Tag: company doctor

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Cash Flow & Forecasting Debt Collection & Credit Management Finance General Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs Winding Up Petitions

Surviving a Winding-Up Petition

WindingupPetition helpA Winding-Up Petition need not be the end of a business, but it does require prompt and decisive actions if the business is to survive.
Given that a Petition is usually served when a creditor, be it a supplier or HMRC, has run out of patience, a review of both the financial position and the future prospects is necessary before considering the options for dealing with the Petition. There are several.
When a company’s financial position and cash flow forecasts are dire it is not likely to have the funds to pay off the debt such that financial restructuring is often needed if the business is to be saved.
In addition, the cause of the financial situation is often the business model where an operational reorganisation is also often needed if the business is to survive.
Both the review and implementing change are not something to be undertaken without experience where the help of a turnaround expert is necessary.
Turnaround experts, also called Company Doctors or Restructuring Advisers, will be able to put together a strategy to deal with the immediate need to answer to the court on the required date, will be able to advise on what you are legally obliged to do and will help you to plan a strategy for the future of the business.
There are three main options for dealing with the first hearing of a Winding-Up Petition.
If the business believes that it does not owe the amount stated in the Petition, it can dispute the debt and ask for the petition to be withdrawn and apply to court to stop it being published in the London Gazette.  However, any dispute needs to be credible, and supported by evidence that will be examined as part of the directions (dispute) procedure.
If the review identifies a viable business but the Petition debt cannot be paid before it is heard then a long-term payment plan may be best using a CVA (Company Voluntary Arrangement).  CVAs require consent of a requisite majority of creditors and can also be used to write off a portion of the debt but all too many fail because they are not based on a turnaround plan that is prepared by a suitably experienced adviser.
While there are other options these are covered in the CVA Guide and free articles that are available online in the ‘K2 Knowledge Bank’ or via App Stores in the ‘Turnaround’ App.

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General Insolvency Rescue, Restructuring & Recovery Winding Up Petitions

Beware! Disputing a debt may not stop a Winding Up Petition

It is not enough to dispute a debt when dealing with a creditor’s Winding Up Petition, it is the disputed amount of the debt that matters.
A recent case involved a complex debt that was disputed where the Court made a Winding Up Order on the grounds that it was satisfied that more than £750 was undisputed.
While the High Court does not like creditors to use petitions for debt collection by putting improper pressure on a company, the Court does not have to resolve the dispute or agree how much is actually owed if it is satisfied that more than £750 is due.
£750 is the threshold amount needed for a Court to make a Winding Up Order.
All too often companies fail to deal with a creditor long before the hearing for a Winding Up Petition, where they have plenty of opportunity throughout the process to halt proceedings if the debt is disputed or to pursue a restructuring option if the company simply cannot pay the debt.
In most situations where creditors are pursuing overdue debts, and in all cases where a Winding Up Petition is served on a company, help from an experienced turnaround and recue adviser is needed if the company wishes to survive.
Companies should not believe that simply disputing a debt is in itself enough to ensure that such a Winding Up Petition will be dismissed.

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Accounting & Bookkeeping General HM Revenue & Customs, VAT & PAYE Insolvency Voluntary Arrangements - CVAs

Beware of Directors’ Loan Accounts

Accountants often advise clients to use directors’ loan accounts as a device to help minimise their personal tax liabilities. However, be warned, they only work when the directors are also shareholders and the company is making profits.
Essentially they involve the directors borrowing money from their company and drawing only a minimum salary through their company’s payroll. The loan account is paid off by declaring a dividend and this is a legal way for directors to minimise their personal tax and it avoids having to pay employee and employer NI contributions.
This is fine when a company is profitable but it can become a problem if the company does not have sufficient profits as distributable reserves that can be used to clear the loan.
We are coming across increasing numbers of companies that have not made a profit and where the loan cannot be cleared, leaving the directors effectively owing money to the company.
This can be a serious problem if the company is hoping to reach a Time to Pay (TTP) agreement with HMRC to defer payment of corporation tax, PAYE or VAT because HMRC generally stipulates that such loans are repaid as a pre-condition of approval.
Similarly, when proposing a Company Voluntary Arrangement (CVA) or when a company becomes insolvent, the appointed administrator or liquidator will most likely ask the director(s) to repay the loan. Before approving a CVA, experienced creditors particularly HMRC also tend to demand repayment of directors’ loans.
It is often forgotten that such attempts to reduce tax carry the risk of creating a huge personal liability. To avoid it, we recommend that such dividends are declared in advance so as to avoid a loan or at least regularly to avoid building up a huge directors’ loan account. This avoids the normal practice of waiting until long after year end when the annual accounts are prepared, during which time the company may incur losses that mean dividends cannot subsequently be declared.
A further note of caution relates to any directors’ loan account outstanding at the company year end, which will be highlighted to HMRC in the accounts. Despite any intention to reduce the tax liability, tax legislation seeks to limit the benefit by imposing a section 455 CTA 2010 tax liability (under Corporation Tax Act 2010, formerly s419 of the Income and Corporation Taxes Act 1988). While this tax can be recovered when the loan is subsequently repaid by the director, whether in cash or as a dividend, it triggers a significant tax liability on the company.

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

Falling Confidence Among SMEs Supports Evidence of a Long L-Shaped Recession

Recently released insolvency figures show relatively little change year on year, suggesting that the debate about whether the recession would be a V-, U-, W-, or an L-shape Is now over.
It is four years since the economy collapsed and the evidence is piling up that it is flatlining. Whatever the technical definition for coming out of recession may be (ie two successive quarters of growth), a growth of 0.2% for the UK economy means it continues to bump along the bottom of an L-shaped economic decline, whether it is called a recession or not.
Had the recent decline followed the pattern of previous ones the numbers of insolvent companies would by now be climbing noticeably, as they are generally held to do when an economy is on the road to recovery.
However, the latest CBI quarterly survey shows a sharp decline in confidence among small and medium sized businesses, reporting flat domestic orders in Q3 and export orders down by 8%. They expected domestic orders to fall by another 4% in the final quarter, no growth in exports and were indicating intentions of reducing their stock holdings – hardly suggestive of any optimism there.
Perhaps the most interesting feature of the just released quarterly insolvency figures is the noticeable increase in the number of Company Voluntary Arrangements (CVAs) relative to the numbers of companies in Administration as going concern formal insolvency procedures. Compared to the same quarter last year, CVAs rose by 29.6%, while Administrations rose by only 6.3% perhaps reflecting the adverse publicity over the use of Pre-Pack Administrations.
Many commentators are predicting a lot of insolvencies lining up for the end of Q4. Since a rise in insolvencies traditionally indicates the emergence from recession, perversely, this suggests that they are being optimistic rather than pessimistic.
But if the economy doesn’t recover and there is a rise in corporate insolvencies, this will be truly damaging for the UK. There is a huge difference between insolvency to restructure a business to prepare it for growth and insolvency to close it down.
Continuing low interest rates and no discernible evidence of banks or other creditors really piling on the pressure, nor any sign of the restructuring that normally indicates the bottom of a recession, plus the plummeting confidence of the country’s SMEs, suggest that the economy will bump along the bottom Japanese-style for the foreseeable future at best or will decline further at worst.

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Business Development & Marketing General Insolvency Rescue, Restructuring & Recovery Turnaround

The Roller-coaster That is Magazine Publishing

The magazine publishing industry has been on a roller coaster ride for many years as print advertising revenues have plummeted, driven partly by a shift to online advertising but more recently by the drop in marketing budgets during the ongoing economic crisis.
This year alone, Sky has discontinued all its magazine titles, each of which had a circulation of £4 million. BBC Worldwide has sold 34 titles to a private equity company. Future UK closed eight titles in July, citing a decline in revenues particularly in the US, and the UK-based B to B publisher Schofield closed its US operation completely, allegedly because the US division’s bank withdrew its finance.
Publishers have been suffering from a triple whammy, of diminished advertising revenue, increased newsprint and ink costs, while simultaneously trying to service residual debt taken on during the good times. 
Yet some publishers remain up beat. London-based B to B publisher Centaur Media has announced that it will double the size of the business in three years by focusing on buying up exciting new businesses, paid-for subscription services and events. Centaur restructured into three divisions in June and says that by 2014 it will double its revenue, the proportion of money it makes from online media and its operating margins. It also plans to reduce its reliance on advertising and shrink the contribution of printed media from 43 percent to 16 percent.
The question is whether it will succeed. We know of one publishing company currently going through a restructure that had been growing over the last two years.  It has a defined circulation B to B market with publications funded by advertising revenue. However, despite its current profitability it is carrying huge liabilities built up over two years of loss making while the business was growing. The sad fact is that this publishing company was undercapitalised and as a result its suppliers have funded its growth and are now exposed as unsecured creditors.
The raises the issue of growing liabilities in an industry where revenue is declining and supplier costs are rising. The potential for a publishing house to drag a lot of suppliers down with it is huge. Restructuring such companies is also difficult since cutting editorial costs has an impact on quality and relevance to readers.
Clearly the industry will need to be much more innovative if it is to survive and prosper. One obvious tactic, as illustrated by Centaur, is to shift some titles to being online only.  Others are making some online sections accessible by subscription only and charging for special reports and in-depth industry information. Other innovations could include experimenting with outsourcing writing overseas, outsourcing sub editing and page make up and printing abroad.
Readex, which regularly surveys attitudes among B to B readers recently reported that 74% wished to carry on using print versions of the titles they read so there is plainly life in the B to B publication market. Professionals will always need to keep up to date with their industry’s developments and the activities of competitors.
Nevertheless, the print side of the industry is likely to decline. Publishers will need to be more innovative and change their business model, most likely embracing alternative media that does not rely on printing and physical distribution.

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Business Development & Marketing General Rescue, Restructuring & Recovery Turnaround

Politicians and Retailers are Still in Denial as they Focus on Window Dressing

Once again retailers have blamed the weather for stagnant sales, only this time it was a couple of weeks of unexpected sunshine in September rather than the three weeks of snow that were blamed for dire pre-Christmas sales last year.
Both politicians and retailers are still in denial about the High Street. Most initiatives are aimed at stimulating consumer spending whether discounting or sales, talking up the recovery and promoting spending or window dressing by Mary “Queen of Shops” Portas.
The fact is that consumers in the UK are undergoing a huge change in their approach to consumption and credit. They are spending less on unnecessary goods and this in turn is having an adverse impact on retailers.
Over the last thirty years our excessive consumption has driven the UK economy, creating the illusion of growth while all the time we became ever more dependent on the retail sector. Our consumption based growth was fuelled by ever more debt, not just personal debt but national debt, creating an ever increasing huge balance of payments deficit. This combined debt, consumer, corporate and national borrowings, represents 466% of UK GDP.
However the debt has to be repaid, and we have finally faced up to this harsh reality, paying back a net £200 million in September according to the British Bankers Association.
Companies like JJB Sports, Jane Norman, TJ Hughes, Walmsley and Alexon with its 990 shops all recently joined a growing list of struggling companies going bust, while the Home Retail Group, owners of Argos and Homebase, has reported pre-tax profits down 72%.
We need to challenge the notion that all these high street retailers should survive. If we are going to consume less, can we sustain the current number of retailers?
In addition to adjusting their UK retail business models some, including Debenhams and Argos, are focusing on international expansion.
As turnaround specialists we are arguing that we need a vision, we need export oriented manufacturers and services to effect a transformation if we are to become a producer economy with a balance of payments surplus.

