Bankruptcy is a court-based procedure, with individuals either opting to file for bankruptcy or having it forced upon them if they cannot pay their debts. A trustee in bankruptcy will be appointed, and your assets will be placed in their hands. Their role is then to turn the assets into money to recoup losses for your creditors. In some cases, individual bankruptcy can be a more suitable option as it can be completed in significantly less time than an IVA. The terms of an IVA (a formal agreement with your creditors in which you make affordable payments) may last 5 or 6 years, for example. Through bankruptcy proceedings, however, liabilities are likely to be extinguished within 12 months or sooner. Although the bankruptcy Trustee does have the power to suspend your discharge if you do not cooperate.
Before applying for bankruptcy, a proper and thorough assessment of the situation is required. If any of the below apply to you, we recommend you seek immediate, professional advice:
You can file for bankruptcy on the government website here. However, the procedure is not without fees. Bankruptcy costs include the filing of the petition, which will cost £680. You will not get this money back once the order is made. It’s also important to note that your bank accounts are, generally, frozen, so you will need to prepare and ensure you have enough to cover day-to-day expenses.
If the application is accepted, your money and bank accounts will, subsequently, come under the control of the Official Receiver. Immediately, they will arrange an interview and tell the creditors about the current situation, with a report on your finances. The Official Receiver (OR) will act as the trustee in bankruptcy unless the OR or your creditors seek the appointment of an insolvency practitioner to act as the Trustee.
Most debts you have at the time of filing for bankruptcy are covered, but there are some that are not written off. Those creditors in the list below can still act to regain their money, so you must always have a plan in place to deal with these creditors and potential cash flow issues. The debts include:
It’s critical that you cooperate with the Official Receiver/Trustee at all times as not doing so can result in severe consequences, possibly even an arrest warrant if you do not attend a public examination. The Official Receiver will:
They may send you a questionnaire for extensive details on your personal situation and finances. Similarly, you will be given an appointment for an interview within 10 days of the application being accepted, and you must attend. Alternatively, these interviews can be held over the phone. They can also request you attend a public examination and a creditors meeting. As a minimum, if you do not cooperate with the official receiver, your discharge from bankruptcy will be suspended indefinitely, meaning there is no end to the consequences of bankruptcy upon you.
If your circumstances have changed and improved since the bankruptcy order has been granted, you must tell the trustee in bankruptcy. For example, if you have received an increase in salary, have received a lump sum or claim payout or have even won the lottery - the details must be recorded. Likewise, you should also tell the IP if your salary has decreased, as you may no longer be able to make the repayments. It’s also important to immediately convey any forgotten debts or assets, which can be later included in the bankruptcy order.
Generally, your bankruptcy order will be complete within 12 months. However, in some cases, it may be discharged later than expected - also known as delayed discharge. This can be due to reasons such as not providing all necessary information. After you have completed the procedure, some public records will be automatically removed - including your details from the Insolvency Register. However, you may have to take action to remove others such as your creditors updating your credit file.
A creditor can attempt to file for bankruptcy on your behalf. Before they do so, they must provide beyond reasonable doubt their attempts to contact you for repayment. For instance, they will usually send a statutory demand or submit a court judgement. If you have received the above two legal methods, your next option is to seek debt advice immediately - these are very real threats. You can oppose the bankruptcy order if you believe you do not owe the money.
Alongside the Official Receiver, the creditors can also appoint a Trustee over your estate. Depending on the type of bankruptcy, the Trustee will review the petition, look for any red flags and attempt to maximise the returns for your unsecured creditors.
Your assets may be sold to help pay for your bankruptcy debts. You will have to hand over the assets to the person appointed to oversee your bankruptcy procedure. Either, the official receiver or licensed insolvency practitioner.
Assets you can keep include the likes of tools and vehicles that you may need for your job. Similarly, essential household items. However, these may be at risk if they are worth more than a reasonable replacement. Higher value vehicles, however, may be sold and replaced with a much lower value alternative.
As mentioned above, your bank account will be frozen. All debit and credit cards must be passed over to the Trustee who will take control of your accounts. However, you will, generally, be able to access accounts for essential living expenses.
Bankruptcy is a procedure that should not be taken lightly. There are several factors to consider before making the order:
The most important and critical thing to do at this point is to look for immediate debt advice. Our business rescue experts can provide guidance on the best procedure for your situation and work to resolve your cash flow issues.
Starting up a business requires directors and owners to understand a variety of business functions. One of the most important factors in maintaining SME finance is that of accounting. To ensure your company doesn’t fall into tax arrears, you must make sure all tax payments and returns are complete and delivered on time. Similarly, you will need to produce a realistic budget, detailing previous history (you can use competitor accounts at Companies House as a starting point, if starting completely from scratch) and forecasts for your business. Without a budget, you may fail to make repayments back to suppliers and lenders if you do not have the proper cash flow to do so (as outlined in the budget). Likewise, mistakes when submitting taxes can result in financial penalties, further affecting your startup company.
