During our 22 years of assisting companies we have experienced three downturns in economy. The latest of course is the current Covid 19 crisis .
The provision of government loans and furlough assistance will need to be addressed when the time comes to repay the loans.
For most companies income has been drastically reduced but outgoings commitments still need to be honoured.
Advice for companies/directors
Directors must monitor their Sales Ledger and be mindful of how much they can afford to lose before it affects their Balance Sheet. A £50,000 loss against a gross profit of 10% means turnover would have to increase by £500,000 to retrieve losses. Not easy in these turbulent times.
Should a Creditor Petition for the Liquidation of a Company or, the Company file on their own behalf, will result in the intervention by the Official Receivers Office. The Liquidator has a duty to inspect and investigate the affairs of the Company and report any offence committed under the 1986 Insolvency Act & Company Directors Disqualification Act 1986.
Directors must also be mindful over new ruling introduced on the 01st October 2015. If it is proven that the demise of the company was brought about by the negligence of the directors creditors can now take out a private prosecution for compensation. On the 1st December 2020 HMRC became preferred creditors where paye , vat and CIS taxes have been collected but not paid over to HMRC.
TWO VERY IMPORTANT QUESTIONS TO BE ADDRESSED.
Can the Company pay its accounts as and when they fall due? (Cashflow Test)
Would liquidated assets be sufficient to pay liabilities in a liquidation? (Balance Sheet Test)
Should the answer be NO to either questions, this is the point at which a Company has established it is insolvent. To continue to obtain credit is “Wrongful Trading”. Directors need to be aware that They are jointly and severally responsible for the debts and are unable to claim protection under the Ltd liability status. Sections 213 & 214 Insolvency Act 1986. Wrongful and Fraudulent trading.
Before a Creditor can present a Winding Up Petition, the outstanding debt must be at least £750 for Ltd companies and the newly introduced level of £5000 for sole traders and individuals. A statutory demand is no longer required to be sent to Ltd companies. This has been replaced by sending a 'Letter Of Intent' which would only need to offer 72 hours notice of intention to present a 'Winding up order' There is a judicial process that has to be followed and by obtaining an order from the Courts to stand down litigation in process, can give the time to defend.
Directors that have Personal Guarantees pledged against Company overdrafts must look at their options when the Company’s future is not secure. This must be done before the bank exercises their right to litigate to obtain a Charging Order against a Directors property.
WHAT OPTIONS ARE AVAILABLE FOR A STRICKEN COMPANY ?
A COMPANY VOLUNTARY ARRANGEMENT.
A “Statement of Affairs” is produced indicating “Assets & Liabilities” and “Income & Expenditure” This is circulated to all creditors who will have an opportunity to vote for or against the proposal. An affordable monthly amount is payable into an account on behalf of the Creditors and is supervised by one of our professional Insolvency Practitioners.
Unless a 100% dividend is on offer, the duration of the arrangement will be for 5 years. For an application to be successful, the overall amount to be received must be greater than would be available via a Liquidation. It is normal to offer at least 40% of the liabilities. ( indicated on the Income & Expenditure forecast ). However it is basically what the creditors are prepared to accept.
The advantages of a Company Voluntary Arrangement are beneficial to all concerned. Creditors will receive more monies than they would available in a liquidation. The Debtor is given the time to trade through the problem without the fear of litigation. The Directors continue to control their Company.