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Debt Collection & Credit Management General Rescue, Restructuring & Recovery Turnaround

Construction in Crisis – Time for a Reconstruction?

The ongoing economic crisis continues to take its toll on the construction industry with the sad news that a high profile company that was more than 100 years old has gone into administration.
KPMG have been appointed as administrators of London-based Holloway White Allom, which recently completed a refurbishment of the Victoria & Albert Museum, for which it won a conservation award.
The company, founded in 1882, was known for high profile contracts including the refurbishment of the Bank of England in the 1930s, the construction of Admiralty Buildings on Horse Guards Parade, of the Old Bailey in the early 1900s and the fountains in Trafalgar Square.
Although the company was undergoing a turnaround and restructure, following a cash injection earlier in the year from private equity firm Privet Capital, it is understood that it was forced into administration by late payment for one large project.
This latest high profile casualty comes as the construction industry faces increasing pressure. ONS figures show that output on public housing was down by 5.3% and on other public projects by 7.5% during the three months to August 2011 compared with Q3 last year, and accountancy firm Deloitte reports that the number of property and construction companies that went into administration in Q3 2011 rose by 11% to 117 compared to 105 in the same period last year.
However, some sectors of the industry are faring better than others.  Bellway, for example, this week posted a 50% annual increase in pre-tax profits, smaller construction companies focusing on repair and refurbishment are also surviving well and commercial construction activity has increased for the 19th month in a row.
Those companies that took steps to restructure their business to focus on what is likely to survive in a declining market and to deal with indebtedness early in the recession have done well. 
This suggests that those companies with a bad debt or over-indebtedness due to historical loans should consider restructuring their businesses before they run out of cash. It is not too late for them, but they are likely to require a restructuring adviser to help them.

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Banks, Lenders & Investors Cash Flow & Forecasting Debt Collection & Credit Management Factoring, Invoice Discounting & Asset Finance General Rescue, Restructuring & Recovery Voluntary Arrangements - CVAs

Businesses Should Pay Down Debt and Beware Offers That Seem Too Good to be True

Many businesses are overburdened with debt and desperate for ways to deal with pressure from banks, HMRC and other creditors. All too often they are prepared to pay off old debt by taking on new debt which leaves them vulnerable to unscrupulous lenders.
Prior to 2008, interest-only loans and overdrafts were a common method of funding, and were reliant on being able to renew facilities or refinancing.
Like many interest-only loans, an overdraft is renewed, normally on an annual basis, but it is also repayable on demand. What happens when the bank doesn’t want to renew the overdraft facility?  With the economic climate continuing to be volatile and uncertain and banks under intense pressure to improve their own balance sheets, they are increasingly insisting on converting overdrafts to repayment loans and interest-only finance is disappearing.
This has created a vacuum for alternative sources of funding to enter the market where distinguishing between the credible salesman and the ‘snake oil’ salesman can be very difficult. Desperate businesses are desperate often try to borrow money and become more vulnerable to what at first sight seem to be lenders that can offer them alternative funding solutions that the banks cannot.
Generally the advice is to beware, as the recent eight-year prison sentence handed to “Lord” Eddie Davenport illustrates.  The charges related to a conspiracy to defraud, deception and money laundering, also referred to as “advanced fees fraud”. 
The court found Davenport and two others guilty in September. Meanwhile a large number of businesses had paid tens of thousands of pounds for due diligence and deposit fees for loans that never materialised and left victims even deeper in debt. The case only became reportable in October, when restrictions were lifted.
Many businesses just want to survive and are trading with no plan or in some cases no prospect for repaying debt. In such instances they should be considering options for improving their balance sheet by reducing debt. Options might include swapping debt for equity, or debt forgiveness by creditors or setting up a CVA (Company Voluntary Arrangement).

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Business Development & Marketing General Rescue, Restructuring & Recovery Turnaround

Small Business Marketing Needs Innovation and Commitment

It is a natural reaction in tough economic times for businesses to look at their various activities and identify costs that can be cut back.
One area they traditionally prune is the marketing budget but this can be counter-productive for small businesses that need to protect their sales revenue, retain existing customers and keep the orders coming in.
A business rescue adviser brought in to help a company in difficulty will closely examine spending and in the process help develop a new business plan which will include innovative marketing aimed at generating sales at a lower cost.
In situations where a number of businesses are failing a small business also has to think carefully about remaining visible or risk potential and actual clients assuming that it has ceased trading and look around for an alternative supplier that has remained visible.
There is some evidence that small businesses are becoming highly innovative about their marketing. Instead of employing an in-house marketing team, for example, they are outsourcing their marketing and buying services only as and when they need them.
Joining a business networking club is one example of a cost effective trend that has been growing for some time.  But it is not a short term fix and many businesses leave it too late, joining only when they realise they are in trouble.
Networking needs commitment and it takes time to get to know the other businesses represented and understand exactly what they do. It works on the truism that ‘people buy from people’ and there needs to be trust as well as synergy.  This is unlikely to happen in less than six months of becoming a member of a club.
Too often people frantically try to sell their services rather than listening and learning about the other businesses in the club. It is vital to follow up with every member once you have joined and learn more about each other even if you can’t immediately see any synergy.

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Banks, Lenders & Investors Business Development & Marketing General Insolvency Rescue, Restructuring & Recovery Turnaround

Are Estate Agencies Safer Businesses Now than they were in 2008?

The sub prime mortgage crisis that precipitated the 2008 global recession led to plummeting property prices, very limited mortgage lending, repossessions and to a dramatic slump in the housing and commercial property markets.
Estate agencies were among the first businesses to feel the effects of the crisis. By December 2008 an estimated 40,000 employees had lost their jobs while around 4,000 estate agency offices -approximately one in four – had closed.
The smallest agencies, of perhaps four or five branches or less, were worst affected particularly if they depended solely on property sales.
So is the worst over now for the estate agency business? Not if the most recent information on the housing market is any indication.
Gross mortgage lending declined to an estimated £9.8 billion in April 2011, down 14% from £11.4 billion in March and the number of mortgages approved for house purchases hit a new low in April, at 45,166, the lowest April figure since records began in 1992.
The Council of Mortgage Lenders predicts that the numbers of homes repossessed will rise from 36,000 in 2010 to 40,000 in 2011 and 45,000 in 2012 and the online housing company Rightmove reports that average unsold stock rose from 74 to 76 properties per branch, reaching the highest ever level for May.
Although the housing market varies significantly in different parts of the UK, with London booming and East Anglia holding steady while the north suffers there is also evidence that the demand for rented property and buy to let property is rising along with rent levels.
None of this suggests that the business of estate agency is likely to be any more secure for a few years yet.  If the High Street agents are to survive they need to revisit their business models, diversify their activities into letting, make use of online marketing and be sure they are up to speed on all the regulations governing landlords’ and tenants rights’ and other property letting regulations.

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Banks, Lenders & Investors Factoring, Invoice Discounting & Asset Finance General Rescue, Restructuring & Recovery Turnaround

It is obvious why Bank Fees are High and Business Lending is so Difficult

The figures for January to March showed a shortfall of 12% against the £19bn that represents a quarter of the annual £76bn target agreed with the government under the Project Merlin scheme for lending to smaller businesses.
Only 16% of FSB members had approached banks for credit and 44% of those had been refused, including some seeking credit to fulfil firm orders.
Growing businesses need working capital to fund the goods, materials, marketing and staff for new growth. While some of that can be obtained by borrowing against the sales ledger (through factoring and invoice discounting), the banks are seeing them as too high risk.
This is actually a reasonable response by the banks where businesses have been clinging on by their fingernails since the 2008 recession and, having used up most of their working capital on paying down old loans, are therefore according to the bank models seen as at high risk of insolvency.
It is a vicious circle. Less working capital means businesses neither have sufficient funds to buy materials to fulfil orders nor are they adequately capitalised to justify new loans.  This is why it is very common for businesses to go bust when growth returns following a recession.
Once banks are realising that a company with outstanding debt is in difficulty, they are providing for the bad debt by adjusting their own capital ratios to cushion against increased risk and in anticipation of the new Basel lll rules requiring bank Tier 1 capital holdings (equity + retained earnings) to rise from 2% to 7% to be phased in from 2015 to 2018.  
The result is higher fees and higher interest rates to businesses and it is no surprise that some companies already seen as a bad risk cannot borrow money, even when orders are rising.
Businesses that have used their land and buildings to secure loans or mortgages may also face huge risk related costs due to the bank’s exposure because banks already have so much commercial property as security that cannot be either leased or sold. The bank will therefore impose penal fees in a bid to recover the provisioning costs.
It has never been more urgent for businesses to mitigate this catch 22 by calling on expert help to look at fundamental solutions and recognise they will not be able to borrow money to limp along as they have been for the last two years.

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Accounting & Bookkeeping Business Development & Marketing Cash Flow & Forecasting General

Franchising Can Be Great if You do the Research and Check the Small Print

Many people dream of owning their own business and in the current economic climate are finding themselves pitched into starting up perhaps before they are quite ready.
A franchise often comes with an established brand, support in training, promotional materials and advice so it is tempting to see buying into a franchise as a safer option than going into business completely independently. 
But sinking savings or redundancy payments into any kind of business is a risk and a franchise is no different.
The big danger in taking on a franchise is getting a false sense of security that someone else is responsible for your business. They aren’t and a business plan is as important for a franchisee as for an independent trader.
Also, while the franchise provides support, it may also impose limits on independent action in order to protect its brand and reputation. The most successful franchises have tested their business model and methods and incorporated these into the package. It can happen that a franchise has failed because the franchisee has failed to follow the advice.
In a recent case of a franchise business in difficulty one of the biggest issues was that the franchisor declined to take any legal steps to protect its intellectual property or its franchisees’ rights.  
The franchise model offered complete geographical coverage and each local franchise unit’s success depended on the whole network‘s efficiency, but there was nothing to stop people who had gained privileged knowledge within the franchise from setting up in competition.
It is essential when setting up any business to scrutinise any legalities required, take advice and to negotiate. Until comfortable with the terms do not buy into a franchise.
Essentially, yes, a franchise can be a very good business opportunity but it does not eliminate much of the risk inherent in setting up a business and needs the same preparation work as for any business start-up.

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Cash Flow & Forecasting Debt Collection & Credit Management Factoring, Invoice Discounting & Asset Finance General Rescue, Restructuring & Recovery

Do Small Businesses Understand Working Capital and Liquidity?