As such, we recommend seeking the advice of a qualified accountant to ensure your records are filed properly.
During the start up period for your business, a qualified accountant can provide invaluable advice for your business. Similarly, they can assist in making decisions that will maximise your profits. The right accountant will also guide you through the financial section of starting a business and outlining a realistic business plan to ensure your liabilities do not overtake your assets. If that does happen, you risk facing the possibility of company insolvency.
We also recommend speaking to peers within your industry as to the particular sector. For instance, share advice on the peak periods and expenditure.
The correct advice is critical during periods of growth for your company. Your business can benefit from the advice regarding business funding and any finance options that are available if you need to expand on stock etc. In addition, to the financial reports that indicate how your company growth should be handled, they may have further insights into alternative opportunities.
In many cases, a company will face cash flow issues - especially at the beginning of its life. An accountant can help mitigate the problems or identify any methods by which to bring the finances under control.
In the case of insolvency, an accountant will work with the insolvency practitioner to provide details on the financial issues the business has faced, and work to come to a solution that could even result in business rescue.
As mentioned above, an accountant will, likely, take control of your accounts and any finances for your startup business. However, in the very rare case they file the wrong information, you may be seeking further advice. For instance, it’s critical you submit VAT and PAYE on time, or you will incur additional financial penalties - even by only one day. Almost every business owner who suffers this fate will likely attempt to point all liability towards the accountant. However, HMRC may not view it this way.
As part of your director duties, you must ensure the accuracy of all accounts and any business funding. Essentially, the accountant is an agent for your business, but the legal responsibility lies with the director. Therefore, the company will be responsible for any taxes, fees or financial penalties. If this does happen and you fail to make repayments, HMRC can move to close down your company. To rectify this situation, we suggest contacting HMRC immediately to inform them of the situation. In some cases, they may be able to extend the payment deadline or negotiate a time to pay arrangement. More information can be found here.
If your company is in financial difficulty, you should seem immediate insolvency advice. Our insolvency practitioners can work to assess the best finance options for your company. For example, refinancing may be suitable to provide the necessary cash boost for the business.
The input of an insolvency expert can be instrumental in gaining the trust of your bank or any other lenders. Similarly, an IP can provide advice and guidance on personal guarantees in various circumstances, and outline the very real consequences with every guarantee.
Ultimately, you must seek advice for any signs of financial distress. Doing so may also help you to come to an arrangement with your creditors, putting in place realistic monthly repayments and providing you with breathing space before they look to take any legal action against the company, or you personally.
You can speak to our business rescue experts regarding the best route to avoid closure of your company and any other business funding options that may be available.
As mentioned above, a scheme of arrangement can be used for companies in financial trouble, allowing them to reach an agreement with their creditors and shareholders regarding payment of all, or part of their debts. A scheme of arrangement may be used for rescheduling and restructuring debt, for takeovers or even returns of capital. The relevant provisions and scheme of arrangement timetable can be found under Part 26 and 27 of the Companies Act 2006.
If a scheme of arrangement is deemed an option for your company, you will need to begin creditors negotiations. It’s important the company directors are completely transparent and honest about the financial difficulties the business is facing, along with the reasons and the company history.
The court will call a ‘Class Hearing’ - essentially a creditors meeting to establish the class of creditors. For instance, the creditor classes include fixed charge, floating charge, unsecured creditors etc. To ensure the scheme is legally binding, the creditors must agree to the scheme in their classes. They will hold a creditors meeting to vote, with a majority of 75% in favour required for the arrangement to take effect. More information regarding creditor classes can be found here.
The creditors will be made aware of the first creditors meeting when receiving an Explanatory Statement, outlining the proposal and the reasons for doing so. If the required number agrees to the scheme, the court will then hold a ‘Sanction/Fairness Hearing’ to ensure all parties are represented. The scheme will then become effective once a court order has been sent to the Registrar of Companies, with the creditors required to submit a proof of debt form within the first three months.
It’s possible that during the scheme of arrangement timetable, the court can refuse the proposal if deemed unfair for creditors. One notable example of refusal is if the creditors are not classified correctly. Therefore, you must ensure your proposal is clearly outlined, and all information is correct. Further to this, while there is no automatic moratorium unless applied, this procedure can be used as an exit from administration.
