting businesses’ ability to invest in capacity, efficiency and R & D as planning for growth. Instead, most SMEs seem to be focused on cash flow and immediate profits, in that order.
In the current uncertain economic climate short term thinking may seem to be a rational response by creditors seeking payment.
However, there is another, perhaps more worrying trend that I am seeing among creditors, many of them suppliers to SMEs. Larger companies owed money and their solicitor advisers are often pursuing debts by early use of a winding-up petition instead of speaking with their SME clients and if necessary helping them. Unlike most reporting which is about large companies delaying payments to SMEs, I am focusing on large companies’ aggressive debt collection from SMEs.
Sometimes it is necessary for creditors to help their clients who are in difficulty such as allowing time to pay or helping them put a restructuring plan in place.
There is rarely a day when the demise of another business is not reported in the media. At the moment, these are consumer-oriented businesses, such as Toys R Us, Maplin, Carpetright, UK Claire’s Accessories and East, not to mention the many struggling restaurant chains.
Again, arguably, uncertainty about the future could be a motivating factor in using insolvency procedures where creditors are owed substantial sums but all too often one creditor uses legal action as leverage, a ransom even, to get to the head of the queue for being paid.
The lack of trust and consequences of such action have a negative impact on both businesses concerned and the wider economy.
How effective is formal insolvency for debt recovery?
Aggressive debt collection by creditors to wind up clients is very short-sighted because if a Winding Up Petition (WUP) is granted they are even less likely to get their money.
Firstly, the WUP process is in itself costly, including the fees charged by the Insolvency Service and the Practitioner as Liquidator are paid ahead of any distribution to creditors. The IP is most likely to look for the quickest option when realising assets despite any obligation to recover as much as possible. This will normally be based on selling the company’s tangible assets, but the question is how much these will fetch and whether it will be enough to cover its liabilities.
Since the debts to secured creditors such as banks, and to preferential creditors such as employees, take precedence will there be anything left to repay unsecured creditors, such as suppliers?
If the supplier creditors’ primary motivation is to recover their money as quickly as possible, they should also remember that the insolvency process can be lengthy, given that a business can petition to delay the WUP to allow for time to set up a restructuring plan such as a CVA.
Surely, therefore, rather than using the courts as a tool for debt recovery it would be preferable for creditors to have the patience to allow a business the chance to be saved with the help of an experienced restructuring adviser where provision is made for debts to be paid in a manageable way over time. That way, while it would be wise for them not to extend further credit to the company in difficulty, they will keep them as a client with the prospect of getting their money back over time.
The key is to not let the debt grow, to have patience and to think for the medium and longer term.
After all, If the restructuring is successful, the creditor will end up with a potentially growing and successful client company from which their own business will ultimately benefit.

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Cash Flow & Forecasting County Court, Legal & Litigation Insolvency Rescue, Restructuring & Recovery Turnaround

Insolvencies – the signs are not good for struggling SMEs

insolvencies signpostMore businesses have been declared insolvent during July to September, according to the latest statistics released by the Insolvency Service on Friday, October 27, 2017.
An estimated 4,152 companies entered insolvency in the third quarter of the year, an increase of 15% on the previous three months and of 14.5% compared with the third quarter of 2016.
Construction companies, Manufacturing and Accommodation and Food Service Activities topped the list of insolvencies, as they have in the previous two quarters, and, although final figures have not yet been released for the latest period, the trend is clearly upward.
The news comes as R3, the insolvency and restructuring trade body, released the latest findings of its long-running research into business health.
It revealed that more businesses were showing signs of financial distress increasing from one in five in April to one in four in September. Among the causes cited were decreased sales and increasing use of overdrafts with many reporting that they were at their overdraft maximum limit.
R3 President Adrian Hyde said: “Businesses have faced a number of fresh challenges over the last year. Increasing input costs caused by post-referendum inflation increases and a weaker pound, a rising national living wage, the added costs of pensions auto-enrolment, and, for some businesses, rising business rates will have hurt bottom lines.”
He said investment in new equipment had dropped between April and September from 33% to 22%, which suggested that concern over the economic prospects for the UK was prompting company directors envisaging trouble ahead and building up cash reserves to get them through tougher times ahead.
“The question of balancing competing needs – whether to prioritise solidifying their cash position or investing in their businesses, a key concern in the digital age – is more urgent than ever for many companies, especially with the economic landscape becoming more unsettled,” he said.

Time to revisit the business model?

It is, in our view, more imperative than ever that businesses retain tight control over their cash flow, revisit their business plans and have a close look at their operations to identify where savings could be made. Uncertain times only offer opportunities for those with deep pockets, for most businesses surviving them requires a focus on margins and hoarding cash until a more stable future can be predicted.
It may be a time, sooner rather than later to take a thorough look at the whole operation to identify whether it is time to restructure or pivot the business model to one which is more sustainable. This can involve some level of restructuring in order to be prepared for the possibility of worse to come.