When borrowing against current assets, such as the sales ledger using factoring or invoice discounting or against fixed assets like plant and machinery or property, there seems to be a widespread misunderstanding among businesses about business funding and, in particular, working capital.
While credit is the most common form of finance there are many other sources of finance and ways to generate cash or other liquid assets that provide working capital. Understanding these is fundamental to ensure a company is not left short of cash.
Businesses in different situations require finance tailored to their specific needs. Too often the wrong funding model results in businesses becoming insolvent, facing failure or some degree of painful restructuring. In spite of this, borrowing against the book debts unlike funding a property purchase is a form of working capital.
Tony Groom, of K2 Business Rescue, explains: “Most growing companies need additional working capital to fund growth since they need to fund the work before being paid. For a stable business where sales are not growing, current assets ought to be the same as current liabilities, often achieved by giving and taking similar credit terms. When sales are in decline, the need for working capital should be reducing with the company accruing surplus cash.”
Restructuring a business offers the opportunity of changing its operating and financial models to achieve a funding structure appropriate to supporting the strategy, whether growth, stability or decline. Dealing with liabilities, by refinancing over a longer period, converting debt to equity or writing them off via a Company Voluntary Arrangement (CVA), can significantly improve liquidity and hence working capital.
While factoring or invoice discounting, like credit, are brilliant for funding growth, businesses should be wary of building up liabilities to suppliers if they have already pledged their sales ledger leaving them with no current assets to pay creditors.

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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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Banks, Lenders & Investors Debt Collection & Credit Management General Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs

Break Free from Servicing Debt and Invest in Growth

Britain lacks self confidence and suffers from inadequate education, risk averse bureaucrats and unimaginative politicians trapped in the Westminster bubble outside the real world.
Former CBI chief Lord Digby Jones identifies all these as obstacles to rejuvenating UK Plc in an extract from his book Fixing Britain. It’s a picture K2 recognises.
“Too much of Britain is focused on repaying debt and not on investment in growth,” he says. “Too many companies are servicing debt and existing for the benefit of the banks when they should be cramming down debt and pursuing a clear strategy.”
Lenders, more interested in loans being repaid than on growing their customers, are stifling businesses with potential by soaking up surplus cash to service and repay their loans.
In our view companies should return to being run for their shareholders and employees rather than for the benefit of lenders. Rescue advisers can help companies with debt restructure by renegotiating loans and interest, converting debt to equity or using a CVA to cram down debt.
We need to create a market-driven and investment culture, where profits are reinvested and appropriate tax incentives to encourage business investment.
The UK cannot compete as a low-cost manufacturer with countries like India or China and therefore businesses need to focus on high value goods and services requiring specialist knowledge to justify a premium. This is why high calibre education of young people and apprenticeships are needed.

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General Insolvency Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs

First decline in household income for 30 years causes pain on the High Street

The Office for National Statistics (ONS) reported recently that in 2010 real household disposable income fell by 0.8%, its first drop since 1977.
A plethora of profit warnings from major high street retailers is therefore no surprise. JJB successfully agreed a new Company Voluntary Arrangement (CVA) for repaying debt, just two years after its last one. Oddbins’ attempts to agree a CVA were rejected which led to it going into administration.
Meanwhile travel company Thomas Cook announced a 6% fall in holiday bookings from the UK. Dixons announced that it was cutting capital expenditure by 25%. H Samuel and Ernest Jones, Argos and Comet all report falling sales. Mothercare is to close a third of its 373 UK stores and HMV has just sold Waterstones for £53 million to pay down some of its £170 million of debt.
Falling consumer confidence, the Government’s austerity measures and rising commodity prices have led to a steady erosion of disposable income. An April report indicated an increase in retail sales, up 0.2% on February’s, but this was attributed to non-store (internet) and small store sales and probably conceals a continued decline in High Street sales.
After a few years of expansion fuelled by debt, it is entirely logical that the marketplace is now facing a sharp contraction as consumers spend less money while they are concerned about their job security and repaying their huge levels of personal debt.
Many companies need to contract and reduce their cost base if they are to survive. For the High Street retailers this means concentrating on profitable stores and reviewing strategy.
Growth is likely to involve developing experience based retail outlets in dedicated shopping environments or direct sales such as online. The High Street has failed to reinvent itself and the recession has accelerated its decline.

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General Rescue, Restructuring & Recovery Turnaround

The Current Conundrum Over Inflation and Interest Rates

The most recent inflation rates show that the Consumer Price Index (CPI) has risen to 4%, a surprise drop of 0.4% from February and the Retail Price Index (RPI) to 5.3%, also a fraction less than February’s 5.5%.
If times were normal these figures would nevertheless trigger a rise in the interest rate to 7 % to 8%, about 2.5% above the RPI.
However, times are still clearly not normal following the financial “tsunami” that was the 2008 Great Recession. Many businesses are still struggling to survive and grow in the face of reduced spending by consumers and clients and cope with soaring materials and commodity prices and volatile oil prices because of uncertainty over events in North Africa and the Middle East.
As a result the fear that an interest rate rise might push the economy back into a recession has led to interest rates being decoupled from inflation.  Inflation is a form of currency devaluation.  It means that every £1 buys less than it did when inflation was lower.  Interest rate rises help to correct this. 
I would argue that currently many businesses are operating with huge levels of debt and not doing all they could to reduce even though they can only survive because interest rates are currently so low.  But this current situation is only temporary.
While a viable business should be able to build a surplus of cash in this situation to provide itself with a cushion once interest rates start to rise again, a business in difficulty will not have this option. It therefore needs to think ahead and revamp the business model and restructure to survive and be ready for to what will happen when things are more “normal”.

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Business Development & Marketing Cash Flow & Forecasting General Rescue, Restructuring & Recovery

Maghreb and Middle East Volatility Adds to Pressures on UK Business

Pressure on UK businesses is already intense as a result of the Government’s austerity measures designed to cut the UK budget deficit.
Already facing changes to NI payments, rising prices for raw materials as well as January’s increase in VAT from 17.5% to 20% and the dilemma of how much of these additional costs to pass on to consumers, now upheavals throughout North Africa and the Middle East are adding enormous uncertainty.  Oil prices have soared to their highest levels for two years, with impacts on all areas of the economy.
But it is not only oil prices that could add to business instability.  The UK is Egypt’s largest investor at around £10 billion, with around 900 UK companies involved, in
Tunisia exports from the UK in 2009 totalled £153 milliion, while imports were at £406 million, and trade with Libya is estimated to be worth £1.5 billion. British exports of goods to Libya were worth an estimated £1.29 billion in 2010.
The impacts will be felt on the UK travel industry, UK construction involved in building and infrastructure projects in Egypt and Tunisia but also on domestic services, for example Libyan-funded education in the UK of more than 6,000 students on undergraduate and postgraduate courses, worth an estimated £160 million.
I believe that, while businesses should try to hold their nerve, even those businesses that have survived so far without getting into difficulties might be wise to not only pay close attention to cash flow but also to revisit their business plans to put themselves in the best possible shape to be able to cope with the continuing uncertainty.

Categories
General Rescue, Restructuring & Recovery Turnaround

K2 believes the budget is positive for business and for those in difficulties

With the latest inflation figure showing an increase to 4.4% and a lower amount of tax collected in February, both announced the day before the budget was due, arguably the Chancellor had little room for manoeuvre.
There were some small comforts for smaller enterprises though the bulk of George Osborne’s measures are likely to benefit big corporations the most.
Cutting fuel duty by 1p per litre, and delaying a planned 4p per litre rise to April 2012 along with scrapping the fuel duty escalator was welcome particularly to hauliers, couriers and other companies that depend heavily on transport.
Keeping personal tax at its current level and increasing the personal tax allowance next year will also moderate any pressure on wage inflation, which is in any case not great given the current uncertainty over employment.
The money for apprenticeships, the new enterprise zones, the relaxation of planning laws and the new decision deadline should also make life easier for businesses.
However, I believe most of the budget’s measures are likely to benefit larger corporations, rather than the smaller, UK-focused businesses.
Overall this is a budget that doesn’t load yet more pressure on struggling businesses but the real concern among businesses is the prospect on interest rate rises which will squeeze those who are struggling to survive and precipitate a significant increase in the number of formal insolvencies.

Categories
Debt Collection & Credit Management Factoring, Invoice Discounting & Asset Finance General Rescue, Restructuring & Recovery

Factoring and Invoice Discounting: Be Wary of Hidden Fees

Factoring and invoice discounting (borrowing money against invoices) can be a helpful tool for funding the working capital of a business.
While it used to be regarded as a means of borrowing by businesses in financial difficulties, it is now a common source of finance for managing cash flow and has the additional benefit of imposing discipline on the collection of outstanding sales invoices.
The service charge fee is pre-agreed with the finance provider and generally relates to the level of service provided. Fees for factoring are generally at a higher rate of between 0.8% and 3%, than for invoice discounting because the factoring service charge includes debt collection.
However, hidden in the small print are usually contingency fees that can be triggered by a default. These fees are sufficiently large to justify some lenders looking for reasons to trigger them.
There are many examples of companies in financial difficulties where the factor or invoice discount provider pull the plug on a facility and collects in the outstanding debts to recover funds loaned as well as their retaining the default and recovery fees.
Typical default fee are 10% of the ledger held plus recovery fees which are generally not specified. Such is the scope for earning fees that advisers to lenders might be persuaded to recommend the exercising of rights under a default knowing that they, as advisers, can be paid out of the recovery fee clause as well as repaying their lender client the loan and default fee.
Such self interested behaviour may swell the coffers of lenders but it doesn’t help preserve businesses or improve the reputation of the finance community.

Categories
Debt Collection & Credit Management General HM Revenue & Customs, VAT & PAYE Rescue, Restructuring & Recovery Turnaround

HMRC Taking a Tougher Line on Debt Recovery

Evidence is emerging that HM Revenue and Customs is adopting a tougher approach to PAYE, VAT and tax arrears and increasingly using its powers of distraint to take over control of the goods, stock and assets of businesses.
In one example this week, just two hours after K2 was appointed by a company in difficulties, HM Revenue and Customs (HMRC) officers appeared at the premises and levied distraint on all the company’s assets and stock. There are similar stories from other turnaround and restructuring professionals.
The issue of a distraint notice (a C204 notice, also called a distress or walking possession notice), under HMRC powers allows it to take control of everything seized and while it does not necessarily remove property at that point, it means that the company cannot continue trading and is effectively put out of business because it is prevented from using its stock and cannot either sell or give away anything that has been distrained.  It normally has just five days to comply.
This walking possession is used rather like Winding Up Petitions (WUPs) when HMRC has exhausted attempts to communicate with the company.  Most companies are shocked when HMRC follows through with the actual action because it appears to come as a surprise, but when they review their correspondence they should not have been.
If the company does not pay or come up with alternative proposals, HMRC or an appointed agent can then take everything away for sale.
This hardline change of tactics comes after figures, published end of January, showed that the HMRC rejection rate for Time to Pay (TTP) arrangements had climbed from 2.7% in 2009 to 5.8% in 2010.
TTP is a very real solution for companies that cannot pay. While for the last two years HMRC has supported government policy of providing a light touch approach to businesses in difficulty, it is responsible for collecting arrears and not for saving businesses.
If a company receives a notice of intention to either wind up or distrain it should not delay in seeking the services of insolvency or turnaround advisers.

Categories
Banks, Lenders & Investors General Rescue, Restructuring & Recovery Turnaround

Will Project Merlin Make any Difference to Business Lending?