As mentioned earlier, this scheme is not part of insolvency legislation, therefore avoiding the publicity involved in such procedures. Other examples of benefits include:
A scheme of arrangement can be used as a way to exit the administration procedure, thus allowing a business to avoid any consequences of entering insolvency. This scheme is most notable for flexibility and selectivity, allowing a company to continue to trade in their market. Similarly, once agreed, the arrangement is legally binding. Therefore, creditors cannot threaten or harass you with further action.
The arrangement also avoids the negative publicity and loss of goodwill compared to an insolvency procedure, meaning suppliers and consumers will still support your business. For directors, it’s also important to note that there is no report on the arrangement under the Company Director Disqualification Act 1986.
Another major advantage to the procedure is that the costs are significantly less than that of administration, liquidation etc. in terms of monetary value and reputation.
Like many other procedures for companies facing financial difficulties, there are certain considerations to look over before submitting a proposal. For instance, unlike administration, there is no moratorium period for a company. The vote threshold for the scheme of arrangement is also high, and requires 75% of creditors to be onboard. If they do agree, you must still go to court and risk the court refusing the arrangement. Due to large involvement from the court, the costs of proposing a scheme of arrangement are much higher than than of a Company Voluntary Arrangement.
Before considering the scheme, we suggest seeking immediate, professional advice. You must be sure the arrangement is most suitable for your company, and you have a profitable future to ensure your creditors do benefit. Likewise, all information regarding your creditors must be present and correct. Our business rescue experts can discuss your business and provide initial free, confidential advice as to your next move.
Overtrading typically occurs when a business grows at a staggering rate. Suddenly, the business requires new resources, such as increased staff, stock and, perhaps, even more office and warehousing space. A shortage of the resources may mean you are unable to deliver on contracts. If you cannot deliver on contracts you will not get paid and may even be liable for a counterclaim for any losses arising from your failure to deliver. This can respectively lead to an inability to pay for company liabilities, thus resulting in tax arrears and a possible breakdown in creditor negotiations.
A lack of a solid business forecast is a cause for concern. If there aren’t any defined objectives for entering a trade, too many opportunities may result in more ‘cash’ in the short term, but a lack of stability in the long term.
Often, seasonal trends can prove costly for businesses and proper forecasts must be put in place to account for this. Company resources at specific periods in the year, or a sudden increase in a particular stock, may need to be dealt with. If your company doesn’t collect the money efficiently, your liabilities may increase. For instance, even a late payment of one day to your corporation tax can incur penalties, and significantly reduce your working capital.
Overtrading is responsible for a large number of company insolvencies in the UK, most notably Carillion. The collapse of Carillion, Britain’s second-largest builder, has been attributed to, amongst other reasons, taking on too many projects. Overreach at Carillion was detected in 2013, when they began to build contracts which were deemed a ‘risk’. To add to the problems, borrowing spiralled out of control to an average of 925 million in 2017. More information can be found on the dissolution of the construction company here.
Carillion is just one example of a company failing to provide a realistic business forecast. The latest insolvency figures for Q1 in 2018 tell a similar tale. The total number of insolvencies in Q1 are at their highest since Q1 in 2014, driven by an increase in creditor voluntary liquidations and, in the case of Carillion, compulsory liquidations.
As a director, you should be aware of the particular signs of overtrading to ensure your business doesn’t follow suit of the likes of Carillion.
A company that repeatedly has to dip into an overdraft and borrow cash regularly is a warning sign. Often, unexpected expenses - such as licensing and software - may be required one month and, without the cash reserves, you could compromise your company’s financial health. It’s also important to note that SMEs may struggle to obtain business credit, so you need alternative methods of finance in place.
Often, we see companies that cut costs and, subsequently, profit margins in an attempt to improve sales. As you reduce your profit margins, you are making it ever difficult to sustain a business - especially in a rapidly changing marketplace. In the long term, you may even hinder your company as you will have to work harder to initially gain sales.
As mentioned above, excessive borrowing will alert your lenders to financial difficulties. Borrowing money to pay invoices and suppliers each month is certainly not sustainable. In some cases, the banks may even ask for a personal guarantee from the directors, thus putting you at risk of any liabilities.
Initially, most suppliers will be happy to provide additional resources to meet demand. However, if you begin to fall behind on payments, they may reduce your stock - further complicating your situation if you are without resources, and suppliers to help. Essentially, your company will lack working capital and the supplies to carry on. If you believe your business is facing this issue, you must seek immediate debt management advice.
Be aware that insolvency occurs when there are insufficient resources to pay debts as they fall due, and the number of liabilities exceeds the assets. Therefore, keeping an eye on cash flow is critical to maintaining a healthy business. You must also ensure that you prepare regular and realistic business forecasts, taking into account historical and competitor records.
Leasing the required company assets may free up some available cash flow, particularly as you are not buying them outright. However you should always consider whether buying second hand equipment at a reduced price would also cover the issue.