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County Court, Legal & Litigation General Rescue, Restructuring & Recovery

The costs to a business of dispute resolution

dispute resolution clashing antlersIn an ideal world, most SME business owners would like to think that their business is so efficient and well-run and with such consistently good relationships with customers and suppliers that there is no likelihood of any dispute arising.
In reality, with the best will in the world given that people can be volatile or even unreasonable it is wiser to be prepared for the possibility that a situation may arise that results in a dispute that has to be resolved.
If it happens the associated costs may be so great that the result could be business failure.
By costs, we are not only referring to money, though if in the worst case the dispute ends up in court the financial costs of lawyers and court fees can be high, and more so where a court ruling goes against the business resulting in awarding costs against it including the other sides lawyers’ fees.
Add to that the worry and stress, and the time taken in trying to resolve the issue and preparing for court. Dealing with disputes is both distracting and takes focus away from the business itself, quite apart from uncertainty of the outcome.  There is also the risk that litigation can spiral out of control. These are also costs.
Whether the dispute is small enough to be referred to the small claims court or something larger the outcome may be damage to relationships with suppliers or customers.
Too often small disputes spiral out of control with disastrous consequences for some but for many it is an unwelcome and uneconomic distraction.

Alternative forms of dispute resolution

There are two main routes that a business could follow rather than trying to settle things in court.
One is to appoint a neutral third party, acceptable to both sides. This person would help them both clarify the issues under dispute and negotiate a mutually acceptable solution. Once agreement has been reached the parties would draw up and sign a binding agreement.  This process is called mediation and is considerably less costly than dispute resolution in a formal court setting. It depends heavily on the skills and expertise of the mediator and the willingness to arrive at a consensus.
A slightly costlier, but still less so than a court case, is the process of arbitration.  Again, this depends on a mutually acceptable neutral person whose judgement will be accepted as being impartial.  Normally the disputing sides will be required to sign an agreement stating that the arbitrator’s decision is binding on them. The arbitrator will then examine the evidence, hear both sides’ arguments and then impose a settlement.
Either of these two alternatives must surely be preferable to ending up in the adversarial situation that exists in a court of law, not only for saving costs (both financial and otherwise) but ultimately in saving a business from the risk of failure.
Given the cost saving it may be worth reviewing the relevant clauses in contracts to make an alternative dispute resolution option binding instead of the standard terms used in most agreements that refer to court as the default resolution procedure.

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County Court, Legal & Litigation General

Corporate Governance review needs your responses

word cloud corporate governanceIt has received very little publicity but in November 2016 the Government published a green paper outlining proposals for a review of corporate governance.
The green paper provides information on the current situation. It includes proposals for changes and is being used by the Government to stimulate debate, consult with the wider community and gather contributions and suggestions.
The deadline for responses is Friday, February 17, and the paper includes a useful list of questions, as well as information on three ways to respond, either by email, through a website or as hard copy.
The paper covers three main themes, executive pay and its regulation, strengthening the voices of employees, customers and suppliers at board level and the current anomaly whereby large privately-held businesses are subject to lower standards than public companies.
A fourth section has been included asking for suggestions for other ideas or themes that could be explored to strengthen UK corporate governance.
In her introduction to the green paper the Prime Minister emphasises the pledge she has repeatedly made to strengthen the economy and UK business “for everyone, not just the privileged few”.
She argues that for people to retain faith in the economic system “big business must earn and keep the trust and confidence of their customers, employees and the wider public.”

Ethical behaviour is a must for all businesses

Ultimately no business, whether it is a SME or a large corporation, can hope to prosper and grow long term without earning the trust of its employees, customers and suppliers and even the wider community.
While the focus of this green paper is on larger concerns, it contains food for thought for all types of business.
The treatment of employees, fair levels of pay for both workers and senior executives, how the business relates to and contributes to the community in which it is located and how it treats its customers all contribute to its reputation.
While the larger business may seem to have the power to get away with sometimes questionable behaviour this is not a risk SMEs can afford to take if they want to survive and prosper.

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Accounting & Bookkeeping County Court, Legal & Litigation Finance General

Business insurance – are you properly covered?

business insurance protectionThere are many situations that can be covered by various types of business insurance, some compulsory, others advisable but how does a business choose what is essential?
To some extent it may be about assessing the risk for a specific business but inevitably it will also be determined by how affordable non-essential cover may be.

Business insurance required by law

Most employers must by law insure against liability for injury to their employees arising out of their employment under the Employers’ Liability (Compulsory Insurance) 1969 Act. It should cover all the places where employees are working, whether in the UK or elsewhere.
The minimum level of cover is £5 million and businesses must both display copies of the certificate of insurance prominently where employees can see it and they are advised to keep a copy of the insurance document for a minimum period of 40 years.
The Health and Safety Executive (HSE) is responsible for enforcement and has the power to fine up to £2500 for any day when you are without suitable insurance. If you do not display the certificate of insurance or refuse to make it available to HSE inspectors when they ask, you can be fined up to £1000.