With so many companies in financial difficulties will many companies be able to take out further loans as a result of the new agreement known as Project Merlin?
The government last week announced that it had reached agreement with the UK’s four biggest banks to increase the amount of new lending to business in 2011 to a total £190 billion, of which £76 billion would be for small and medium sized businesses (SMEs). The SME portion is an increase of 15% on 2010.  
The lending to businesses will be on commercial terms that reflect the reduced number of lenders in the market. With bank base rates being so low, currently 0.5%, companies are being charged a huge premium with interest rates being set as 8 – 9% above the base rate. In addition, huge arrangement fees are also being applied, where fees representing 5 – 10% of the loan are not uncommon.
Many balance sheets are so decimated carrying huge liabilities to creditors such as HMRC, suppliers and asset based lenders (often at over value) that many businesses will not be able to justify a loan.
Business advisers, who see the effects of policy on the ground, say that one effect of Project Merlin will be for the banks to convert short term revolving facilities, such as overdrafts renewable daily, monthly or quarterly, into medium term loans. These will almost certainly be categorised as new loans in the quota reports but won’t actually represent additional, new funding. The banks continue to run rings around the politicians.
Converted loans are increasingly repayable on demand and therefore are being agreed on terms that allow the bank to keep all its options for essentially demanding immediate repayment.
Andrew Cave, of the Federation of Small Businesses, commented that the majority of small businesses were not seeking finance from the banks at the moment because the cost of existing and new borrowing is increasing and David Frost, director general of the British Chambers of Commerce, also cast doubt on whether the agreement will make any difference because of what he called the banks’ poor and opaque decision-making and over-centralised processes, with a lack of good frontline relationship managers locally in the banks.

Categories
Banks, Lenders & Investors General HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery Turnaround

Latest Insolvency Figures Suggest that UK Business is Hanging on in There

Figures from the UK Insolvency Service just released on 4 February 2011 for the last quarter of 2010 (Q4) show a decline in compulsory and voluntary liquidations, continuing a downward trend.
The total number of compulsory liquidations and creditors’ voluntary liquidations for the quarter to 31 December 2010 was 3,955 in England and Wales, a decrease of 0.2% on the previous quarter and a decrease of 11.3% on the same period a year ago. 
However, closer examination of these numbers reveals that there were 1,200 compulsory liquidations, up 5.8% on the previous quarter but down 9.9% on the corresponding quarter of 2009, while 2,755 creditors’ voluntary liquidations (CVLs), are down 2.6% on the previous quarter and down 11.8% on the corresponding quarter of the 2009. 
Compulsory liquidations are therefore showing a very slight upward trend after the previous two quarters, when they were down 3.2% on the previous quarter and in Q2 were down 9.9%.
A more interesting and perhaps pertinent comparison is with the figures from the last recession.
Either directors are doing a fantastic job of restructuring their companies to remain profitable with positive cash flow, which is unlikely when the word is that advisers from the insolvency and restructuring professionals are not busy.
The other possibility is that “companies are just hanging on in there” with support from creditors, including HMRC and banks, adopting a very light touch on struggling companies.
Companies should bite the bullet and undergo restructuring to survive as viable businesses. Until then, they will continue to “hang on in there”.

Categories
Banks, Lenders & Investors Business Development & Marketing General Rescue, Restructuring & Recovery Turnaround

Is it Realistic for Private Businesses to Employ more Staff in 2011?

The majority of businesses in the UK are defined as small and employ fewer than 50 people while only one per cent of UK companies employ more than 1000 people.
Small businesses would generally be defined as having fewer than 50 employees, assets worth less than £5 million and a turnover less than £5 million, yet they account for two thirds of the UK’s private sector.
The Government is pinning its hopes of recovery on dramatically and quickly reducing the country’s budget deficit with a combination of cutbacks, including making an estimated 330,000 people in the public sector redundant, a figure revised downwards in November 2010 from its estimate of 490,000 the previous June.
This revision, albeit in human terms still a large number of people, is based on its forecast for growth in the economy in 2011 of 2.1% for all of which it relies on the private sector – the majority of which is made up of small businesses.
Economists and politicians are both emphasising that the opportunities for growth lie largely in increasing exports on the grounds that there is a burgeoning middle class in the fastest growing economies, like China, India, Brazil and Russia (the BRICS) with a growing appetite for sophisticated technology and household products.
But while this might be an option for businesses involved in manufacture it does not help those many small businesses providing services and products to local businesses and consumers in the UK only.
The UK manufacturing sector currently accounts for 26% of Gross Domestic Product (GDP) and the Government’s Department for Business, Innovation and Skills (BIS) published a White Paper proposing to expand adult apprenticeships by up to 75,000 by 2014-15 and to set up a new £50 million Growth and Innovation Fund, with financial support to SMEs to co-fund the costs of training for lower skilled employees.
Help with skills training by 2014-15 is hardly much use in 2011 and in any event growth will depend on being able to both increase sales and availability of finance from the banks to fund the additional working capital needed to support them.

Categories
Banks, Lenders & Investors General Interim Management & Executive Support Rescue, Restructuring & Recovery Turnaround

Employee Equity can Improve the Chances of a Successful Restructuring

Businesses and the UK economy are under pressure from inflation thanks to increased taxes, such as VAT, and commodity prices and also pressure due to declining sales thanks to the reduction in consumer spending.
The current situation is as there has been a considerable amount of wage restraint in the marketplace with employees more concerned about keeping their job than earning more. This fear of job loss however does not apply to all staff, where retaining certain key employees is crucial as their loss would have an adverse impact on the business.
This is a common problem for restructuring advisers who need to solve it when dealing with companies in financial difficulties. When a business is in financial difficulty management often seeks to reduce staff costs such as by asking employees to take a pay cut in order to help the company survive and to keep their jobs.
Many attempts at restructuring insolvent companies fail due to flawed restructuring strategies and an inability to get the support of staff for a realistic solution. In the case of the Rover car company the opportunity was there to restructure the company using the £500 million dowry from BMW. But management failure and a lack of ownership of the problem by staff and their union representatives contributed to the company failing five years later when all employees lost their jobs.
Employees tend to be more concerned about the survival and future viability of their jobs than most other stakeholders. Banks and lenders tend only to be interested in the security of their outstanding loan, and shareholders often sell their shares or just ‘hang on and hope’ without further investment.
Involving employees in the development of a restructuring plan instead of imposing decisions on them can bring about solutions such as real cost savings and flexibility.
This notion of giving employees a greater say in their future exists in other countries, notably in Germany where employees’ representatives sit on the board of directors, and in the USA where unions like the Teamsters often hold shares in their member companies and are actively involved in strategic decision making.

Categories
Banks, Lenders & Investors General Rescue, Restructuring & Recovery Turnaround

The Deadline for Repaying Bank Bail-out Money Implies Continued Pressure on Business Lending

British banks have until 31 January 2012 to pay back the money made available to them by the Bank of England since April 2008 through its Special Liquidity Scheme, the support that was provided following the temporary public ownership of Northern Rock in the UK, the collapse of Lehman Brothers in the US and the onset of the global economic recession.
Where is this money is going to come from? The likely answer is from businesses and customers. While banks are likely to borrow some money via issuing corporate bonds in the marketplace it is unlikely there will be much inter-bank lending.
So it is reasonable to assume that banks will make up the difference by withdrawing money from the marketplace, that is from businesses and individuals from repayment of loans and overdrafts.  In addition to reducing existing loans, it will be difficult for banks to find new money for lending and businesses and other borrowers will find it harder to agree loans, and even if they are successful will find that repayment terms will be stricter and more costly.
The amounts involved are almost too big to imagine.  The amount due to be repaid is £185 billion which is similar to the combined value of the UK’s four leading banks (LloydsTSB, Barclays, HSBC and RBS).
At the same time the banks know they face tighter regulation on lending and capital reserves under new regulations, called Basel III, from the world’s banking regulator. Meeting these new requirements will require banks to raise substantial amounts of fresh capital placing further burden on the lending market.
At the same time the Government has now introduced a series of measures, including a rise in VAT, higher National Insurance Contributions and public sector cuts, aimed at reducing the country’s budget deficit.  The bulk of businesses on which the economy depends are small traders and entrepreneurs and if they are experiencing a combination of higher costs and tightly restricted lending they cannot plan for growth and increasing the profits they would need to be able to expand and in fact should be focusing on cash management and cash flow in order to survive.
It is difficult to see how a long gentle decline can be avoided in these circumstances, when the fact is that the banks must find the money for repayment somewhere. Double dip recession?

Categories
General HM Revenue & Customs, VAT & PAYE Insolvency Turnaround Voluntary Arrangements - CVAs

HM Revenue and Customs is Increasingly Rejecting CVA Proposals

It is not being much talked about in the marketplace but it is becoming increasingly common for HM Revenue and Customs (HMRC) to reject Company Voluntary Arrangements that would previously have been accepted.
In the past HMRC has appeared to be a great supporter of CVAs, but recently they have been rejecting a number of CVA proposals that they would have approved in the past.
While there are no published statistics on the numbers of liquidations resulting from failed CVAs, historically a large percentage have failed. Business rescue advisers and insolvency practitioners believe that the failure rate of CVAs post approval is somewhere between 60% and 70%.
HMRC website guidelines to case officers indicate that they should attempt to get arrears repaid within 12 months with longer periods being the exception. This may explain why HMRC is now rejecting more proposals.
A CVA can be used to improve cash flow quickly in order to keep trading while paying off its debts in a manageable way.  It is a legally binding agreement between an insolvent company and its creditors to repay some, or all, of its historic debts out of future profits, over a period of time.
For a business in difficulty a low level of contributions in the early period of a CVA allows it to get back on its feet in the short term while refocusing the business on survival and increasing profits, thus enabling it to pay higher contributions later in the CVA.  This increases the chances of the business being able to maintain its payments throughout the CVA period and reducing the risk of failure. High repayments required in the early stages will mean it cannot do this.
However, many CVAs are drafted by insolvency practitioners with a view to the proposal being approved, and as a result many of those being approved today are offering significant contributions to creditors, some exceeding 100p in the £.
While the greater contribution improves the chances of a CVA proposal being approved by creditors, the lack of realism about a company’s ability to achieve the commitments is the reason for such a high failure rate post approval.

Categories
Banks, Lenders & Investors General Rescue, Restructuring & Recovery Turnaround

Business Survival Depends on Stakeholder Co-operation and Collaboration

The support and co-operation of its stakeholders can be crucial to the success or failure of the efforts by a business in difficulty to restructure and survive.
Stakeholders are all those people who have an interest in the business and are likely to be affected by its activities and most crucially by its failure, and they include shareholders, investors, creditors, the bank, suppliers, landlords, employees (and their union representatives) and customers or clients.
Plainly, when a business is in difficulty and has called in a rescue adviser to review its activities, costs, business model and viability, any actions it may need to take as a result will be more likely to succeed if its stakeholders both understand the situation and support the proposed solutions.
While there is one key interest that all hold in common, which is that all have an interest in the business surviving if they want to continue to receive income from it, it is probable that the interests of some stakeholders will conflict with those of others.
Employees will be most concerned about keeping their jobs and their co-operation in any restructuring is likely to depend on whether they feel the management is considering their concerns as well as involving them in the changes that may need to be made.  If there are unions involved getting them on board can be the key to persuading employees to co-operate.
Creditors and investors, on the other hand, may just want to be paid what they are owed and whether they are prepared to forgo or renegotiate payments or finance in the short term will depend on how much confidence they have in its future. 
The bank’s primary concern is to ensure loans are secure, safe and will be paid and will want to be kept informed as well as being given evidence that the business has been properly looked at by a specialist adviser, shown to be viable and any proposals are realistic and have a good chance of achieving the desired results.
It is crucial that the rescue adviser is involved in the management of the stakeholders thus ensuring that their concerns are understood. This will go a long way to ensuring stakeholders’ co-operation.

