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

Independent insolvency advice

An independent adviser can help a business’ directors by identifying what is essential to and special about their business and its future.
If a company is insolvent and its directors are considering their options then an independent adviser is vital, as we argued in articles in Business Review in today’s City A.M. and in last Sunday’s Telegraph.
Directors need someone who can assess whether and how their company can be saved, and whether it is via a turnaround or transformation. This is different from advice on what is in the bank’s best interests.
Also, as Tyrone Courtman, of PKF Cooper Parry, points out in the same article, directors need guidance from someone who is not subject to conflicting interests.
Do directors need their own independent advisor when a bank introduces its advisors?
See article page 8: Transforming Business Fortunes in Business Reporter

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General Insolvency Rescue, Restructuring & Recovery Turnaround

Bosses don’t always know best

It is fantasy for directors to think that they can keep things under wraps when their company is in difficulties.
Too often they will engage in secret meetings in the belief that it is important to keep employees in ignorance while they decide on the way forward.
At one company where I was called in to advise, the directors were having secret meetings and believing their staff knew nothing.  But late one night, I happened to inspect the loos, something I often do to gauge when a company is in trouble.  If the ladies’ is less than clean or tidy it can often be an indication of disaffected or unhappy employees.  In this case, however, the facilities were clean enough but I could hear a phone ringing.
Further inspection revealed that the ringing phone was in the boardroom right next door with just a thin wall in between.
It is wise for directors to remember that not only do employees generally keep themselves informed of their rights for their own protection.
They also often have good instincts and sense when their company is not doing well.  In this case, it would have been easy enough if they had concerns to listen in from the ladies’ to confirm their worries.

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

The proposed revisions to SIP 3 do not adequately address the issue of IPs being both poacher and gamekeeper

A CVA (Company Voluntary Arrangement) is an agreement that allows an insolvent company to survive with the consent of 75% of unsecured creditors to reschedule and possibly write down debt to a level that is affordable.
As such it can be a useful vehicle for both creditors and the business concerned, offering the creditors the chance of a better return on their money than they would perhaps expect from the company being wound up.
A CVA essentially involves a proposal to creditors by the company directors, sponsorship of the proposal by an Insolvency Practitioner (IP) as Nominee, and upon approval monitoring by an IP as Supervisor. The preparation of the proposal is often done by or at least with the assistance of an Adviser who has experience of CVAs.
There are a number of issues with IPs drafting CVA proposals which may be the reason that so many fail, approximately 70% I am given to understand. One major issue is the lack of fundamental change to effect a turnaround of the company. This is understandable given that IPs can rarely justify their hourly rate approach to charging for sorting out the causal factors that contributed to the insolvency. 
Another issue is the inherent conflict of interests between the Adviser who acts on behalf of the company, and the Supervisor who represents creditors. The Adviser drafts the terms which include a proposed basis for the Supervisor’s fees and also whether the Supervisor benefits from a failure of the CVA. I have seen examples of uncapped Supervisors’ fees being far greater than estimated, leaving insufficient funds to pay a fixed percentage dividend to creditors such that the CVA failed, despite the contributions being paid into the CVA as projected in the proposal as drafted by the same IP as Adviser.
The above reasons alone are sufficient to challenge the revised proposals to Statement of Insolvency Practice 3 as set out in SIP 3.2.
I would suggest that an IP can be either an Adviser or Supervisor, but never both for the same company.

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

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

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

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General Insolvency 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.