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Banks, Lenders & Investors Finance Insolvency Rescue, Restructuring & Recovery Turnaround

Conflict of interests for insolvency practitioners doing restructuring & turnaround work

conflict of interestsWhen a business is either in financial difficulty or heading that way, I would always advise getting expert help and the earlier the better.
Leave it too late, to when the business is formally insolvent, and the opportunity to restructure and survive becomes much more constrained.
But insolvency, whether actual or approaching, is characterised by a cash flow problem and advice doesn’t come cheap.
This is because advisers need in-depth knowledge and experience in a wide variety of disciplines. They include experience of business processes and finances including the ability to analyse accounts, cash flow forecasts as well as know the various legal compliance issues including HR and redundancy, insolvency law and litigation. They also need to be familiar with options for restructuring and negotiating them with stakeholders including banks, shareholders, HMRC, creditors and enforcement officers.
While restructuring and turnaround advisers and insolvency practitioners generally have this knowledge and experience, their approaches are very different.
Insolvency practitioners are appointed by creditors and work for their interests, while restructuring and turnaround advisers are appointed by the company and primarily work for its interests.
When a company is insolvent all board advisers essentially become shadow directors and as such their advice should be in the creditors’ best interests, however this does not mean the company should be liquidated, which is the normal outcome that follows the appointment of an insolvency practitioner.
Consensual restructuring with the approval of creditors should offer them a far better outcome providing the underlying causes of the financial situation are addressed – hence the need for turnaround alongside any financial restructuring.
The crucial difference between the two is that the restructuring and turnaround adviser will have your company’s best interests at heart. Their fees ought to be success based and linked to their ability to save your business and their rates are generally far less than those for insolvency practitioners. Call them in early enough and let them carry out an in-depth investigation of all aspects of your business and they will identify what, if any, parts are unprofitable and should be discontinued as well as ways of restructuring debt that can save the company, albeit in a modified form.
Although a business in difficulty can enlist the services of an insolvency practitioner as an adviser, their focus and experience are more likely to have been on recovering creditors’ money at the earliest opportunity. They may not, therefore, be open to options that could lengthen the time it would take for creditors to be satisfied and their focus is more likely to be on realising the value of your business’ assets and preventing further losses, therefore the likely outcome is liquidating the assets of the company rather than saving it.
While insolvency practitioners claim to do restructuring and turnaround work I believe this is a conflict of interests since they cannot serve two masters: creditors and the company. If they do restructuring and turnaround work, they should not take formal insolvency appointments.
It would be better, therefore, for restructuring and turnaround advisers to be entirely separate from insolvency practitioners.

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

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

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

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

Bankruptcy petition threshold increases

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

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Banks, Lenders & Investors Debt Collection & Credit Management Finance General Insolvency Rescue, Restructuring & Recovery Turnaround

Creditors are losing their appetite for formal insolvencies

The decline in the numbers of formal insolvencies suggests that creditors are realising that they don’t actually solve the problem.
Creditors’ reduced appetite for pulling down companies is directly related to whether or not they are going to get the money they are owed. In many cases insolvent companies have been shown to have very few unencumbered assets available, meaning that there is no money left to pay creditors.
This is a positive for the insolvent company in that it means there is likely to be more scope for restructuring.
Logic would suggest that if creditors are willing to be more patient and to accept a consensual restructuring proposal, they are likely to get a better outcome than via formal insolvency.
Consensual restructuring is a pragmatic approach and relies on reaching agreement to ensure future supply as well as reassuring creditors, who are often key suppliers.
Reaching agreement for new terms and implementing the plan can be difficult when trust has broken down which is why independent third party executives such as company doctors can be valuable.
We would welcome your comments on the viability of consensual restructuring and the reasons for the decline in insolvencies.

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Accounting & Bookkeeping

A chance to get involved in a much-needed review

The terms and conditions governing most financial transactions affect us all in both our business and our personal lives.
A modern, properly transparent and regulated personal property security law, or transactional law, is central to the functioning of an economy, affecting everyone from small businesses, borrowers and finance providers of all types, creditors and debtors, lawyers, insolvency practitioners and lawyers.
According to Professor Louise Gullifer, executive director of the Secured Transaction Law Reform Project, a wide-ranging project investigating English transaction law, the current situation has serious flaws, some of which follow:
It is a complex mixture of case law and a number of statutes, which may guarantee lawyers an income but is opaque to both them and the non-experts it might be affecting.
Current law on fixed and floating charges can affect the cost of credit and the willingness of financial institutions to lend especially to unincorporated small businesses, forcing them into structuring themselves in forms that may not be appropriate to their needs in order to access secured finance.
In the case of insolvency, the lack of an up to date, clear and transparent registration system for secured assets can complicate matters for both creditors and debtors.
Business rescue is often hampered by the emergence of security that is not registered with Companies House or on the Land Register. This relates to a lack of transparency about ownership or control of specific pledge assets that distorts most balance sheets such that corporate solvency and viability is often not clear.
This is a wide-ranging and comprehensive project looking into this and the organisers are inviting as many people as possible to get involved, make comments, or raise concerns.  There’s more on the secured transactions law reform project website: http://securedtransactionslawreformproject.org/

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Banks, Lenders & Investors General Insolvency Liquidation, Pre-Packs & Phoenix Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs

Zombie companies have a number of options for achieving growth

Zombie companies will at some time need to confront three fundamental problems before they can achieve growth: 1. how to fund growth; 2. how to repay debt; and 3. how to service interest when rates rise.
Provided that a zombie company can generate profits on an EBITDA basis (earnings before interest, taxes, depreciation, and amortization), it has a number of options for resolving these problems as a pre-requisite for growth.
Options include negotiating a partial debt write-off, a pre-pack sale via Administration or a Company Voluntary Arrangement (CVA).
From the suppliers’ viewpoint a growing business offers the prospect of increased profits from increased supplies. From the existing lenders’ viewpoint profitable growth means that non-performing debts can be repaid. From a new investor’s viewpoint, new money can be used to fund growth rather than replace existing debt. From the company’s viewpoint growth inspires confidence in the future prospects of the business. 
Given the benefits, it makes sense for zombie companies to get help from restructuring experts who are familiar with these options.