Categories
Business Development & Marketing Cash Flow & Forecasting General Rescue, Restructuring & Recovery Turnaround

How Many High Street Names Will Survive to the End of 2011?

Traditionally UK retailers expect sales in the fourth quarter of the year(Q4) to be significantly boosted by pre-Christmas shopping and by year end sales.
However, according to figures released on January 21 by the Office for National Statistics retail sales volumes dropped 0.8% in December compared with November. It was said to be the weakest annual performance for any December since records began in 1988.
Among those that have already reported sales drops are Clinton Cards, with sales down by 2.1% in the last five weeks of the year, and Mothercare posting a drop of 4%. HMV reported falls in December sales of 10% in the UK and 13.6% in Ireland and issued a profit warning.  Next said it had lost £22 million in Christmas sales.
Many blamed the three weeks of December snow that seized up the UK’s transport system and even online shopping options were no help because many distribution services were unable to guarantee pre-Christmas deliveries.
Sainsbury’s, however, reported sales up 10.1% for the four weeks to December 25, compared with the same period in 2009.
The Q4 figures and further retail results may show that there has been some late-December cheer as consumers rushed to beat the January 4 VAT increase, from 17.5% to 20%.
But it is looking as if the end of year boost the retail sector traditionally relies on may not have quite materialised for most and may have left them less well placed to face the difficult trading conditions expected in 2011.
The most difficult issue facing retailers will be maintaining their profit margins. Margins may have been propped up in December-January by the rush to beat the VAT increase, especially on the larger items but commodity prices on basics like cotton, wheat, rice, maize and sugar are expected to continue to rise thanks to global financial speculation.
Without a fundamental examination of the business, cost cutting (wages, premises,  equipment etc) may not be sufficient for survival in current conditions.
Perhaps a high street retail presence is no longer sustainable and more fundamental and innovative solutions, such as moving the emphasis to online selling, may be the only way some retailers can survive.

Categories
Cash Flow & Forecasting Debt Collection & Credit Management General Rescue, Restructuring & Recovery Turnaround

The Focus Must be on Cash Management When Times Are Tough

Profit and turnover are, of course, important measures of business performance but when times are as difficult as they are at the start of 2011 and many businesses are finding themselves in difficulties the main focus must shift to cash.
Cash flow is the most immediate indicator of the way a business is performing and can also provide a warning signal that action needs to be taken to prevent a slide into insolvency.
Close attention to cash flow should give a clearer picture of the immediate state of the business but while it may be possible to adjust to strengthen incomings against outgoings this is only going to be a holding operation.
The business must also look at its business plan and business model, preferably with the help of a turnaround adviser.  An objective outsider working as part of the business team to secure its medium and longer term future may identify fundamental weaknesses that undermine the ability to control cash flow.
The first step in managing cash is to construct a 13-week cash flow forecast to help identify risks and actions that can be taken to reduce them. It should include income from sales and other receipts and outgoings, both to ongoing obligations such as rent wages and finance and to creditors.
The business also needs to control cash on a daily basis, with payments made on a priority basis with purchases approved by an authorised person who is aware of their impact on cash flow. This will avoid the risk of returned cheques. It is also advisable to talk to the bank and keep it aware of what is being done to keep things under control.
Tight control of cash coupled with a thorough look at the business model and a realistic business plan will go a long way to help a business survive in difficult trading conditions.

Categories
Cash Flow & Forecasting General Rescue, Restructuring & Recovery Turnaround

Businesses Should Prepare Themselves for the High Level of Inflation

One of the greatest worries in the predicted difficult conditions of 2011 for both businesses and consumers is price inflation thanks in part to the increase in VAT from 17.5% to 20% from January 4 but also to the rise in commodity prices including basic foods and oil. 
Coupled with rising energy prices and public sector job cuts, this is expected to lead to a drop in consumer spending on non-essentials.
Businesses therefore need to protect themselves to ensure their survival and consider whether to concentrate on profits in the short term rather than longer term growth.
A high inflation rate makes it difficult for businesses to set prices. Normally when the inflation rate is climbing too quickly or remaining consistently high, interest rates will be increased in an attempt to bring it under control and eventually reduce it.
However, in an interconnected global economy, where most countries are subject to the same external pressures from such things as commodity price speculation on basic foods, speculation on futures in oil and minerals that are the raw materials used by manufacturers, it is being argued that this will not work now.
Financial engineering is being carried out well outside the influence of the government and beyond any attempts by the Bank of England to use interest rates to bring inflation down.  The question is whether in fact inflation is something to be worried about in current circumstances.
A UK business trading only in the UK will face a tougher time than a UK business focused on export, which can target the emerging BRICs with expanding middle classes that provide capacity for economic growth.
UK focused businesses in 2011 are therefore likely to be caught between a rock and a hard place and it may be that businesses should consider carrying out a thorough review to identify any cost savings they could make before the going gets any tougher.

Categories
Cash Flow & Forecasting General HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery Turnaround

The Questions HM Revenue and Customs Asks to Assess a request for Time to Pay Arrears

Recently uploaded guidelines for HM Revenue and Customs case officers dealing with requests from businesses in difficulty for time to pay arrears of VAT, PAYE or tax, reveal the detail of what questions will be asked before the request for a Time to Pay arrangement (TTP) can be considered.
Applicants must be able to show that they have tried to raise the money they owe by other means beforehand.  Individuals, which includes sole traders and the self employed, may be asked to show that they have approached their bank or asked friends or family for a loan or that they cannot pay the debt via a credit card.
However, the advice to case officers also states that for individuals “it is unacceptable for us to insist that a customer has made every effort to secure a loan before agreeing TTP” because it would contravene Office of Fair Trading Debt Collection Guidelines.
Both individuals and larger businesses may also be asked whether they have any assets that can be easily converted into cash or any savings that they could use to settle the debt, even if early withdrawal might incur a payment penalty. This also applies to endowment or life insurance policies, although the HMRC cannot insist that these are cashed to pay a debt.
The HMRC distinguishes between debts below £100,000 and debts above that amount and for larger businesses HMRC would want to see evidence, usually a letter from the bank, that the company has approached their bank and discussed borrowing facilities beforehand as well as exploring options for raising money from: shareholders, Directors, book debt factoring and invoice discounting, stock finance, sale and leaseback of assets or venture capital providers.
The case officer will also consider the applicant’s previous history of paying on time, whether they have had a previous TTP and previous difficulties will weigh heavily in the final decision and whether the business is viable.
It would make sense, therefore, to have a thorough business review and the support of a rescue adviser or insolvency practitioner to assess the business viability and explore all these options and to document them before approaching HMRC.

Categories
General HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs Winding Up Petitions

Guide to Company Voluntary Arrangements (CVA) and When to Use Them

A Company Voluntary Arrangement (CVA) is a binding agreement between a company and those to whom it owes money (creditors).
It is based on a proposal that will include affordable, realistic and manageable repayment terms. It normally allows for repayment to be spread over a period of three to five years and can also be used to offer to repay less than the amount due if this is all the company can afford.
The proposal is sent to the Company’s Creditors along with an independent report on the proposal by an insolvency practitioner acting as Nominee.
Creditors are invited to respond to the CVA proposal by voting to either accept it, or reject it, or accept it subject to modifications that the Creditor proposes as a condition of their vote for acceptance. The votes are counted by value of claim where the requisite majority for approval is 75% of the votes cast. This is subject to a second vote to check that 50% of the non-connected creditors approve the proposals.
A CVA can only be used when a company is insolvent but it can be used to save a company rather than close it when creditors are pressing including when a debt related judgement can’t be satisfied or a creditor has filed a Winding Up Petition (WUP).
In addition to proposing terms for repaying debt, it helps to include details of any restructuring and reorganisation along with a business plan so that creditors can assess the viability of the surviving business. The proposals must be fair and not prejudice any individual or class of creditor including those with specific rights such as personal guarantees. These include trade suppliers, credit insurers, finance providers, employees, landlords and HM Revenue and Customs, the latter often being key in view of the arrears of VAT and PAYE that many companies have built up.
A CVA should only be used when the company’s directors are willing to be honest with themselves and face up to the position the company is in, preferably with the advice and guidance of an insolvency practitioner or experienced business rescue advisor but used properly it can improve a company’s cash flow very quickly by removing onerous financial obligations and easing the pressure from creditors.

Categories
Cash Flow & Forecasting General HM Revenue & Customs, VAT & PAYE Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs

Save Your Company by Terminating Onerous Contracts to Cut Costs

Many directors are afraid of terminating contracts and agreements when their companies are in financial difficulties normally out of a concern that termination will lead to a cancellation payment that the company cannot afford.
If a company is experiencing fewer orders or lower sales, for example, generally it will need fewer staff but the worry is that terminating contracts of employment will trigger costs, particularly where senior staff are involved.
Similarly, a reduction in orders may mean that the company only needs two of the five fork lift trucks it has where terminating a hire purchase, hire or lease arrangement ahead of the agreed contract period will trigger a termination settlement or a contract termination liability.
Equally it might now no longer be able to afford the 12-month advertising contract it agreed six months previously. Even terminating contracts with advisers can be expensive.
A company in financial difficulties does not have the surplus cash to meet these obligations.  But while it puts off terminating arrangements it no longer needs it continues to bear the costs.
It is often better to cut the cash flow if this reduces costs that mean the business is viable: profitable with positive cash flow. There are remedies that can be used if necessary to deal with the crystallised liabilities when a company cannot afford them.
Negotiating terms for informal arrangements with creditors is sensible. It may involve negotiating terms of payment, such as a Time to Pay (TTP) arrangement with HMRC for PAYE or VAT arrears, which have been very effective in helping companies out of insolvency.
Many companies leave it far too late to reach informal arrangements that would have allowed them to terminate contracts before the company finally runs out of money.
But there is a solution that allows companies to terminate contracts and not pay for them immediately on termination. A Company Voluntary Arrangement (CVA) avoids liquidation of the business and closing it down. It allows for paying the contract termination out of profits.