Other business insurance policies to consider

While not required by law other types of cover may be advisable and these will depend on the nature of the business.
Professional Indemnity cover, for example, is likely to be important to such businesses as legal and accountancy firms, architects & design practices and professional advisers.
For anyone selling products whether online or via e-commerce, it is important to have product liability cover in case a product they have either manufactured themselves and supplied or simply bought in and supplied causes damage to either a person or their home for which the customer may then claim compensation. Remember the Samsung phones that caused fires.
Public liability insurance is another business insurance that many would be advised to have, especially if members of the public, suppliers and others visit their premises, as is the case with retailers, but also if they supply a service that is carried out at customers’ premises.
The fundamental question to ask is whether there is a chance that your business activity could cause damage to the public or to their property. Lawyers love customers who are injured while in a shop.
Equally, where a business has contractors regularly supplying services at others’ premises and therefore using vans to travel and to transport expensive tools and equipment insurance cover against theft from the vehicle may be essential, as indeed are the obvious vehicle and premises insurances.
There are also lots of add ons to consider such as policies that cover production delays due to strike action or when equipment breaks or loss of profit due to flooding or fire, and many more scenarios that might be considered.

Where do you go for insurance cover?

The first step is to seek advice from any trade association of which your business is a member. It may be also that appropriate insurance cover is included in your membership fees. One example is the market traders’ association who provide insurance for those who sell goods at craft fairs, indeed many event organisers carry insurance that covers the stall holders.
Failing that, seek out a knowledgeable insurance broker, who can provide advice as well as discuss the pros and cons of the different policies. They can also search out relevant cover specific to the business’ needs.  That way cover may be more appropriate and affordable than a combined all-risk policy, parts of which may not be relevant.

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County Court, Legal & Litigation General

Keeping the costs of business legal services under control

legal business documentsEmploying lawyers can be costly, but no business can operate safely without at least some basic and well-drafted legal documents.
These should include the Terms and Conditions under which the business operates with both suppliers and customers and good quality employment contracts.
This way, a business and its suppliers and customers will have clearly-stated, written details to support any transactions and to minimise disputes.

How to get the best legal deal

Small businesses cannot normally afford to buy bespoke documents but a lot of free legal help is available to businesses such as to those who are members of the FSB (Federation of Small Businesses) or the Institute of Directors (IoD).
But it is foolish to operate without any legal protection so if cost is an issue, it is worth trying to agree a fixed price deal with a lawyer, at least to review your current documents.
Lawyers generally charge for consultations by units of time. Their standard unit is just six minutes long so it can become very expensive to have a meeting where a lot of time is spent on irrelevant conversation, some of which may not be pertinent to the documents being discussed.
It is far more efficient and cost effective to arrive for a meeting having given requirements some real thought and done some research to find a template that can be used as the basis of the contract the business needs.  There are plenty of template forms online to give a business a start. The template can be used to produce a draft covering all the relevant points the business wants to include.
Businesses should beware using a template without amendment and without ensuring that it covers precisely the conditions relevant their specific circumstances. As a result, legal input is often necessary.
Doing the research, defining clearly what any contract needs to cover and producing a draft will greatly reduce the amount of time spent in discussion and will enable the lawyer to produce a final document much more quickly, and therefore affordably for the client.

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Banks, Lenders & Investors Cash Flow & Forecasting County Court, Legal & Litigation Finance Insolvency Rescue, Restructuring & Recovery Turnaround

A sorry tale supports the case for proposed changes to insolvency regulation

stressed businessman 2 Huffington PostWe were recently involved in helping an insolvent construction company with their restructuring, which was necessary for them to survive.
All had been going according to plan, with the directors, shareholders and most creditors on board in support of a CVA proposal that would have helped the business to survive.
Or so we thought.
Having finalised the CVA proposal it was being reviewed by one insolvency practitioner (IP) who was expecting to act as Nominee and Supervisor when another IP turned up at the company offices having an hour earlier been appointed Administrator without notice being served on the company.
Unknown to the directors, it transpired that one of three shareholders, who incidentally had shortly beforehand resigned as a director and was also a creditor, had independently sought advice from an IP with the inevitable results. We deduced that not only had the IP advised the shareholder/creditor that an Administrator should be appointed but also had advised them not to reveal this to the company’s directors or the proposed Nominee.
We can only presume that the IP concerned saw an opportunity to get himself appointed without first checking what might be in the best interests of creditors.
What the IP/Administrator clearly did not understand was the nature of debt in construction companies, where there are usually very few recoverable fixed assets and debt is normally based on applications for payment and certificates as project related payments. Construction project debt is complicated due to the set-off nature of debt when a company is unable to complete a project. The IP’s staff had to ask the directors to explain applications and certificates.

