In this article, we will outline what is a liability order, and the action you need to take should your company receive one.
A liability order is a court demand for you to pay the full amount of business rates you owe, along with additional costs. Before your company has a court liability order submitted against you, a summons will be sent. The summons is the action councils take before sending your firm a liability order. This document details the date and time for your Magistrates hearing, to consider whether you will be issued with a business rates liability order.
As soon as the summons is posted, your company will incur costs of £61. The best option for your company is to pay your business rates in full, but we understand this may be difficult if you are suffering from cash flow problems. However, if you do not pay the total of your business rates, you will be charged a further £14 in council costs. This brings your council costs to pay up to £75, as well as your business rates in full.
The council will state that you do not have to attend the Magistrates court in regards to the summons. However, this will sacrifice your chance to explain your company’s predicament, and a liability order will automatically be issued in your absence.
You can appeal the order. However, it is a very costly and expensive route to take, with a small window of time to do so. Similar to applying to set aside a statutory demand, you have to act fast when it comes to a court liability order.
It is advised that you contact the council before your summons hearing and explain the company’s situation. All effort should be made to negotiate a payment plan. If the council accepts your finance issues, they will cancel the summons, thus stopping the liability order enforcement against your business. You can also dispute the bill if you believe it to be incorrect.
There are several reasons as to why the Magistrates may not submit a court liability order against your company. We have outlined the reasons as follows:
To save time and costs for your business, you should seek urgent advice from the council if you are struggling to pay your business rates. A payment plan is the best course of action for your company. It’s also worth noting that the belief you should be provided a discount, or exemption, on your business rates is not a valid defence for the liability order.
If you did not attend the court and a liability order has been issued, the council gains further powers. Submitting a court liability order allows the council greater powers in collecting the debt your business owes. They can collect the debt through a variety of methods:
If your company is suffering financial issues, seek advice as soon as it becomes apparent. The longer you ignore the problem, the worse it will be for your long-term standing. We have outlined the business funding options for struggling companies with our comprehensive guide. If you have received a summons, we urge you to contact the council immediately and attempt to put a payment plan in place, before the inevitable business rates liability order is issued.
If you would like to speak to someone regarding your business funding issues, you can get in touch with one of our business rescue experts for free, confidential advice.
A client facing the early signs of insolvency could be regularly struggling with:
These signs can quickly escalate into company insolvency. To give your client the best chance of survival, advice should be sought as early as possible to avoid the risks of director’s liability for wrongful trading.
As an established insolvency practice, there are a range of services we can offer for business rescue, as well as insolvency procedures, if necessary.
For businesses struggling to access funding, there are a number of alternative finance options available. We have a comprehensive guide on the various types of business funding for companies that are struggling with the threat of insolvency. The options detailed in the post may help get your client back on track and away from insolvency procedures. Our experts have dealt with many issues regarding cash flow and funding, and have built up relationships with lenders, therefore, we can provide an honest assessment of suitable solutions for your client’s company.
To understand how to fix the issue, you need to know where and when the cash flow issues started. A review enables us to identify where the business has been struggling, and what can be done to prevent further issues.
As your client’s accountant, we can work with you and your knowledge of the company to analyse potential future profit, providing a detailed plan of the business rescue operation.
If the business is heading for company insolvency, the risks can be magnified if your client’s private assets are threatened due to personal guarantees. Many directors or managers may struggle to consider the consequences of personal guarantees, which is where we can help.
Our insolvency practitioners can offer guidance on the pros and cons of personal guarantees, and outline the procedure for you and your client. We’ll provide advice on the possible implications of personal guarantees and support your thoughts on whether it is viable for your client. For more information on personal guarantees, we have an extensive guide available here.
If your client is simply continuing in business, struggling to pay creditors, let alone pay their contractual salary, it may be time to call it a day and consider voluntary liquidation. Not only can this reinvigorate the business if the assets are bought back through the liquidation process, but the director may also be able to recover their outstanding employment entitlements from the national insurance fund. If money is too tight to pay for liquidation, it may be possible to fund the liquidation from a redundancy payment. The monies leftover will go back to the director.
This new freedom from the burden of historic debt can revive a business which overwise has potential and ensure continuity of your client base in the long term.
As part of instructing an insolvency practice, your insolvency professional will communicate with the company’s creditors. The threat of company insolvency can often lead to miscommunication with creditors, and it’s best to let experienced practitioners negotiate with creditors and provide a clear message on the future of the company. This could make all the difference in your client’s case, as the information will be concise, clear and highlight the issues.