Categories
General Insolvency Liquidation, Pre-Packs & Phoenix Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs Winding Up Petitions

Guide to Insolvent Liquidation and When and How it is Used

Insolvent Liquidation involves a formal process to close a company. It happens when a company is insolvent, which means it does not have enough cash or liquid assets to pay its debts and the directors have concluded that continuing to trade will be detrimental to creditors.
There are four tests (set out in the Insolvency Act 1986) any of which can be used to establish whether a company is insolvent.  The tests don’t necessarily mean that the company will have to close down, although often directors assume that it must.  However, there are remedies that could save the company if at this stage it calls on a licensed insolvency practitioner or business turnaround adviser, who would carry out a review of the accounts, the assets including property, stock and debts and the liabilities. With help from the adviser, the company can develop realistic plans for it to survive and trade out of insolvency.
Once it is decided that the company is insolvent, and cannot be rescued, it should be closed down in an orderly fashion which means via a liquidation process. This involves the company’s assets being turned into cash and used to pay off its debts to creditors.
There are two types of liquidation, one compulsory and one voluntary and both are legal processes.
Voluntary liquidation through a Creditors’ Voluntary Liquidation (CVL) is when the directors of the company themselves conclude that the company can no longer go on trading and should be wound up.
Normally they would engage an insolvency practitioner to help guide the directors through the formal procedure, which involves a board meeting to convene shareholder and creditor meetings.
The nominated liquidator normally sends out notices to shareholders and creditors having obtained their details from the directors and helps directors prepare the necessary formal documentation that is legally required.
The nominated liquidator must be a licensed insolvency practitioner who provides his consent to act which must be available for inspection at the meeting.
If the directors have left consulting too late they can then find themselves facing the court winding up procedure rather than having the option of a CVL.
Compulsory liquidation is triggered by a creditor formally asking the courts to have a company closed down by submitting a Winding Up Petition (WUP. In this case the court decides whether or not to support the petition by ordering that the company be wound up (compulsorily liquidated).
Upon a winding up order being made, an officer called the official receiver is automatically appointed to take control of the company to oversee the process of closing it down.  The official receiver may, if he/she wishes, appoint a liquidator to assist in dealing with recovering and selling any assets.

Categories
Banks, Lenders & Investors General Insolvency Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs

Dealing with the Bank When Considering a Company Voluntary Arrangement

The large number of companies in financial difficulties is swamping the banks and as a result there is a lack of experience in banks when dealing with companies in the process of restructuring.
If a company is subject to a Winding-up Petition (WUP) the bank can be held liable for any funds that are paid out of its bank account once the Petition has been advertised in the London Gazette. As a result banks tend to freeze the accounts of any company with an outstanding WUP as soon as they become aware of it. The only way for a company to free up money in a frozen account is via an application to Court for a Validation Order.
When attempting to save a company where there is no WUP, however, the lack of experience among banks means that in some instances they are behaving as if there were a WUP and this is getting in the way of attempts to restructure because banks do not understand the distinction between the various restructuring tools.
An example of where this is happening is when a Company Voluntary Arrangement (CVA) is being proposed.  The process of agreeing a CVA involves notifying creditors of the intention and allowing time for a meeting to be set up for creditors to approve the CVA proposals. Usually there is a hiatus period of at least three weeks between notification and the meeting, which allows creditors to consider the proposals and make any comments or request adjustments before the meeting.
However, banks’ inexperience of CVAs is leading some of them to freeze company accounts during the hiatus period and this has an adverse effect in that the company is no longer able to trade. While banks generally do not have the right to freeze their clients’ bank accounts unless there is either a WUP, an order by the Court or a breach of contract, they may take precautionary action out of fear when they don’t know what is going on. Concern about fraud can always be used to justify such an action.
It therefore makes sense for a company to talk to its bank beforehand to let them know what’s going on. Where the company is overdrawn clearly the bank is a creditor and should be notified of any restructuring proposals, in particular where there is a CVA.

Categories
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.

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

Guide to Creditors Voluntary Liquidation (CVL) from K2 Business Rescue

Creditors’ Voluntary Liquidation is a process by which the directors of an insolvent company can close it down in an orderly fashion without involving a court procedure. There are four tests of insolvency laid down in the Insolvency Act 1986.
Insolvency does not necessarily mean that a company should be closed down, but depends crucially on whether or not continuing to trade will enable the company to emerge from insolvency and will improve the position for creditors.
If the company does continue to trade, the directors should seek professional advice as they have a legal obligation to act in the best interests of the company’s creditors and if the company eventually does have to be closed down they will need documented proof of this or they risk becoming personally liable for the company’s debts.
The CVL procedure is defined by the 1986 Act and involves a board meeting at which the directors formally agree that the company should cease to trade. The next step is to seek shareholder consent. At least 75% of the shareholders must approve the directors’ proposal and at least 50% must approve the nominated liquidator. The shareholders may disagree and wish to appoint new directors to save the company.
Documents must be prepared including Statutory Information on the company, a history of the business, historical financial information of the company, deficiency account, a statement of affairs and a list of creditors.
A creditors’ meeting is also convened to confirm the nominated liquidator or appoint the creditors’ own nominee, who will need approval by at least 50% of the creditors. All nominated liquidators must be licensed insolvency practitioners who have provided consent to act, which must be available for inspection at the meeting.
The liquidator’s duties include dealing with assets which are normally sold, accessing creditors’ claims and distributing surplus cash to creditors following a strict order of legal priority. They must also investigate the accounts and activities of the company and in particular look at the transactions prior to the company being placed into liquidation. Having done this they report to the Insolvency Service on the conduct of the directors.
A CVL is a very efficient procedure with the liquidator taking over responsibility for dealing with creditors and closing down the company. It also demonstrates that the directors were responsible in carrying out their duties by closing down the company in an orderly manner when they believed it should cease to trade.

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

Directors Could be Storing Up Trouble for Later by Sacrificing Pay and Drawings Now

In the current economic crisis company directors are cutting their drawings and foregoing their salaries in order to save their companies still hoping that the market will recover.
As a result they are retaining costs that their companies cannot afford by sacrificing their personal drawings on the company today.
For how long can, or should, directors sacrifice their income and dividends in order to retain the company’s capacity for growth in the hope the order book fills up?
Once a company’s creditors are affected by a worsening balance sheet then there is a risk that the directors could be held personally liable for the increasing debt if they do not take decisive action to get the situation under control, for example by consulting a business turnaround adviser.
In any event no company can continue in a situation of insolvency for long in the hope of an upturn in the market without taking some measures to try to move it back to profitability.
At the time of writing it is estimated that there are more than 370,000 Time to Pay arrangements between businesses and HM Revenue and Customs (HMRC). Such a huge number suggests that a lot of directors have sacrificed their drawings in order to prop up their company to keep it going in the short-term by deferring payments rather than restructuring the business for long term survival. This highlights the need for a lot of companies to change their business model and significantly cut their costs.
Doing so would benefit a company’s directors, who could then start to pay themselves once the company resumed profitability.
While it may be easy in such circumstances to cut your drawings, pension contributions or health insurance this can only ever be a short term measure. 
Without a proper review of the company or the ability to make profits you may be prejudicing your personal futures.
It is a very rare company that does not need to review its business model from time to time, and it may also be that there is a viable core business buried under the current problems that an objective but supportive turnaround adviser may be able to identify and help the directors to nurture.

Categories
Cash Flow & Forecasting General Insolvency Rescue, Restructuring & Recovery Turnaround

Turnaround Forecasting is About Reality, Not Wishful Thinking

Most forecasting is generally done for lending, fund raising or other investor related purposes and therefore with hope of future growth built into the forecast. Such forecasts show how loans will be repaid and investors will achieve a return on their money. Such forecasts are often more about hope than reality.
On the other hand, a turnaround forecast must be achieved and ideally exceeded and is more oriented towards improving cash flow than making future profits.  Low expectations are set so that the business does better than forecast, especially if the business is looking for support from the bank or additional finance that tends to have expensive penalties for failure. Therefore turnaround forecasting will deal with a level of detail where a turnaround business plan is essential.
So the turnaround forecast is used to show the pre-turnaround business model, and then the costs of implementing the turnaround and then the post-turnaround business model. To illustrate this take the situation of a company recently helped by K2 Business Rescue, that has shrunk and no longer needs two factory units and is looking to consolidate into one to reduce premises costs.
The less expensive but ideal unit needs three-phase electricity installing to operate the heavy equipment that is in the second unit, but the electricity supplier has switched off the power in that unit due to an overdue account. The cost of reinstating the existing supply, however, is similar to the cost of installing the new three-phase supply.
K2’s turnaround forecast showed a significant cash saving if the move was brought forward by investing in the three-phase installation which both cut premises costs and saved the cash that would otherwise have been needed to pay to reinstate electricity as well as install the three-phase. The focus on cash helped make this decision, the profit and loss benefit helped justify it. And the electricity supplier liability was bound in a CVA (company voluntary arrangement).
It challenged the orthodoxy that not spending money is going to save money whereas investing a little now could save a lot later. 
The essential point is to distinguish between short term and medium turn benefits and a turnaround forecast is looking at cash flow in the short and medium term rather. It is dealing in reality rather than hope and incorporated into the medium term is the effects of what fundamental change is being made in the short term.

Categories
Banks, Lenders & Investors Factoring, Invoice Discounting & Asset Finance General Rescue, Restructuring & Recovery Turnaround Winding Up Petitions

A Frozen Bank Account Need Not be the End of a Business

If a bank takes action to freeze a company’s bank account it is an indication that the bank is nervous and under its bank facility terms and conditions has exercised its right to not release funds.
A bank’s behaviour is monitored by its facility people and triggering action to freeze does not imply any expression of judgement or opinion on the business itself.
There are two other circumstances that can trigger a bank account freeze.
The first is when a winding up petition is advertised in the London Gazette, which is a legal requirement before a petition can be heard in the High Court.  In this situation the bank is required to freeze the business account because the bank can be held to be liable for any funds paid out of the account.
A second situation that can trigger a bank account freeze is when there are not sufficient funds in the account, which makes it effectively frozen, even if it hasn’t been done formally by the bank.
It is most likely to happen because the company is not paying money into the account, possibly because its factoring company is not remitting funds to the bank.
A company’s relationship with its bank is aggravated if the company fails to take steps to deal with this situation, putting the bank in the embarrassing position of having to return cheques or direct debits.
Payment returns can also cost a company a great deal of money, adding to the pressure on its cash flow by charging fees but it also causes the bank to more actively monitor the account because the company’s directors are failing to manage it within the facility that has been agreed.
In a situation like this when there are insufficient funds but the bank account is not formally frozen, the directors need to take prompt action, including stopping the release of cheques, cancelling all standing orders and direct debits and taking control of the cash to manage all future payments. This creates a hiatus period during which cash is only released if there are sufficient funds.
During this hiatus period when survival is in jeopardy, directors must manage the company in the best interests of creditors. Payments are only made to meet ongoing costs and those crucial liabilities that need to be paid for to keep the business going.
If, however, the bank account has been formally frozen the directors can only make payments either with the bank’s approval or with an order from the courts.

Categories
General Rescue, Restructuring & Recovery Turnaround

Is Your Business Structure Holding Back Your Success?

The structure of a business is crucial to its success and often it can get in the way of growth.
If a business needs to build another factory, say, then if the funding is not in place to do so that will get in the way of growth. This should be factored into the business model.
Often, in order to correct this kind of issue a business needs to be restructured to give itself the flexibility it might need to survive and grow.
Ideally a regular look at the business structure would be part of the process of continuous improvement to ensure a business is in the best possible shape to meet short term problems,  like an economic downturn and a consequent drop in orders, and to enable it to thrive, grow and expand long term.
Restructuring more often is carried out as a consequence of a business struggling to survive and is one of the tools available to business rescue advisers called in to help a company in difficulties.
An example of what a restructuring adviser can do is the case of a company K2 was involved with that had a break-even point of £3.5 million and whose turnover had declined from £5 million to less than £2.5 million.
In this situation it was clear that, although viable, significant changes were needed. They included closing a factory, getting rid of onerous financial arrangements, terminating some employment contracts and reducing other fixed costs.  The outcome of these actions was to reduce the break-even point to £1.8 million.
A reduction of sales to just under £2.5 million then became a healthy profit rather than a significant loss.
It meant that the unit cost of production was also reduced once it was free of the burden of the finance drain on the equipment.
It might seem that this should have been obvious to those running the company, but it is possible to be too intimately involved in the day to day running of a business, especially one under this kind of stress, and to be unable, therefore to stand back and look at the elements in the structure of the business that are impeding a solution to its changed circumstances.