Try to find ways to reduce costs that will not affect your ability to deliver your services / contracts.
You could attempt to negotiate new payment terms with your suppliers and creditors, in an attempt to provide your company with breathing space. However, if you habitually offer late payments - you must be aware that your creditors could issue a winding up petition to recoup their losses.
If you already fear you are at the stage of overtrading, it’s worth noting the alternative methods of business finance. Similarly, we suggest seeking immediate advice to ensure you avoid insolvency and, possibly, the closure of your company. Our business rescue experts can discuss your concerns and provide ideas and advice to find a solution for your cash flow issues. Alternatively, we can advise if you are already facing the early signs of insolvency.
As mentioned above, this article will detail the statistics for the industry, as well as the future consequences to be taken into consideration.
The UK insolvency statistics - released each quarter - provide us with insights that are useful for thinking about the issues facing different sectors, and what can be done to combat the number of limited company insolvency procedures. According to the 2017 report, the underlying number of businesses becoming insolvent increased, driven by a large number of creditor voluntary liquidations. While the largest number can be attributed to the administration industry, the accommodation and food service sector accounted for the fourth highest number of liquidations. The other industries accounting for the ‘top 5’ (as it were), most at risk are:
The 2018 insolvency statistics for the first quarter tell a similar tale for insolvency procedures as a whole. The number of insolvencies increased in Q1 to the highest level since Q1 in 2014, with the statistics affected by bulk insolvencies. In total, 4,462 companies entered into insolvency, with 72% due to creditors voluntary liquidations. While the number has increased, the accommodation and food service sector has experienced brief relief, dropping in the list of industries affected by insolvency. However, with for example the recent news of Carluccio’s entering a CVA, feedback would suggest there are still many issues to combat.
The hospitality industry has experienced considerable changes throughout the years. For instance, the number of UK pubs in operation has continued to fall since 2010, with 985 closing their doors in 2017 alone (according to CAMRA). Over the years, the industry has faced issues with the likes of:
However, the industry did experience light relief with the freeze on most alcohol duty, outlined in the Autumn budget in 2017.
Carluccio’s, a famous restaurant chain with over 3,200 employees, has recently revealed plans to save the business. The eatery proposed a company voluntary arrangement to rescue the business. In May 2018, over 91% of their creditors voted in favour of the CVA - a recent procedure being used by many to shed sites that are, currently, making a loss. With these plans, there is talk that Carluccio’s is looking to close more than 30 of its UK restaurants. A group of 34 restaurants are said to be affected by the CVA, with landlords agreeing to cut their rent bills by a third for six months. After the six months, they will close if a reduced rent deal cannot be agreed.
There are many options regarding insolvency advice should you feel your bar or restaurant may be facing cash flow issues. For instance, you could seek an injection of additional finance from alternative lenders. However, if you are struggling with paying your HMRC taxes, a HMRC time to pay arrangement (TTP) may be a suitable option. The TTP arrangement provides an extended time period to pay your tax arrears, and can last anywhere between three to 12 months. More information can be found here.
Alternatively, negotiating a CVA - similar to that of Carluccio’s - can provide your company with time to make single, monthly and affordable repayments to creditors. However, before doing so, you must seek urgent business insolvency advice as a CVA requires the services of an insolvency practitioner (IP). The IP will oversee the CVA, which does allow your limited company to continue trading. Essentially, a CVA does help your business return to profitability, but you must speak to an expert and discuss all insolvency advice options before speaking to your creditors.
The landscape for the hospitality industry has changed dramatically over the years. Similar to the effects of the retail industry, the ability to purchase online has affected the food and beverage sector. For instance, consumers can buy cheaper drinks and actively stay at home. However, the younger generations may be the way forward for those struggling to make the change. For example, 18-24 year olds have listed one of their most popular activities as social media. Therefore, online advertising and a long-term social media strategy may help appeal to more customers. Similarly, friendliness, music and WiFi also play a part in their choice of bar.
If you have noticed any changes in your company and have noticed any of the early signs of insolvency, you can speak to our business rescue experts regarding confidential business insolvency advice.
Whether you are a startup or SME, you will require finance at some point. However, there are several factors to consider about the range of SME funding options:
With that in mind, we’ll discuss the SME finance options below. It’s also important to note that, while traditional banks are still the predominant source of finance, smaller businesses are using a range of alternative methods to gain funding. According to the Small Business Finance Markets 2017/18, peer-to-peer lending increased by a staggering 51%, among others.
Government business funding is available for SMEs. However, obtaining a government grant is a competitive process. Typically, the government grants focus on particular business themes or purposes:
There are also regional grants that support growth and provide small business funding. For instance, your location may improve your eligibility for government business funding. While it can be challenging obtaining the finance, you do not have to pay the money back.