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

Zombies are not dead

We hear a lot about the dead weight of zombie companies and how they should be put out of their misery.
But we take a slightly different view.  Yes a zombie company is regarded as one that is limping along only servicing interest on its debt, unable to fund growth.
However, a zombie status does not mean that a business is necessarily a failure and that the best thing creditors can do is to take the money and run.
Often, the reason a company has reached this point is that it has pursued aggressive growth based on debt during the so-called “good times” pre 2008 but the trading climate since then has changed out of all recognition.
All companies are at the mercy of market forces at all times, but we make the point that it does not necessarily follow that the services or products a business is offering are in themselves a bad idea.
What is needed is for the directors and management to recognise that there is a problem sooner rather than later.
Then they should get in expert help to assess the situation and advise them of their options and if necessary help implement changes to secure the future of their business.
A turnaround advisor is on the company’s side unlike the insolvency practitioner who, if appointed, works for creditors.
The turnaround advisor has an interest in helping the company survive and be prepared, including having adequate finance available, for growth when it comes.

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

Why isn’t more effort made to rescue failing businesses?

It is almost 30 years since legislation in the Insolvency Act 1986 introduced Administrations and Company Voluntary Arrangements (CVAs) as mechanisms intended to help with turning around failing businesses.
This legislation followed the 1982 Cork Report, which recommended procedures for trading out of insolvency.
Despite this and further legislation, however, there has not been any noticeable increase in rescue attempts where Insolvency Practitioners have been brought into companies in distress.
We explore why this should be and whether anything can be done to encourage more banks and IPs to embrace the rescue culture so that more businesses can be saved.
To see the full article please visit: Insolvency Today at http://bit.ly/17TpoJj or join the lively Insolvency Today LinkedIn discussion here http://linkd.in/1cBA6vD

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Banks, Lenders & Investors Cash Flow & Forecasting General Insolvency Rescue, Restructuring & Recovery

Business pain in a recovering economy

There are two things happening that suggest that signs of economic recovery are believable, rather than government spin.
The first is the narrowing of the trade gap with a significant growth in exports in June and the second is a 10% rise in business insolvencies (compulsory and creditors’ voluntary insolvencies) in the quarter from April to June 2013 (3,978) compared with January to March (3,601).  However, there were actually slightly fewer insolvencies this year when compared with the same quarter in 2012.
Insolvencies generally do increase when an economy is coming out of recession because creditors normally start to lose patience and begin recovering debt when they can see signs of a rising market.
This time, however, I believe something else is going on.
Firstly, for more than two years now businesses have been focusing on paying down debt so why should creditors suddenly lose patience? Secondly, it may be that HMRC is taking a tougher line on collection of arrears now.
But most importantly now that the owners and directors of businesses can see the future more clearly, and there is greater optimism around, they are starting to restructure their businesses because clearly any future growth is not going to be fuelled by business lending.
It is perhaps no bad thing that growth is likely to be slow and steady and will be achieved by businesses ensuring they have enough working capital, by imposing tough payment terms on customers and suppliers and by everyone in the supply chain working together.
The worrying thing is that in other circles there is still too much reliance on a consumer-led recovery and that exports to non-EU countries were lower, playing no part in the narrowing of the trade gap.

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

Latest insolvency stats suggest Zombie companies are still hanging on

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

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Banks, Lenders & Investors Cash Flow & Forecasting General HM Revenue & Customs, VAT & PAYE Insolvency Interim Management & Executive Support Liquidation, Pre-Packs & Phoenix Rescue, Restructuring & Recovery Voluntary Arrangements - CVAs

Many companies for sale turn out to be insolvent

Many companies are being listed for sale through brokers with high price tags based on very tenuous valuations, where the owners have been deceived into thinking they will be paid a huge amount for their equity.
However, on closer inspection it turns out that many of them have a Time to Pay arrangement with HM Revenue and Customs or are in arrears with the Revenue and are stretching their trade creditors. All too often they are insolvent but don’t realise it. 
This over indebtedness is becoming a serious concern among potential investors because often the company they want to buy is operationally a great business and for trade buyers a perfect fit with their existing businesses. The problem for investors is how to protect their own interests and avoid contamination.
Very often, even experienced executives lack the knowledge and methodologies for assessing a company they want to buy, let alone knowing how to sort out the indebtedness once due diligence has revealed its extent.
In my view, potential investors can work with incumbent directors to reach agreement with creditors that protects all parties by enhancing the prospect of a return to sellers and avoiding cross contamination.
One method I use is an investment, conditional on approval of a CVA by creditors thus leaving finance agreements and any liabilities in the target company. It also allows creditors’ issues to be addressed where they are not normally consulted in a pre-pack. For the investor, this can be structured to give them security and control if they so wish.
As a rescue specialist I would advise owners trying to sell a business in difficulty to employ their own turnaround advisers before putting the business on the market.

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

Companies are failing to manage Debt Collection and Credit terms

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

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

A Significant Increase in Winding Up Petitions

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

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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.