Categories
Cash Flow & Forecasting General Rescue, Restructuring & Recovery Turnaround

Business Turnaround Process Involves Completing Three Phases

There are essentially three phases to a business turnaround which are the first, emergency phase to try to ensure survival, followed by stabilisation, which includes a thorough look at any fundamental changes needed to achieve a viable business and finally the growth phase to secure its future on solid foundations.
It is important that the main objectives of each phase are achieved before going on to the next one. This needs a clear understanding from all those involved of the objectives of each phase. The focus of activity changes throughout the process from hoarding cash, terminating contracts and limits on spending while trying to survive in the emergency phase is very different to funding marketing activities, new processes, training and other efficiency related initiatives during a stabilisation phase.
The turnaround process differs from the insolvency process in that the aim of turnaround is to achieve a viable company that can survive whereas insolvency is aimed at putting a business in the best shape to sell the assets and liquidate the company. 
The first phase can be likened to triage and is similar to the actions usually carried out by a paramedic at the site of a traffic accident.  The paramedic’s job is to stabilise the situation so that the injured can be moved to the surgeon (if needed) who would carry out the second phase of dealing with the damage.
Company doctors are the business equivalent of the paramedic, taking quick decisions to optimise survival, and the surgeon, focussed on becoming cash positive as quickly as possible by only paying essential suppliers and liabilities.
Once the adviser has had a detailed look at the accounts and the business operation to establish the essentials they can then also put together a proposal for ensuring that there is sufficient cash flow to deal with the immediate situation in a way that will allow the business to continue trading while a strategy is being prepared for the next phase.
It will depend on the state of each individual business what the adviser will suggest to stabilise the situation but there are a number of tools that can be used.
A rescue adviser works as part of the company’s team and even if some of the proposed “medicine” seems unpalatable it is worth keeping in mind at all times that their interest is in helping you to survive and that the big advantage to you is that they are able to bring a new and more dispassionate eye to problems within the company to which you may be too close to be able to identify.

Categories
Business Development & Marketing General Rescue, Restructuring & Recovery Turnaround

Survival sometimes needs Fundamental Change

Any successful business would be expected to be constantly monitoring its activities and modifying them where necessary to improve the efficiency and its various offers.
Continuous business improvement does two things: it optimises existing processes and keeps them optimal by continually updating them. 
But on its own, especially when there are significant challenges in the wider economy, such as the current global economic downturn, continuous improvement may not be enough.
Such unexpected challenges can plunge a business into difficulties where its survival may be at stake and this may mean looking at a fundamental change to the way it operates.
Too often businesses struggling to survive, are characterised by hard work and trying to improve the existing business model before they fail.  Business improvement is all about laying foundations, tweaking the system and improving. 
In my view fundamental change is a more radical look at the whole operation but it also needs care to avoid throwing the baby out with the bathwater by looking hard at the business and what needs to be preserved in order to survive and grow in the future. However, if a business tries to grow before bedding in new foundations following fundamental change it will reinforce problems that had not been sorted out.
For example in a downturn it is an understandable reaction for a business to trim its costs when it may be better to have an in-depth look at its business model and be open to more radical changes.
This can all seem too much when a company’s directors are struggling to keep a business afloat at a difficult time.  It is possible to be too close to the problem, however, and a combination of worry and a sense of urgency is not ideal for taking an objective look at the whole business model.
This is where calling on a business turnaround adviser could make all the difference between success and failure.  The adviser is motivated to help a business succeed and will expect to work with committed managers and staff, but they are not so immersed in the day to day minutiae of the operation and can therefore look at all aspects of the business, identify what is viable, what processes are draining the company and what actions can be taken.

Categories
General HR, Redundancy & Trade Unions Rescue, Restructuring & Recovery Turnaround

Working With Trades Unions to Promote Consensual Turnarounds

I have approached a number of UK trades unions with a view to forging a collaborative approach to dealing with companies in financial difficulties. 
In my view, currently, employees are rarely involved in the decision-making when a company’s survival is threatened, but a successful business turnaround relies very much on the support of its employees.
Unlike formal insolvency procedures, turnarounds are consensual. Leadership, teamwork and communication are key to implementing change. Engaging with staff and involving them in the business introduces accountability and responsibility to a business and is crucial to its success. This is even more so with a turnaround where change is necessary.
Historically turnarounds have been co-ordinated by banks as secured creditors, or by new investors who drive change from a purely financial perspective, oriented towards achieving single stakeholder objectives.  What gets measured, gets managed. 
Many stakeholders have compromised their credibility with employees by this pursuit of short-term objectives of repayment of their investments with little interest in a company’s survival.  
So who is really interested in the employees let alone securing their employment for the future?
The trades unions are still believed to be the true representatives of employees’ interests and while the relationship between management and union representatives has in some instances become polarised this is not helpful when trying to save a fragile business. It is rather like the surgeon fighting with his medical team when a patient’s life hangs in the balance on the operating table.
This new initiative to collaborate with trades unions is based on developing a mutual respect and understanding of each other’s objectives outside the constraints of a turnaround situation.
Union input can be valuable when considering the thorny problem of how to reduce staff costs, where hard choices might have to be made between cutting numbers, wages, hours, or benefits. Their involvement helps remove fear among staff by reassuring them that their interests have been taken into account when developing the turnaround plan.

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General Insolvency Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs

A Business in Difficulty Can Terminate its Property Leases and be Fair to Landlords

In April 2009 the retailer JJB successfully proposed a CVA designed to save 250 stores and 12,000 jobs. It has become the model for subsequent CVAs in the retail sector.
The proposal included closing 140 unprofitable stores but made available a fund of £10m for the landlord creditors of these premises, equating to a payment of approximately six months rent and JJB also made a significant compromise in bearing the substantial costs of the business rates of the unprofitable stores.
No leases were ‘torn up’ by the CVA and it was left to individual landlords to decide whether they wished to accept a surrender, consent to an assignment or forfeit the lease. The landlords as a group recognised that there was a substantial risk that JJB would go into administration, with a loss of their payments of rent or business rates for the closed stores and appreciated being consulted in a transparent process and being offered a genuine compromise.
It often happens that the core of a struggling business is viable and it need not go into administration if it can be restructured to focus on the parts that are profitable.
That can be beneficial to the creditors too, because they will then see some return on what they are owed, as the above example illustrates. In many cases the creditors will include landlords who own the property or properties from which the business is trading.
The forced termination of a lease can only be done by a liquidator following a company’s liquidation. If a company goes into administration and is sold the Administrator can also force termination of those leases no longer required.
However, in the JJB illustration negotiation with the landlords to terminate some leases was made possible by proving to them how much they would receive in the event of a liquidation and showing that the alternative offer set up using a Company Voluntary Arrangement (CVA) was better than liquidation.
Forcing a change in the terms of a lease is extremely difficult and the courts will want to test whether or not a landlord has been treated fairly as a creditor in a CVA, regarded as vertical and horizontal tests.

Categories
Cash Flow & Forecasting Factoring, Invoice Discounting & Asset Finance General Insolvency Rescue, Restructuring & Recovery Turnaround

Cash is King When a Business is Facing Financial Pressure

A company can be said to be insolvent on any one of four tests: the cash flow test, balance sheet test (negative asset value), an unsatisfied judgement (usually a county court judgement) or an outstanding statutory demand.
Of these four, the most crucial is the cash flow test which looks at whether a company can pay its liabilities as and when they fall due where late payment of creditors indicates that a company is suffering cash flow problems.
Running out of cash is the cause of most business failures and it happens chiefly  for three reasons: the bank freezing the company account, a restriction in the company’s ability to draw down funds possibly due to the lack of available credit and thirdly, a sales ledger issue where the company can’t draw down funds from factoring either because invoices have not been logged, or because of declining sales, or overdue or disputed invoices.
If the company’s relationship with its bank is under pressure then the causes and effects must be examined. Banks generally would prefer not to close down businesses and only usually start to get tough if  a business consistently tests its overdraft limit, company cheques cannot be honoured and the business does not communicate or  provide sensible financial information if asked for.
It may be that the company is forced into an onerous factoring arrangement that will benefit the bank but can reduce funds available putting further pressure on cash flow.
If the sales ledger system is not being kept up to date accurately or there are issues with suppliers over invoices then the system needs to be looked at thoroughly and a more robust set-up may need to be put in place.
In terms of cash outflow, there are two main tensions that can result and they are the inability to pay outstanding bills and the inability to pay future bills. In this situation prioritising payments becomes essential.  This is critical if a company has decided it is insolvent because it must act in the best interests of its creditors and needs clear principles for making payments to avoid personal liability.
In these circumstances unless a company is familiar with this sort of situation it would be advisable to take advice from a specialist restructuring adviser, who will have a number of strategies available to help and it may be that at its core there is a viable business waiting to be unlocked.
A cash flow crisis is an alarm bell sounding that should indicate that the business needs to be properly assessed with experienced outside help.

Categories
General HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs Winding Up Petitions

Employing Restructuring Advisers to Help Save Your Company

There are a number of options for companies who find themselves in financial difficulties, but a real challenge is finding someone to help.
It’s made more difficult if the directors/owners take the view that they know their business better than anyone else and infer from this that if they don’t know the solution, then no one else will.
A second issue is trying to solve the situation alone, via a self-help route.  It may be that research has revealed a number of options and in a situation of financial difficulty there is a temptation to latch onto the cheapest or first solution. Indeed, you are likely to think you can’t afford help and as a result persuade yourself that the cheap solution is the right one. It is no surprise that a lot of companies fail having not sought any advice.
In either situation eventually a squeeze on cash flow or pressure from creditors tends to be the catalyst that galvanises action and you are likely to start looking for a solution.
Who do you turn to for help when feeling as boxed in as this?  What’s needed is a business rescue adviser, but how do you go about the process of finding one from among the insolvency, turnaround, accounting and consultancy advisers?  
Carry out a thorough vetting process to confirm they have suitable experience and offer a rescue process rather than selling only one rescue solution. The rescue process should involve a thorough business review to identify a viable business that can emerge from the process, then developing and implementing an operational reorganisation and financial restructuring plan. One aspect of the financial restructuring plan will be how to deal with all the company’s liabilities.
In addition to bank and trade creditors a key creditor is likely to be the HMRC (Her Majesty’s Customs and Excise). Too often companies are advised to enter a Time to Pay arrangement with the HMRC to deal with tax, VAT or PAYE arrears or to enter a Company Voluntary Agreement (CVA) to deal with debts without a realistic assessment of the other demands on the company’s cash.
The first thing to find out, therefore, is whether the adviser is selling something or has a vested interest in the company pursuing a particular solution. Having established they are truly independent, the adviser will conduct a review to establish the core issues.
Support from business rescue advisers with broad commercial experience, not just insolvency, will help manage the process while at the same time helping find a realistic solution.