The case for imposing proposed changes to insolvency regulation

So, an opportunity for a consensual restructuring that was acceptable to nearly all those involved was lost, and there was arguably a conflict of interest in that the IP’s own interest was in their fee, they had a duty to look after the party that appointed them, but as Administrator their main duty is to act in the best interests of all creditors.
While one of the outcomes of Administration is a CVA, the practice of most IPs is to use it for the purposes of a better realisation. Cynics might argue that this offers scope for maximising the IP’s fees.
Despite the clear benefit that a CVA offered to creditors on the example cited above, it will be no surprise that the Administration pursued a better realisation purpose, without the better realisation being achieved.
All of which supports the Insolvency Service’s current proposal for a three-month moratorium against enforcement or legal action by creditors and allows time for rescue plans to be prepared and considered by creditors.

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Cash Flow & Forecasting County Court, Legal & Litigation Debt Collection & Credit Management General Insolvency Rescue, Restructuring & Recovery Turnaround

Is someone close to you showing signs of business related stress?

K2 Blog recovery from pressure February 25 2016 ID-100161914When a business is in difficulties it is a fairly common behaviour for owners or managers to go into denial, perhaps hoping that something will turn up or time will solve the problem.
This rarely works and indeed the most likely outcome is a worsening of the problem, but the last thing most business owners will do is to talk to an expert adviser let alone share their problems with friends or family.
Instead they will try to tough it out in the mistaken belief that showing any sign of weakness will only make the problem worse.
So they will bury any feelings of fear, grief and anxiety without realising that they will still be showing signs of distress to people who know them well. Waking in the middle of the night to feelings of despair is not unusual.
Typical behaviour is to try to assert their “authority” by using anger, controlling behaviour or shouting. Short temper and anger over trivial incidents at home is also typical behaviour.
A different personality type may instead retreat into themselves and withdraw from communicating with others.
If a friend, partner or spouse is behaving like this and it is not how they typically have been then the chances are that they may be trying to deal with stress related pressure.
While you may not be able to provide practical solutions, showing support and empathy are still important as are encouraging them to talk about the issue.  The old cliché “a problem shared is a problem halved” applies.
Encourage your friend or loved one to seek the help of an objective expert such as a restructuring or turnaround adviser, who can look at the whole picture as well as the details in depth, to help analyse the problem and suggest solutions.
Cash flow issues and pressing creditors will not necessarily kill a business.  Failure to talk about or examine the problems realistically almost certainly will.
There are plenty of articles in the K2 Partners’ Knowledge Bank that can help a struggling business to survive and prosper.
(Image courtesy of cooldesign at FreeDigitalPhotos.net)

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Banks, Lenders & Investors Cash Flow & Forecasting County Court, Legal & Litigation Finance General Rescue, Restructuring & Recovery Turnaround

Macho behaviour avoids facing business and financial problems

let's talk about itResearch published in the British Journal of Psychiatry reported that in the years following the 2008 Great Recession by the end of 2013 there had been more than 10,000 extra suicides across Europe and North America.
Moreover, in the UK there was a significantly higher incidence in those regions, such as the North East, with the highest unemployment.
The increase was predominantly among men, mainly middle-aged men, according to figures from the Office for National statistics (ONS).
The Samaritans’ executive director of policy, Joe Ferns, put this in context, saying that the increase was “sadly not surprising to us given the context of a challenging economic environment and the social impact that brings”.
Add to this the widely-held view that men are generally reluctant to talk about their feelings when experiencing problems, borne out by some research carried out by YouGov and the Campaign Against Living Miserably (CALM) which found that 41% of respondents said they never spoke to anyone about their feelings.

A problem ignored is likely to escalate both in reality and in the mind

Given that business and economic life continues to be stressful in 2016 this underlines the risks of bottling up worries and the importance of not ignoring business and financial problems.
All too often, however, business turnaround advisors report that business owners and directors leave it until the last minute, before calling on them for help, often at the point when they run out of cash or when pressure from creditors overwhelms them.
Since the majority of those in senior management and business tend to be men it perhaps should be no surprise that such behaviour is common.
Yet there is plenty of evidence that an insolvent business can be saved with the help of a turnaround advisor.
Macho behaviour, whether putting up a front and toughing it out, or not showing what is perceived to be weakness by asking for help will not save the business or indeed those jobs that depend on it.
There is plenty of expert and non judgemental support available and willing to help turn a situation around.