If the above business purposes do not relate to your company, the government also offers support through tax schemes and capital allowances, reducing tax liabilities. You can find more information here.
Venture capital is a form of investment at an early-stage for a business, with great growth potential. Unlike private equity - generally investing in a more mature company - venture capital funding involves investing in a new business, with many not yet making a profit. Aside from the SME funding, obtaining venture capital can also provide valuable expertise and guidance within the specific industry. Similarly, you will have additional resources and connections. However, you must consider that you may lose some control in your business, as the investors will likely want to become involved in the company objectives. Likewise, depending on their stake, you could lose management control.
Working capital is crucial for all businesses - small or large. Without working capital, you cannot purchase stock, pay staff wages or undertake any other essential activities. When it comes to SME finance, working capital loans can meet everyday costs. The specialised loan, unlike larger business loans, is short-term and intended to cover a cash flow issue, or growth. Similar to the above options, there are advantages and disadvantages to a working capital loan. You will have the cash available to deal with any cash flow issues, and can spend it on the assets you would like. You will also keep ownership of the company. However, you will have to repay the loan and, generally, within a much shorter time period to that of a business loan. There is also the chance of a high level of interest, so you must consider all factors.
If your SME is struggling to obtain a business loan, invoice finance may be a suitable alternative. This procedure can be a relatively quick way of accessing funds, using your invoices as assets. There are two types of invoice financing: invoice factoring and invoice discounting. There are differences between both, regarding sales and who is responsible for collecting payment. With invoice discounting, you retain control. On the other hand, invoice factoring involves a factoring company collecting payments. After you raise a customer’s invoice, the finance company will afford your company between 75-90% of the invoice value. While invoice financing does free up time in chasing late payments, you will lose profits on any invoices managed this way. More information can be found here.
Asset finance is an SME funding option, referring to a type of finance used by companies to buy necessary equipment and stock etc. In the case of startup businesses, cash is often tight and asset finance allows you to gain the tools for growth, without paying large, upfront costs. You can spread the cost of the asset over a longer period, regularly paying a charge. However, you cannot claim capital allowances on leased or hired asset if the lease period is less than five years. You may even end up paying more for the asset over a longer period.
Today, there are multiple websites helping to raise SME funding for relatively low cost businesses. Crowdfunding has experienced a boom, due to the likes of Kickstarter, and is an SME finance option. Crowdfunding enables you to set a target fund, over a period of time. However, it could prove difficult to obtain the small business funding without a unique idea, persuasive pitch and long-term plans for growth.
As mentioned above, peer-to-peer lending has experienced a growth of 51% in the past year. Similar to crowdfunding, peer-to-peer lending connects your business with corporates and individuals that want to lend. As the bank has been cut out of the equation, borrowers often receive lower interest rates. However, those individuals or companies are investing in your SME, thus may become heavily involved in the future.
Once you have obtained business finance, you must correctly manage your cash flow to ensure your company survives in the long-term.
Our business rescue experts will be more than happy to provide advice on SME funding options, and will work to find the best possible solution should you suffer from cash flow issues.
GDPR supersedes the 1995 Data Protection Directive. This is viewed as a largely inadequate directive created to regulate the processing of EU citizens’ (data subjects) data, to protect citizens’ fundamental human right to privacy. As the number of companies which hold personal data, and the complexity and volume of data being held (think social media and cloud processing for starters), increases exponentially, the overriding aim of the new legislation is to “protect all EU citizens from privacy and data breaches”.
GDPR applies to all companies “processing the personal data of data subjects residing in the Union, regardless of the company’s location.”
Unlike its earlier incarnation, GDPR is a regulation not a directive. It is a binding legislative act which must be applied in its entirety across the EU. Despite Brexit, this will continue to affect the UK, even after it leaves the EU. Legislation is currently going through parliament to enshrine the provisions in UK law.
The key changes that the new EU data protection regulation has in comparison to the original directive concern:
You can view full details of the key changes here.
The headline information is as follows:
“...organizations in breach of GDPR can be fined up to 4% of annual global turnover or €20 million (whichever is greater). This is the maximum fine that can be imposed for the most serious infringements e.g. not having sufficient customer consent to process data or violating the core of Privacy by Design concepts. There is a tiered approach to fines e.g. a company can be fined 2% for not having their records in order (article 28), not notifying the supervising authority and data subject about a breach or not conducting impact assessment. It is important to note that these rules apply to both controllers and processors -- meaning ‘clouds’ will not be exempt from GDPR enforcement." EU GDPR Portal
First and foremost, administrative fines will be related to the most serious offences or breaches of the regulations. In the first instance, the Information Commissioner’s Office (ICO) has the ability to:
Important note: where GDPR refers to data controllers and processors, this is specifically intended to cover both the entity that is determining the purposes, conditions and means for processing personal data, and also any entity which processes personal data on behalf of the controller, including any software used. Previously, only data controllers could be subject to action. However, under GDPR, both controllers and processors can be subject to action. In summary, your organisation must take full responsibility for all organisational data processing activities, regardless of how those activities are carried out.
