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Banks, Lenders & Investors Cash Flow & Forecasting Finance General Personal Guarantees Rescue, Restructuring & Recovery Turnaround

Unworkable business loans and personal guarantees

A Government-inspired business loan scheme would only work if operated in the way that it was actually missold by RBS (Royal Bank of Scotland), according to the director general of the British Chambers of Commerce (BCC).
Under the Enterprise Finance Guarantee Scheme RBS wrongly led borrowers to believe that 75% of the loan was guaranteed by the Government and that borrowers were only required to offer personal guarantees for 25%.
In fact, the 75% government guarantee was to the lender (RBS) only and borrowers were liable to offer personal guarantees for the full 100%.
While RBS has admitted misselling the loan scheme the BCC’s John Longworth has argued that the Government version of the scheme was useless.
In fact, he has said, it would actually only have been of use to small business borrowers if it had actually operated with the government guaranteeing 75% protection to lender with the borrower guaranteeing 25% in the way it was missold.
Are you one of the estimated 9,000 businesses that borrowed through RBS via the scheme? Tell us your experience.

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Cash Flow & Forecasting Finance General HM Revenue & Customs, VAT & PAYE Insolvency Personal Guarantees Turnaround

HMRC has powers to demand security payments

HMRC is using its powers to demand security payments from company officers for VAT, PAYE and NIC where it considers there is a likelihood of default.
In a case in November 2014 HMRC served a demand notice for a total of almost £70,000 on three named individuals, two directors and the company secretary, of a Berkshire-based metals fabrication company.
An amendment to regulations was made in 2012 allowing HMRC to demand security payments from officers of companies, where it was felt there was a high risk that taxes would not be paid.
HMRC can hold the money as a deposit for up to two years and use it to satisfy any overdue tax debts the company may have.
In our experience such notices have previously only been used for Phoenix companies and not for a trading company.
This new development of personal financial liability is something SME directors and company secretaries need to be aware of and if there is any risk of the company becoming insolvent or being forced into liquidation it would be wise to consult a business rescue advisor early.

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Banks, Lenders & Investors Finance General Insolvency Personal Guarantees Turnaround

Director guarantees should mean cheaper borrowing

Financial institutions, especially banks dealing with small business loans, are often asked for loans by directors of companies that do not have insufficient assets. This places banks in a difficult position because they often want to help their clients but at the same time they can’t take risks with depositors’ money. The result is that banks frequently require directors to give a personal guarantee as security for money borrowed by the company.
If the business is subsequently unable to repay the guaranteed loan then the bank expects to rely on its guarantee. Accordingly guarantors are now asked to seek legal advice before signing a guarantee or at least confirm they have been advised to get advice before signing.
Directors should therefore be mindful of the obligations they may be taking on when seeking business finance and weigh up the pros and cons.
We are, however, aware of clients being told by bank managers that they would never expect to actually call upon the guarantee. This confuses the issue as it begs the question why take a guarantee. However most likely if a guarantee exists, it will normally always be called upon in the event of a default providing the director has sufficient personal assets.
While a bank relationship manager may be uncomfortable asking a client to sign a personal guarantee and often confuse their client by trying to reassure them, the bank’s in-house recovery team won’t have a problem if the a bad debt is passed to them.
Some commentators and many aggrieved directors have tried to turn this into an ethical or moral issue but it is straightforward. Banks need security and they should not be lending money at risk, at least not retail or commercial banks. In turn the reduced risk to the bank should attract a low cost of borrowing to the client.

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Banks, Lenders & Investors Debt Collection & Credit Management General Personal Guarantees Rescue, Restructuring & Recovery

Should Governments try to help businesses or leave us alone?

Governments are an easy target for blame when life is difficult for businesses.
The previous UK incumbents were accused of exacerbating the conditions that led to the 2008 global economic meltdown, while the current regime’s efforts to improve conditions for business have hardly won high praise.
No business can exist in a vacuum and all benefit from so-called “public goods” such as infrastructure and the education system, but recently John Timpson, chief executive of Timpson the family-run shoe chain, was quoted as saying that the best way government can help businesses is to leave them alone.
Certainly various government initiatives, such as stimulating bank lending to SMEs, have been a resounding failure.  For example, the Enterprise Finance Guarantee Scheme only pays out when the banks have exhausted all other forms of security, including directors’ personal guarantees. Not surprisingly the scheme has failed to attract many takers.
Calls for a review of business rates have fallen on deaf ears and tinkering with the planning regulations in a bid to help revive faltering High Streets has so far yielded no noticeable results. The new Help to Buy scheme designed to stimulate house building and revive the construction industry brought forth dire predictions of a potential new housing bubble.
It’s clear that these days few politicians have significant experience of the world outside of Westminster so is John Timpson right?  Tell us what you think.