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Banks, Lenders & Investors Cash Flow & Forecasting County Court, Legal & Litigation Finance General Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs

Insolvent Companies can Survive a Winding-Up Petition

overcome a Winding-Up PetitionIt is possible to get a Winding-Up Petition dismissed even when a business is insolvent and does not have the funds to pay off the creditor(s) who have brought the matter to court.
If a company is insolvent and therefore unable to pay its debts on time, it may still be a viable business with a perfectly good product or service to sell.
A review of the accounts, the cash flow, the processes and scope for restructuring and other initiatives to improve profits will need to be carried out by a turnaround specialist who will also prepare an appropriate turnaround plan.
The turnaround plan forms the basis of demonstrating viability such that it is possible to persuade creditors to accept deferred payments.
The turnaround plan is incorporated into a formal proposal to creditors for a Company Voluntary Arrangement (CVA). In addition to the turnaround plan, a CVA Proposal will include proposals for debt repayment and in some cases for debt write-off.
A CVA is a formal proposal where the process has to be carried out in defined steps to comply with the Insolvency Act and should only be done with the help of a Turnaround or Insolvency Practitioner.  While approval is required from 75% of the creditors who vote, it is arguably in the creditors’ interests to agree such an arrangement as they are more likely to get their money than they would be if the company were Wound-Up.
If pursuing a CVA while a Winding-Up Petition is outstanding, this can be adjourned to allow time for the CVA Proposal to be prepared and the formal process to be followed but any adjournment will leave little time for delay so again specialist help is needed.
Once a CVA is approved the Winding-Up Petition is normally dismissed.
In summary a CVA offers the opportunity for an insolvent company to survive a Winding-Up Petition.
You can find out more about Winding-Up Petitions and CVAs in the free articles that are available online in the ‘K2 Knowledge Bank’ or via App Stores in the ‘Turnaround’ App.

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Banks, Lenders & Investors County Court, Legal & Litigation Finance Rescue, Restructuring & Recovery Turnaround Winding Up Petitions

Winding-Up Petitions – the costs of doing nothing

WindingupPetition2 what do I need to doThe following story is a tale of how failing to pay moneys owed can end up not only with costs escalating but can also lead to the risk of a business being closed down as a result of a Winding-Up Petition.
A client was disputing a debt of up to £70,000 in relation to legal costs accrued by their lawyer, because unfortunately the lawyer had not achieved the result the client expected.
After protracted negotiations the lawyers agreed to accept a settlement of £5,000.
However, the client failed to pay because another director of the company refused to pay even this amount.
The lawyer then took the company to court and obtained default judgement for £15,000.
Another 12 months passed, and still the debt was not paid so finally the lawyer issued a Winding-Up Petition in respect of the £15,000 judgement plus interest and costs.
The client had no option but to pay up to avoid their company being closed down. It cost £20,000 excluding our modest fees.
Plainly this whole sorry situation could have been avoided and been considerably less costly had the client paid the £5,000 that had been agreed albeit with only one director.  Instead, doing nothing resulted in having to pay more than four times that amount and to face a cliff-hanger situation regarding its future.
This is a perfect example of how doing nothing can so exasperate creditors to the point where they lose patience altogether.  Do you have any similar examples or anecdotes to share?
For a collection of free articles on Winding-Up petitions and associated issues why not download the “Turnaround” App from your Appstore or visit the Knowledge Bank at K2 Partners.

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Banks, Lenders & Investors Cash Flow & Forecasting County Court, Legal & Litigation Debt Collection & Credit Management Finance General Rescue, Restructuring & Recovery Turnaround

Don’t risk losing your business to a Winding-Up Petition

K2 Blog January 2016 WindingupPetitionWhen a company is on the receiving end of a Winding-Up Petition, it is a sign that a creditor has run out of patience in trying to recover money they believe is owed to them.
The creditor will have weighed up the cost of applying to the courts for a Winding Up Petition which generally involves an investment of ~£3,000 covering £280 in court fees plus £1,350 as a petition deposit (to manage the ‘winding-up’) and the balance in legal fees, so it is a serious step for a creditor to take.
A Petition usually means that the two parties have failed deal with each other satisfactorily whether to take steps to resolve the debt or to be pro-active about dealing with the fact that it can’t be paid.
Winding-Up a company is a formal legal procedure whereby the creditor must be able to prove that the debtor company owes more than £750 as an undisputed debt, it must allow seven days from lodging the application before publishing a formal notice in the London Gazette, also a legal requirement.
However, once the notice is published all the business’ creditors will be aware that there is a problem and since banks are among those that monitor the London Gazette the situation will escalate rapidly since the usual first step for the banks is to freeze the business account.
This makes it harder for a business to carry on trading and in particular to make payments which in turn escalates the problem.
While there are steps a business can take to challenge a Winding-Up Petition, such as disputing the debt, and to restore access to its bank account, such as by applying for a Validation Order, there needs to be documented evidence to show the court.
Ideally, a business should be proactive and deal with the situation early by starting the process of saving the business long before a Petition is served.
Even when a company cannot pay, and when there is a Petition, providing the company is viable it can often be saved.
Saving a business and in particular when there is a Winding-Up Petition needs the impartial advice and the guidance of an expert, whether they are a turnaround advisor or an insolvency practitioner.
However, if things have reached the point where the Petition has been listed for hearing in court, a company can only be represented by a solicitor, barrister or a company director and one of these must attend the hearing to present evidence of steps taken to deal with the situation for there to be any hope of avoiding the court making an Order that the company be compulsorily closed (wound up).
There are more useful free articles on this and related issues to help businesses in difficulties here