Separate to, and/or in addition to the above. However, the supervising authority also has the power to impose administrative fines.
Fines, as outlined in Article 83, should be considered on an individual basis. However, they need to be effective, proportionate and dissuasive. The fines will be subject to a two tiered approach: 1)
Generally speaking, the data protection breaches of controller or processor obligations will be fined within the first tier. Violations of data subjects' rights and freedoms will be subject to second-tier fines.
As mentioned above, the fines will be applied on an individual basis. The general principles for consideration will be:
Were the worst to happen, the way your organisation has approached its responsibilities towards GDPR is likely to play a large part in what, if any action is taken - both before the breach and afterwards.
Privacy by Design is a core concept and legal requirement under GDPR. This data protection regulation requires organisations to protect data subjects’ data from the earliest point, in which systems for processing information are designed and implemented. Obtaining clear consent, only holding and obtaining data which is absolutely necessary. Similarly, respecting subjects’ rights to privacy. This includes the right to access and the right to be forgotten, both key principles which should determine organisational processes and policy.
Where breaches do occur, good organisational behaviours are mitigating factors to help organisations avoid the largest GDPR penalties. For instance: notifying data subjects of the breach, reporting the incident to the regulator and carrying out detailed investigations into how and why the breach occurred. Similarly, conducting impact assessments and undertaking remedial action may help avoid the fines.
If your business has been or is likely to be subject to a fine, or you have concerns about the financial health of your business, contact one of our business rescue experts. We will be happy to offer a free, informal, initial consultation.
Firstly, all charities should have a trustee body that puts in place a long-term strategy. This strategy should cover objectives including (but not limited to) finance, operations and governance. Regular trustee meetings covering financial reports, budgets, accounts and projection should identify any potential risks or signs of insolvency. However, indicators that would suggest your charity may be heading to insolvency would be:
There are basic tests that will enable you to check whether your charity finances indicate potential danger. The cash flow test looks at whether the charity has accessible and sufficient resources to meet liabilities. In simple terms, is the charity able to make payments when they are due?
The balance sheet test looks at the overall finances and position, specifically, whether the charity has enough assets (fixed or current) to meet its liabilities. This test is normally conducted in conjunction with the cash flow test. You can find more information on insolvency tests here.
Effective financial management may help prevent the early stages of insolvency, or help foresee the threat. If identified, however, trustees should take immediate action to rectify the position. The Charity Commission recommends professional advice is taken at the earliest possible stage, to prevent the issuing of a winding up petition and, subsequently, compulsory liquidation. The steps and procedures to deal with the issues will depend on the nature of your charity, and the reasons for the difficulties with your charity finances.
Alternative sources of funding, or launching an emergency appeal, may bring in additional revenue to help avoid charity insolvency. However, you must ensure the additional funds raised are unrestricted to recoup losses for creditors. You could also:
Are there any activities that the charity undertakes that could be discontinued to reduce costs? Is there an an opportunity to merge some or all activities with any other charities of similar purposes? Are there any fixed assets and investments that could be realised to provide additional funds? If you are considering restructuring the charity’s operations, seek advice and support from industry peers as well as insolvency experts.
Administration can be used to give the organisation breathing space. In effect, it can be considered a business rescue process. The procedure is managed by an administrator, appointed to act in the interests of the creditors. Administration can aid in helping a company to survive, in whole or as a part.
Under the terms of the Insolvency Act, charitable companies may be able to enter a company voluntary arrangement (CVA). The contractual agreement sets out payment installments - agreed to by the creditors - that you can afford, based on the charity cash flow. If a CVA is agreed, it also suspends legal action, should a creditor attempt to issue a winding up petition.
Unincorporated associations may be able to obtain an informal arrangement with creditors, outside of the remit of the Insolvency Act. The arrangement would detail repayments that you can afford. However, it’s important to note that this is not legally-binding, an affords less protection than that of a CVA.
As mentioned above, the liquidation process for the charities can differ depending on the structure.
The process of liquidation for a charitable company limited by guarantee is the most similar to that of a limited company. A charitable company limited by guarantee is registered at Companies House, and members determine financial objectives, aims and fundraising. However, unlike a limited company, the charity profits are destined for the purpose of the organisation, rather than distributed to those members.