Categories
General Insolvency Rescue, Restructuring & Recovery Turnaround

Redundancy Costs Due to Staff Reduction Can Leave a Company Insolvent

Companies struggling to survive a severe economic downturn like the current one often consider ways to reduce their overheads.
Generally one of the biggest costs on a business is the payroll and looking to redundancies as a way to reduce them is a common response to a recession.
The reasons used for making employees redundant are generally economic, technical or organisational. This can be that new technology or a new system has made a job unnecessary, the company needs to cut costs or that the business is closing down or moving.
However, making staff redundant is closely regulated and there are rules for the steps that a business must follow if it chooses to go down this route. These can be extremely expensive and if not managed properly could actually leave the company insolvent rather than achieving the desired objective.
Firstly, many companies consult employment specialists to ensure that it complies with the rules and carries out the process correctly and this in itself can involve paying substantial fees.
If an employer is making fewer than 20 employees redundant in one establishment it must consult individually. 
For more than 20 employees being made redundant within a 90-day period it becomes a collective redundancy and the employer has a duty to consult with representatives of the potentially affected employees. If the employer does not consult then the employees can apply to an Employment Tribunal claim for a protective award. This is an award of up to 90 days’ pay.
Rules about employees’ redundancy entitlements are laid down by the Government. The calculation is based on how long the employee has been continuously employed, their age and their weeks of entitlement up to a certain limit (£380 per week current allowance).
Failure to carry out a redundancy operation can also result in employees taking the employer to a Tribunal with a claim of unfair dismissal. In certain circumstances this can also add to the employer’s costs, not only if the Tribunal rules in favour of the employee but also, in some specific circumstances Tribunals now have the power to award costs of up to £10,000. 
A better option for cost reduction before going down the redundancy route could be to call in a business rescue adviser to carry out a thorough review of the business to assess the business viability, look at its accounts and business model, identify any underlying weaknesses and suggest a restructuring plan.

Categories
General HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery Turnaround

Are Government Insolvency Statistics Concealing the Number of Insolvent Companies?

As a consequence of the global financial crisis it is reasonable to assume that the numbers of companies in financial difficulties serious enough to precipitate insolvency would be increasing.
However, figures for the second quarter of this year released by the UK Insolvency Service in August show that there were 2,080 companies in England and Wales that were placed into liquidation.
These are made up of compulsory liquidations and creditors voluntary liquidations and showed a 0.5% increase on the previous quarter but a decrease of 19.1% on the same quarter in 2009.
Compulsory liquidations were down 9.9% on the previous quarter and 21.0% on the corresponding quarter in 2009, while creditor voluntary liquidations were up 5.4% compared with the previous quarter but down 18.3% compared to the same quarter in 2009.
It would be tempting to infer from these figures that the economy is beginning to recover and the pressure on companies is easing.
It is possible, however, that the decline in liquidations is concealing the number of companies in financial difficulties because of a lack of pressure from creditors other than the HMRC (Her Majesty’s Revenue & Customs ), the only active creditor currently seeking winding up orders in the courts.
The Government’s Comprehensive Spending Review in October may reveal the full impact on UK insolvencies.
Even if the UK avoids a double dip recession, there is a risk that the UK economy could develop a twin track economy, with public-sector-dependent industries facing higher levels of financial distress than sectors which are less directly linked to government spending cuts.
Some commentators argue that while Corporate insolvencies are still well below the numbers that would normally be expected at this point in the cycle the slight quarterly rise in the number of liquidations may signal that conditions are starting to turn against UK companies once again.
The lower than expected number of insolvencies is ascribed to a variety of proactive measures, HMRC Time to Pay arrangements and bank forbearance, together buying time for companies to deal with their financial situation. However, this may perhaps have only delayed the inevitable for others that are less robust or those that fail to use the time by taking remedial action to reduce costs or implement other steps that ensures survival.

Categories
General HM Revenue & Customs, VAT & PAYE Rescue, Restructuring & Recovery Turnaround

Managing Tax Payments with Time To Pay Arrangements

There are hundreds of thousands of businesses struggling to meet their financial obligations to the Exchequer.
Businesses, especially smaller enterprises, have been reporting that in the current difficult economic climate they are struggling with cash flow issues as customers and suppliers try to stretch out the time they take to pay invoices. That means they may not have enough liquidity to pay the tax they owe.
While the majority of these tax monies are repaid, the HMRC (Her Majesty’s Revenue & Customs) has reported that 10% of expected revenues are outstanding.
The UK’s Time to Pay (TTP) scheme was introduced in 2008 and allows businesses to pay overdue tax bills over a certain period of time. The scheme is administered by the Businesses Payment Support Service.
According to the HMRC website, arrangements are tailored to the ability of the customer to pay and are typically for a few months although they can be longer.
TTPs lasting longer than a year are only agreed in exceptional cases. Most arrangements involve regular monthly payments being made but in exceptional cases may involve a short period of deferral.
All businesses seeking a TTP of £1m or more need to pay for an Independent Business Review (IBR) to be carried out by an approved firm, normally an insolvency practitioner, and a total of 13 firms have been approved by HMRC to carry out IBRs to establish whether the business can pay back their deferred tax bill.
When the restructuring plans are ready, a business rescue adviser would normally expect to bring in an HMRC approved firm that they already know. The IBR would assess the company’s ability to eventually pay back any tax deferred by HMRC based on a review the proposals prepared by the adviser. These would be prepared with view to demonstrating a viable business.
The most recent statistics issued by HMRC are from March 2010 when it was revealed that 300,000 businesses have entered TTP arrangements since the end of 2008, deferring at least £5.2bn in business taxes. That equates to an average of 4,500 a week.
Concerns have been raised that it is getting tougher to join the scheme, and there have been some predictions that it would eventually have to close. However HMRC has insisted the TTP is still available and the eligibility criteria have not changed. The UK Coalition Government’s Business Secretary Vince Cable, speaking at a recent Institute of Directors event, reinforced this by saying that his department’s instructions to HMRC was to still make it “easy” for applicants to agree TTP arrangements.

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General HM Revenue & Customs, VAT & PAYE Rescue, Restructuring & Recovery Turnaround

Dealing with VAT Arrears and PAYE Arrears

Owing HMRC (Her Majesty’s Revenue & Customs) more than £150,000 for overdue VAT and PAYE when your turnover is less than £3 million is not uncommon in 2010.  
The leniency of HMRC, whose light touch approach to collecting Revenue arrears since the recession began has helped the cash flow of many companies, has also made it easier for them to accrue both VAT and PAYE arrears. But the lack of a recovery has left companies in arrears burdened with debt they can’t easily repay.
Companies in this position have a number of options, but a real challenge is when to do something about it. If ignored, the liability can build up and the underlying business problems can escalate to a point where the company can find it more difficult to recover.
While directors are normally aware of the problems, and in particular of the liability in respect of Revenue arrears, they may not be aware of their options, assuming: “I know my business better than anyone else and if I don’t know the solution, then no one else will.”
Consider three financial solutions when dealing with HMRC arrears. They are immediate payment, a Time to Pay (TTP) arrangement or a Company Voluntary Arrangement (CVA). However, all too often one of these is implemented without considering other issues that perhaps need to be addressed at the same time.
The build up of PAYE arrears and VAT arrears is an indicator that the business is no longer profitable or that it doesn’t have sufficient working capital. The underlying issues can be identified by a business review and preparation of forecasts. It is obvious that an unprofitable company cannot achieve a payment plan while also covering ongoing payments. Less obvious is the restructuring and reorganisation that may be needed to achieve a viable business, one that is profitable with adequate working capital and positive cash flow.
Surviving the pressure of PAYE and VAT arrears generally involves more than just fixing the financial problem.  the underlying issues need to be identified and workable solutions put in place.

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General HM Revenue & Customs, VAT & PAYE Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs Winding Up Petitions

A Winding Up Petition Due to HMRC Arrears Need Not be the End

In early 2010 HMRC (Her Majesty’s Revenue & Customs) served notice for a Winding up Petition against a small trading company. The company had ignored HMRC for three years and had not submitted accounts for three years, not since 2007.  A director attended the winding up hearing in court unrepresented.  He said he was trying to reach agreement with the Revenue and was granted 3 weeks stay of execution.
During the three weeks the company sought our help and experience of turnaround and insolvency, to advise on restructuring options, help develop and implement a rescue plan and also help manage the court process.
After a business review, we concluded that it was possible to buy some time to allow the company to be restructured. We first recommended that a barrister should represent the company at the adjourned hearing.  The barrister successfully sought a six-week adjournment to give time for a rescue plan to be put in place, including proposing a Company Voluntary Arrangement (CVA) for approval at a meeting with creditors. This strategy was achieved and at the third hearing the petition was dismissed.
Winding-up petitions are generally used for two purposes:
They may be used as a final attempt by a legitimate creditor to force the debtor company to respond following previous failed attempts to contact them to try to agree payment terms for the outstanding liability.
They are also used to bully a debtor company into settling an outstanding liability, whether disputed or just to get paid before other creditors.
This second reason is often an abuse of process, where the courts are easily deceived. Procedure in court is often key, especially when experienced creditors who know how to play the court ‘game’ use barristers to deal with innocent directors doing their best to represent the company without expert advice.
Winding up petitions in themselves don’t mean that a company is insolvent but they do indicate underlying issues that have not been addressed. The issues can include a lack of cash to pay bills on time, being unaware of legal process, or a dispute that has been ignored or spilled over into frustration.
The courts are aware of this and tend to be lenient towards directors who ask for time to resolve the petition by granting an adjournment. However, their attitude hardens if, at the adjourned hearing, it is shown that the director has failed to fulfil the undertaking given at the earlier hearing.

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General Insolvency Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs

Company Voluntary Arrangements Offer Scope for Saving Insolvent Companies

A CVA (Company Voluntary Arrangement) is a powerful tool for restructuring the liabilities of an insolvent company, but it does not, in itself, save the company unless the business is viable.
It is an agreement between an insolvent company and its creditors. Therefore a thorough business review is also needed to support the CVA by establishing that the business can be profitable in the future.
The arrangement is a legal agreement that protects a company – essentially giving it some time or a breathing space by preventing creditors from attacking it.
It allows a viable but struggling company to repay some, or all, of its historic debts out of future profits, over a period of time to be agreed, and allows the company’s  directors to stay in control of the company.
CVAs allow a company to improve cash flow quickly, by removing pressure from tax, VAT and PAYE authorities and other creditors while the CVA is prepared. They can also be used to terminate employment contracts, leases, onerous supply contracts with no immediate cash cost.  It is a relatively inexpensive process.
A company can be protected from an aggressive creditor while a CVA is being proposed and constructed. It can stop legal actions like winding up petitions. In case law, providing a creditor has less than 25% of the overall debts of the company then they can be required to consider the proposal even when a winding up petition is issued.
Ultimately it is also a good arrangement for creditors as they retain a customer and receive a dividend on their debts, which might otherwise be written off in the event of liquidation.
However, it is not a do-it-yourself option for a struggling business but should only be entered into with the help and guidance of an experienced business rescue adviser with the tools and knowledge to help turn around struggling companies.

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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.