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County Court, Legal & Litigation General Insolvency Rescue, Restructuring & Recovery Turnaround

New French law expected to help restructure insolvent businesses in France

French legislation has been well-known for making it difficult to restructure insolvent businesses in France.
Now, thanks to as series of small measures covering French corporate and insolvency law, life may be about to become easier. The measures are known collectively as the Macron law.
There are three measures that stand out as being particularly helpful for restructuring a French business when it becomes insolvent.
The first is the establishment of specialised Commercial Courts to deal with larger insolvencies, where just one court will now have the jurisdiction to deal with insolvency procedures for several companies in a group.
A second significant change is that directors may now be banned from managing a business if they have knowingly fail to file for insolvency at the latest within 45 days after payment failure.
As an additional safeguard it will now be mandatory to appoint a second administrator where a debtor company operates in more than one court jurisdiction in France outside the one where it is registered.
This rule will also apply if the debtor controls at least two companies undergoing insolvency proceedings or when the debtor is controlled or owned by a company subject to ongoing insolvency proceedings and the company itself holds or controls at least one other company which is also subject to insolvency proceedings.
The changes have been described as innovative and are expected to help make the insolvency processes in France move more smoothly and efficiently.

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County Court, Legal & Litigation Debt Collection & Credit Management Finance General Insolvency Rescue, Restructuring & Recovery Turnaround Winding Up Petitions

Bankruptcy petition threshold increases

From 1st October 2015 the £750 minimum liability threshold of debt for which creditors can petition for the bankruptcy of an individual has increased to £5,000.
Given the effort involved to make this change, it is interesting that the legislators have left the minimum liability threshold for creditors to petition for the winding up of a company at £750, a figure that was set in 1986.
Whatever the threshold, a petition should really only be issued with the intention of following it through to achieve bankruptcy or winding up as petitions are not intended for use as a debt recovery tool.
The issue however, is how do creditors get paid when dealing with a recalcitrant debtor who is ignoring them.
Historically the debt collection route was to pursue a money claim through the courts, however this is now expensive following the recent increase in fees to a whopping 5% of claim. This route also highlights the inadequacy of UK’s debt recovery procedures where debtors often get away with ignoring creditors, including ignoring a court judgement for payment where there are no assets. They can do this since the appointment of bailiffs of sheriffs only works where assets can be found and seized although such a visit sometimes frightens a director into making payment.
As a result creditors and their legal advisers have increasingly been using petitions as a means of obtaining payment.
The result is that a petition has become a realistic alternative for debt recovery despite it being an abuse of process.
For companies on the receiving end of a petition, it focuses the mind and generally forces the directors to deal with the liability or confront the prospect of the company being wound up. Such an outcome is often not what they want, even where they had hoped that by ignoring their company’s creditors, they would simply ‘go away’.
It would appear that the courts have some sympathy with creditors since they now tend to overlook obvious abuses of the procedure by not holding petitioning creditors or their barristers as court representatives to account. As an example I am seeing more and more solicitors pursuing payment on behalf of clients simply by serving a petition without first serving a statutory demand.
Those companies on the receiving end of a petition often don’t know what to do but might be reassured that there are several options for saving their company. This is however, an area which is not DIY so directors should seek professional advice since it is often a matter of understanding and following procedure.
In summary, the petition threshold is unlikely to influence the number of petitions. Instead, the factor impacting on the number of petitions is the recent increase in cost of obtaining judgement. Despite this a petition does not necessitate the demise of a company and there are several options to consider for those who wish to save their business.

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Cash Flow & Forecasting County Court, Legal & Litigation Debt Collection & Credit Management Finance General HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery Turnaround

Do you know how to deal with enforcement officers?