If a charitable company limited by guarantee becomes insolvent, there are two liquidation processes that can be used. Both creditors voluntary liquidation and compulsory liquidation are options, using the same procedures as that of a limited company. In both cases, an insolvency practitioner (IP) will oversee the process, realise assets and recoup losses for creditors. Staff may also be made redundant and the organisation will be removed from the charity register at Companies House. A recent example of a charity facing compulsory liquidation is that of Kids Company.
This incorporated charity structure is not registered at Companies House. The above liquidation processes are options, with some minor modifications. Almost all cases result in members protected from personal liability for the company debts, as the IP attempts to recoup sufficient funds for creditors.
Unlike the above organisations, charitable trusts are unincorporated entities. As such, the trustees overseeing the objectives and charity finances are responsible for the debts, should the body face insolvency. Typically, the trust deeds will include the procedure for a winding up petition.
Due to the nature of unincorporated associations, the organisation is not treated as a separate legal entity to its members. Therefore, if this type of organisation becomes insolvent, the members are not protected and could be held personally liable for company debts. Formal liquidation procedures are also not available for unincorporated associations.
Charities can continue to operate, but only when great care is exercised. It’s possible that an organisation can continue as a going concern, avoiding the process of winding up. In the short term, charities may have to resort to financing or operate over credit terms. However, directors have a duty to ensure they are not continuing trade if there is no hope of recovery. This is regarded as wrongful trading, and more information on the subject can be found here.
As mentioned earlier, the Charity Commission states you must seek advice immediately if facing the signs of charity insolvency. Doing so may just prevent the worst possible scenario, and allow you to come to an arrangement with creditors. Our business rescue experts can discuss your options and provide a relevant solution.
IVAs, or individual voluntary arrangements, were introduced as an alternative to bankruptcy. As mentioned above, an IVA is a legally-binding contract between an individual and his or her creditors. An IVA is often regarded as the best option for individuals with assets. It provides the necessary breathing space to regain control over finances. Debts that can be dealt with via an IVA include personal loans, credit card debts and other unsecured loans.
As an individual voluntary arrangement is a formal procedure, a licensed insolvency practitioner will oversee the process. The IP will produce the IVA proposal, set out to repay debts over a reasonable period. The IP will then work to negotiate the agreement on your behalf, but you must disclose all financial details. If more than 75% of voting creditors accept the terms, the IVA is legally-binding on you and all of your creditors. You must then begin to make the repayments. It’s important to note that creditors cannot add interest or demand more when an IVA is granted.
The role of the insolvency practitioner will change throughout the IVA process. Initially, the insolvency practitioner will act as an advisor. They will look to establish whether an IVA is indeed the best option for your circumstances before you proceed. They will then assist in the preparation of your IVA proposals.
Once the IVA proposals have been prepared, the insolvency practitioner will prepare their own report to creditors. This will detail what investigations they have carried out to support your proposals, recommending whether or not the proposals should be accepted. At this stage, they are known as the nominee. The nominee will forward their report along with your proposals, and obtain a decision from creditors as to whether the proposal should be approved.
If the IVA proposal is approved, the nominee will become the supervisor. At this point, it is their role to ensure the terms of the IVA are met by all parties. They will also aim to balance the interests of you and your creditors.
While an IVA is considered more flexible than a bankruptcy petition, you will have to pay to set up the procedure. An IVA can only be initiated through an insolvency practitioner, and the IP will charge a fee for doing so. The method for payments will vary with different practitioners. Some may take fees from the monthly payments, and others may ask for costs prior to setting up the IVA. Whilst the advice stage will generally be free, the nominee and supervisor fees will be included in the IVA costs.
If you enter an IVA, you will be placed on the insolvency register. The information also contains your name, address, date of birth and occupation. The insolvency register - which also records bankruptcy orders and other voluntary arrangements in England and Wales - is open to the public. This could affect employees in the financial sector, so you must consider all options before entering into the procedure. However, your entry on the insolvency register will be removed three months after your final payment, once the IVA has finished.
We have touched on the typical length of an IVA, which is to say most IVA’s last for around five to seven years. The exact duration depends on your ability to pay back the monthly installments. For example, if you offer a lump sum to creditors, they can last less than five years. The insolvency practitioner will put forward the number of months in which the procedure will last, offering realistic monthly repayments. Most IVAs will require you to remortgage any property you own. However, if you are unable to do so, creditors will generally expect you to pay for at least an additional 12 months.
Not all individual voluntary arrangements can be granted, as there are certain criteria to meet. You must have sufficient surplus income to put forward a contribution to your creditors proportionate to the level of debt. Before you look into the procedure, we suggest you produce a budget on what you can repay. The insolvency practitioner will also work with you to ensure you are not paying more than you can afford. They will also suggest areas you may need to reduce your spending.
It’s important to consider the IVA pros and cons before initiating the procedure.