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Banks, Lenders & Investors Business Development & Marketing Debt Collection & Credit Management General Insolvency Personal Guarantees Rescue, Restructuring & Recovery Voluntary Arrangements - CVAs

Latest insolvency stats suggest Zombie companies are still hanging on

The latest Insolvency stats suggest that Zombie Businesses are holding back the UK Economy.
A summary of the Q2 2011 UK insolvency statistics shows: Compulsory Liquidations up; Voluntary Liquidations down; Administrations down and CVAs static.
Against a background of slowing growth over the last three quarters of the UK economy, perhaps the picture of what has been going on is becoming clearer.
Unlike most insolvency and turnaround practitioners, I do not believe that we will soon be busy restructuring the large number of over-leveraged businesses.
I believe businesses are putting off restructuring and will do so for as long as possible, at least while the economy is uncertain. Historically insolvencies have increased during the upturn after the bottom of a recession, when business prospects can be predicted. Right now it is not clear if we have reached the bottom and if there will be any growth, let alone how much, or if the market will flatline for some time.
One set of figures, the increase in compulsory liquidations, does indicate a level of frustration over companies not taking action to deal with their debts. Creditors are becoming impatient with directors who are putting off restructuring and starting to force their hand by issuing a winding up petition. But even these figures are very low.
The tragedy is that without restructuring, a great many so called ‘Zombie businesses’, lack optimism to plan for the future. They have run down their stock levels, cut staff to the bone, do limited marketing, are not investing nor looking for growth opportunities let alone looking abroad and are not laying foundations for their future.
The lack of optimism is resulting in quality and service levels being in decline and as a result they are holding back economic recovery because they are not investing in it.

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General HM Revenue & Customs, VAT & PAYE Personal Guarantees Voluntary Arrangements - CVAs

How to protect Personal Guarantees when a company is insolvent

Many insolvent companies are being run to avoid the triggering of personal guarantees given by directors and owners.
Most personal guarantees are provided to secured creditors such as a bank to cover loans or overdrafts that are already protected by a debenture which provides for a fixed and floating charge over the company’s assets. In such cases the personal guarantee is often only triggered by liquidation when the bank is left with a shortfall.
In view of the above I am astonished how many directors plough on, stretching payments to HMRC and extending unsecured creditor liabilities without fundamentally improving their company’s financial situation via a company voluntary arrangement (CVA).
Secured creditors stand outside a CVA and therefore they have no need to call upon a personal guarantee.
I would urge all professional advisers, including accountants, lawyers and consultants to learn about CVAs since they are such a powerful tool for saving companies and in so doing avoiding personal guarantees being triggered.

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General Insolvency Interim Management & Executive Support Personal Guarantees Rescue, Restructuring & Recovery Turnaround

An Outline of Shareholder and Director Liabilities When a Business is in Difficulty

When a company is insolvent the duties of the directors as its officers move from a primary duty to shareholders to a primary duty to protecting the interests of its creditors.
Shareholders’ liabilities are limited to the value of their equity and are protected from liability to creditors under what is known as the “corporate veil”.
However, if the shares are only partly paid for and the company enters formal insolvency the creditors can, via the appointment of a liquidator, demand that the shares be fully paid in order to discharge the creditors’ liability.
It is also possible that a company’s shareholders might have given a personal guarantee at some stage during their involvement with the company.  It might be that at start-up for instance, particularly when a family member has started a small business, or when the company subsequently entered a contract such as a lease, some or all of the shareholders personally guaranteed the contract and then later forget about it, especially if they are no longer directors or officers of the company as they may have been in its early days.  It can also be an issue after the shareholders have sold their shares but not discharged their personal guarantees.
Directors, on the other hand, can be held to be personally liable under the Insolvency Act 1986 for money owed to creditors. They must not sell any assets under their market value. They must not pay some creditors and not others in a way that seeks to prefer those being paid.  The fiduciary duty imposed on the directors of an insolvent company leaves them with personal liabilities that are not imposed on shareholders.
However, it is often the case with small companies that the director and shareholder are one and the same and in those situations the director must remember that he or she wears different hats as director, shareholder, employee and also as a creditor, if they have lent money to the company. This is in particular an area where repaying director loans can attract a charge of preference referred to above.
It therefore makes sense to get outside help from a business turnaround or rescue adviser if you are involved in a business as both a shareholder and as a creditor. It is in the advisor’s interests to offer realistic solutions to help restructure the company.

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General Insolvency Liquidation, Pre-Packs & Phoenix Personal Guarantees Rescue, Restructuring & Recovery Turnaround

Guide to Pre-Pack Administration from K2 Business Rescue

Pre-pack Administration is a tool for saving struggling businesses that are in severe financial difficulties but are potentially sound. Pre-packs allow the business idea to be preserved, retaining customers, suppliers and goodwill, without all the start-up costs normally associated with a new business.
Essentially it means “selling” the business to a new company immediately upon appointment of an Administrator, the preparation for sale being carried out prior to appointment.  The sale requires additional scrutiny if the directors and shareholders of the new company are the same as in the previous company to prevent any abuse.
Insolvency practitioners use pre-pack administrations to achieve the swift sale of a business where it is not appropriate for them to trade the business as a company in administration. This way the business can continue to trade without disruption.
Reasons for not trading a company in administration include avoiding the administrators’ costs and the risks of trading a company in administration. It is often argued that key stakeholders such as customers, staff or suppliers will not remain loyal to a company in administration.
A pre-pack is only one form of administration. In normal administrations there are a number of possible outcomes including return of the company to the control of the directors, such as following a restructuring or a Company Voluntary Arrangement, or the administrator can sell the business and assets ahead of liquidation. In the pre-pack form assets are sold immediately on appointment of the administrator, who does not then trade the company.
Pre-packs also have huge advantages in allowing the new company to trade without the burden of the previous company’s debt, almost without disruption keeping valued staff and equipment, contracts, relationships and customers. 
While a pre-pack is often regarded as controversial because the creditors are faced with a done deal, the counter argument is that a swift sale of the business assets is the best opportunity to preserve value and therefore ensure the best possible return for the creditors who might otherwise get nothing or very little.
However, to prevent abuse, especially as the creditors do not get a chance to object, before a company can use this method it must show it has taken advice from an insolvency practitioner who must ensure the business and assets are independently valued and not sold below their value.

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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.