When a business has a judgement debt due to its creditors, or is overdue paying taxes to HMRC, or its landlord for rent arrears or to the local authority for rates, enforcement officers may arrive at its premises to seize property.
Enforcement officers may be bailiffs appointed by the County Court following granting of a County Court Judgement (CCJ) or by Sheriffs if there is a High Court writ. They can also represent HMRC, the landlord or local authority without judgement.
They can seize assets but only if they have lawful entry to the property and the assets are unencumbered. They do not have to physically remove anything from the premises but the seized assets may not be removed or sold without consent.
Unencumbered assets are those owned wholly by the business.  This means any items on the premises that have been supplied under a seller agreement where they no longer belong to the seller. It may be that many goods on the premises are not actually owned by the business and therefore cannot be seized.
This often applies to company vehicles on a lease or hire purchase basis, as may plant & machinery, photocopiers and IT equipment.
Less obvious are those goods bought for resale which are subject to an agreement that they only become the property of the business once they have been paid for, known as Subject to Reservation of Title.
However, the onus is on the business to prove to the bailiffs that this is the case.
It is therefore imperative that the business keeps proper records of all paperwork such as finance agreements, invoices and purchase agreements to prove any supplies that may be Subject to Reservation of Title.
Quite apart from the reason above, all businesses need to keep proper, up to date records, including sale and purchase invoices, purchase orders and contract related documents regardless of whether they are in difficulty or running profitably.  How good is your record keeping?

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Accounting & Bookkeeping Cash Flow & Forecasting County Court, Legal & Litigation Debt Collection & Credit Management Factoring, Invoice Discounting & Asset Finance Finance Rescue, Restructuring & Recovery Turnaround

Can SMEs afford to recover debts?

From this week SMEs wanting to pursue recovery of a debt of £20,000 or more through the civil courts will have to pay an advanced fee of £1,000 or more.
The fees for civil courts have been increased by an estimated 600%, on a sliding scale calculated at 5% of the value of the amount claimed.
The payment has been increased by more than the actual cost of court action and is therefore called an “enhanced” fee.
The worry is that debtors will have even less incentive to pay what they owe if they suspect their creditor cannot afford the court fees to recover debts.
SMEs would be well advised to take even greater care to protect themselves when taking on new customers. For B to B services it is always advisable to check the credit history of a potential business client and be very clear on the wording of any contract.
Businesses should also check the small print of any credit insurance they might have. They need to know the cost of making a claim in addition to that for the credit insurance as claims normally require proof of default such as getting a court judgement and enforcing this before being able to make a claim.
This also may justify factoring where the finance provider normally collects the debts, although beware any recourse clause that allows them to transfer uncollected debts back to the company.
For both B to B and B to C businesses it is also advisable to review credit risk and terms such as deposits, significant early payment discounts and security including personal guarantees should be considered. Why wouldn’t a personal guarantee be provided if the client’s intention is to pay the debt?
A supplier of goods to Viper Guard, my vehicle parts company, offers a 30% discount for payment within 30 days. They always get paid on time.
While final approval was passed in the House of Lords last week, it is expected that the Law Society and other lawyers’ representative bodies will seek a judicial review of the legality of the new charges.

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County Court, Legal & Litigation Debt Collection & Credit Management General Rescue, Restructuring & Recovery Turnaround

Are businesses vulnerable to fraud?

 

One our investment portfolio companies, Music Room Direct, is a small internet retail business that supplies musically themed goods via online sales that are paid by credit card when the order is placed.

We were horrified to find that once the goods had been delivered the credit card transaction could be cancelled and the funds recalled. We immediately contacted our bank’s credit card administrator, who sent a form asking us to respond within 10 days.

We complied immediately but were horrified to find that our bank had already refunded the customer.

Fortunately on this particular occasion we were able to contact the customer who acknowledged their mistake  as an accounts department error and repaid the money immediately.

But when we questioned the administrator, Global Payments, which administers credit cards for several mainstream banks, it transpired that there is absolutely nothing we can do to protect ourselves from clients claiming a refund of the transaction.

While we acknowledge that consumers should be protected, this system clearly offers scope for the less scrupulous and fraudsters to order and pay for goods then to reclaim a refund when the goods arrive.

Have you come across this or any other “loopholes” that make small businesses vulnerable in a similar way?

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Business Development & Marketing Cash Flow & Forecasting County Court, Legal & Litigation General Rescue, Restructuring & Recovery Turnaround

Law firms need to get serious about their business plans and cash flow

Professional Indemnity insurance is advisable for most professional businesses but for law firms it is compulsory.
Renewal has been complicated by the fact that since 2012 insurers were required to disclose their credit ratings in order to become “qualified” by the SRA (Solicitors’ Regulatory Authority).
In the last year a number of qualified insurers have become insolvent and the financial situations of approaching 1,800 law firms are being closely monitored by the SRA. 
At the same time at least 185 law firms have failed to meet the deadline for re-insuring and if they fail to do so within 90 days under SRA regulations they must close down. Already one London firm, Harris Cartier Limited, has entered administration, the first of what may be many.
Is it time that the culture of law firms is changed so that they see themselves as businesses like any other, requiring a proper business plan with a forecast to support the plan. Such plans might also benefit from input by other experts such as accountants and marketing specialists where lawyers have tended to do it all themselves.
Given the lengthy time between taking on a client, completing often complex legal proceedings and the point at which the job is complete some law firms may need the help with running their business and if necessary restructuring it if they are to ensure they are not forced into closure by failing to put in place the systems that any other business would regard as normal.