An IVA is a formal debt process, but is less extreme than a bankruptcy petition. Filing for bankruptcy is not to be taken lightly, as it removes all financial control and can leave a poor financial reputation. Similarly, bankruptcy petitions can seriously affect your professional status. Many industries are unable to hire those who have previously filed for bankruptcy. The social status regarding an IVA is also seen as less damaging than personal bankruptcy. However, it’s important to note that an insolvency practitioner can initiate bankruptcy proceedings if you fail to keep up repayments.
An IVA offers more flexibility than bankruptcy. It may be possible to keep certain possessions when proposing an IVA. You can also continue to use your bank account when entering an individual voluntary arrangement, whereas your account is likely to be closed when filing bankruptcy.
When you enter a formal debt solution, credit agencies are informed. A note will be made on your credit file and will remain there as long as the IVA lasts. Similarly, you will be placed on the IVA register. As lenders carry out due diligence tests, it’s likely that the IVA will affect your ability to gain credit. Even when the IVA is removed from your record, you may fail to obtain credit. However, there are many lenders specialise in helping those who have been in debt. You can improve your rating with the likes of a ‘credit builder’ card. The same will go for those who are looking to obtain a mortgage after an IVA. You will not be able to do so during the procedure, and may struggle after you have made the repayments.
Unlike bankruptcy, a director does not have to resign or lose their position when entering an IVA. However, some companies may include a provision in their contracts, stating an IVA is grounds for dismissal. Your IVA cannot stop you going on to become a director, unless the company states they do not hire those with an IVA on their record. This is highly unlikely, due to the number of individuals entering the process.
Ultimately, you must seek advice before bankruptcy becomes your only available option. Our licensed insolvency practitioners can work with you to ensure your proposal is realistic, and you can meet all installments, as well as provide the necessary IVA advice.
As mentioned above, there have been several notable examples of companies facing closure. Carillion announced their liquidation in early 2018, quickly becoming the largest insolvency procedure in recent months. Following suit, both Toys R Us and Maplin entered administration procedures. The former initially proposed a CVA, but failed to keep up the creditor payments, thus entering administration. Only several weeks later, New Look announced their plans to close 60 stores, proposing a CVA with financial agreements in place with their creditors. Carpetright and House of Fraser are also companies facing issues with cash flow, and looking for alternative business finance options.
As a creditor, you will have limited access to financial information from your clients. However, there are signs that can provide indications as to a company’s financial health.
These signs act as an early warning, helping to protect your interests.
Poor communication, or even a lack of communication, may provide a strong indication that all is not right. If you cannot speak to senior staff regarding an unpaid bill, you should seek advice - particularly if your clients are no longer taking phone calls or answering emails. If you do get hold of a director, look to see how they respond to your questions. Can they satisfactorily explain any recent changes or problems you have encountered? If not, it could signify a threat to your future trading relationship. You may also need to consider sending invoices on pro-forma terms, as a suitable option for the long-term.
As a result of the above, your clients may dispute invoices for breathing space. Initiating the disputes means they have more time to adjust their cash flow, or locate alternative sources of business funding.
Reputation is critical to business success. A significant loss of reputation often precedes insolvency procedures, as the client struggles to retain their share in the market. Alarm bells should start to ring if the client is losing trust of consumers.
Toys R Us is a recent example of a company facing a loss of reputation with creditors. Toys R Us initially proposed a CVA, with payment installments in place to recoup losses for said creditors. Unfortunately, Toys R Us could not keep up with the repayments, with the CVA failing and the company entering the administration procedure.
Be wary of clients that relaunch and rebrand regularly, under different names. You should ask why they have had to do so. Is the rebrand plastering over the financial issues the original company faced? Take note whether any provisions have been put in place to avoid the same cash flow problems as before. They may have just rebranded in an attempt to improve sales, without a new source of income. Thus, they are likely to face the same issues.
Employees, typically, get a feel for a significant change - such as financial issues or even the possible winding up of the company - before creditors. If there has been a change in staff morale, or the company boasts a high turnaround, you might ask why. Staff can be the difference between success and failure, and a company that doesn’t look after their workforce can indicate trouble.
Senior staff resignations certainly highlight the need for urgent advice. Paired with low staff morale, senior employees leaving the company can be a warning sign of potential financial distress.Often, employees responsible for company finances may resign as they believe this to be the only option, which suggests cash flow problems are at the heart of the staffing issues.
You can use Companies House as a resource, where you might discover if any senior resignations have been made, obtain statutory and annual reports and gain a feel for the cash flow.
If you have spotted any of these signs with your clients, and you are at all concerned that it may affect your company cash flow, don’t hesitate to contact one of our business rescue experts to discuss your business finance options.