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Accounting & Bookkeeping Cash Flow & Forecasting County Court, Legal & Litigation Debt Collection & Credit Management Factoring, Invoice Discounting & Asset Finance General Interim Management & Executive Support Rescue, Restructuring & Recovery

Companies are failing to manage Debt Collection and Credit terms

Many companies are risking their own solvency and ability to carry on trading because they neither manage their debt collection proactively nor have clear procedures for setting and imposing credit terms with their customers. Consequently they are suffering from late payments, or worse having to write off invoices due to bad debts.
They compound the problem by extending credit to customers who turn out to be a bad risk.  If a customer is itself borrowing money under a factoring or invoice discount facility then the company is depending on their customer’s customers thus creating a pack of cards that if recoursed as a bad debt after 90 days could bring down everyone in a supply chain.
I believe the root of the problem to be the company’s own credit management where I find that very few companies have a robust system in place.
The key steps are to do a credit check on any new customer, to set limits, manage them and regularly review customers’ credit levels.
Getting paid however requires more than just a credit check, it involves starting management of invoice payment long before it is due. Checking the invoice is approved for payment for example, will avoid discovering that the order was not fulfilled exactly as required, or the invoice has not been received! 
Paperwork is crucial. There should be a procedure in place whereby the delivered/ completed order is signed for/ off with a clause on the document that includes written confirmation that the customer’s requirement has been satisfactorily fulfilled.
In addition companies also need late payment procedures. If an invoice remains unpaid after the due date, a robust system for managing late and non paying customers should include putting a stop on processing any further orders and debt collection that may result in litigation, and enforcement if necessary.

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County Court, Legal & Litigation General Insolvency Voluntary Arrangements - CVAs Winding Up Petitions

A Significant Increase in Winding Up Petitions

The last couple of months have seen a significant increase in the numbers of Winding Up Petitions (WUPs) being filed in the High Court.
K2 Business Rescue has been monitoring the number of petitions and notes that since April 2011 they have significantly increased.
Weekly averages of 100 WUPs were filed during February and March and have increased to 150 per week in April and May. This compares to a weekly average of 92 during the last quarter of 2010
Many companies in difficulty have been hanging on by their fingernails while hoping their sales will pick up.
While the picture and possible explanations are unlikely to be clear until the quarterly insolvency statistics are released, the increase in the number of petitions is likely to have been influenced by the enduring lack of cash with businesses trying to collect in their overdue debts.
A WUP is normally only filed after efforts to collect payment have been exhausted or more often ignored where the petition is a last resort, the result of frustration. This is certainly the case with HMRC who file most of the petitions.
In view of the rising numbers of compulsory WUPs it is possible that they may overtake the previously historically higher numbers of voluntary liquidations as creditors run out of patience.

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County Court, Legal & Litigation General HM Revenue & Customs, VAT & PAYE Insolvency Personal Guarantees Rescue, Restructuring & Recovery Turnaround Winding Up Petitions

Guide to Winding Up Petitions (WUP) and How to Deal With Them

A Winding Up Petition is a legal application to the High Court or another appropriate court by a creditor asking that a company be closed down.
If granted by the court, the official receiver is appointed to oversee closing down the company and may then engage a licensed insolvency practitioner as approved liquidator.
The purpose of winding up a company is generally to remove control of a company from its directors so that its affairs can be dealt with properly. At the end of the process the company is dissolved and ceases to exist.
The petition must be properly served on the company, normally by personal delivery at its registered office and also it must be advertised in the London Gazette. The advertisement is intended to notify the public but in practice this is normally how banks and other institutional creditors learn of the petition.
Directors, on receipt of the petition, should be aware that the company’s bank account is likely to be frozen when the bank learns about it. They should also be aware that any further trading after the date of receipt may mean that they can be held personally liable for any company debts accrued after that date if, when their actions are investigated, they are found not to have acted in the best interests of the company’s creditors.
If the directors wish to continue trading in order to save the company then they should seek help from a business rescue adviser if the company is insolvent. If they believe that trading on as a managed workout would benefit creditors through recovering assets, then they should seek help from an insolvency practitioner who might well be introduced by the bank or another secured creditor.
Although the petition is very serious and should not be ignored it does not mean that the company is doomed to closure.  With proper representation based on a credible plan to deal with the company’s difficulties it is possible to have a winding up petition dismissed.
A WUP is often used as an action of last resort initiated out of frustration following attempts by a creditor to agree terms for repayment of money owed or after repeated attempts to contact the company have been ignored. HM Revenue and Customs (HMRC) regularly uses the petition when its repeated written reminders and requests for repayment of outstanding PAYE, VAT or tax have been ignored.