Insolvency practitioners have experience in dealing with various business owners, directors and accountants. Therefore, they are able to provide a detailed plan of the best option for the company. At Robson Scott Associates, the team behind Business Rescue Expert, we offer:
If you would like to discuss anything mentioned in the article, or fear your client could be facing company insolvency or a damaging winding up petition, contact one of our business rescue experts directly.
A high court writ (formally known as a writ of control) enables the use of a high court enforcement officer’s powers to visit your business premises. The high court writ allows them to remove goods to the value of the county court judgment, plus the HCEO fees.
Before attending the premises, notice of enforcement must be served 7 clear days (excluding Sundays and Bank Holidays) on the intended address. Only once this period has expired, can enforcement officers attend your premises to take control of goods under the high court writ.
To avoid items being immediately removed, they may take an inventory and pressure you into signing a controlled goods agreement. Subsequently, making a payment plan.
High court enforcement officer’s powers allow them to visit your premises 7 days a week, between 6:00 and 21:00. However, if you run a business that routinely operates outside of these hours, such as a nightclub, an enforcement officer does not need permission to enter your business premises. By giving prior notice, they can force entry to your business premises, due to the high court writ.
Once an enforcement officer has entered your premises, they will first demand payment of the debt. If payment is not forthcoming, high court enforcement officers’ powers allow them to take control of goods. This can be by way of immediate removal of goods, or by binding you to a controlled goods agreement.
Any goods removed from the premises will be sold at auction if the debt remains unsatisfied. Assets that can be removed include:
The enforcement officer must provide 7 days notice before the sale is due to take place. This allows for a final period of time for payment.
That said, you should bear in mind that actual removal of goods and sale at auction is not a frequent occurrence in practice. If the enforcement officer can bind you to a payment agreement, they will seek to go down this route. The removal of goods is a very last resort. Even then, if the sale value of the goods does not exceed the costs of sale, they are unlikely to proceed with removal.
High court enforcement officer’s powers may make you, subsequently, feel powerless. However, they must abide by a strict code of conduct. For example, as intimidating as they may be, enforcement officers cannot be violent in their means of pursuing payment. If they push you out of the way to get into the premises, this is assault. This act should be reported to the police, as well as the enforcement officers’ licensing body.
Your rights are also protected as there are certain items high court enforcement officers may not remove from the premises. This list depends on whether you are a sole trader or a limited company, detailed here. If they attempt to exercise a controlled goods agreement against any third party assets, and you don’t have evidence to hand that this is third party property, you should notify the owner as soon as possible. They may then lodge their claim against the assets. You should also bear in mind that even retention of title agreements class as third-party ownership.
Finally, you also have the right to all the relevant notice periods (as above). High court enforcement officer’s powers don’t extend to the right to attend your premises before the notice of enforcement has expired.
If you’ve received a notice of enforcement of a writ of control and will not be able to pay, this is the best time to seek immediate professional advice.
If a writ of control is issued and there is no valid dispute, you will be liable to pay the HCEO fees. This is on top of the county court judgment debt, court fees and any interest due. These fees increase as execution proceeds. Therefore, if you intend to pay the debt, you should do so as soon as possible.
There are four stages of the enforcement procedure, starting from service of a writ of control and notice of enforcement. These are set out in the chart below, which also sets out the level of HCEO fees and when they take effect.
There are various options to stop high court enforcement officers even before they attend your premises. One such is if you can pay immediately, or over time. If you are unable to pay the county court judgment debt, and other issues are mounting, it may be time to consider an insolvency process, such as liquidation or administration. For further advice on this, you can contact one of our business rescue experts for a free initial consultation.
As mentioned above, this article will outline the process for relief from forfeiture under the terms of the Law of Property Act 1925. Subsequently, it will also share how that will affect your business and what you can do to attempt to overcome the proceedings.
Landlord’s rights give your landlord the power to forfeit your lease under Common Law, if your business falls into commercial rent arrears. The termination of your lease is known as forfeiture. This enables the landlord to enter the property when you are not present to take back control of the premises, most commonly achieved by changing the locks outside working hours. Typically, most landlords will use a certified bailiff to do this.
Forfeiture means that your lease is terminated immediately. You can find out more information on this process with our Landlord’s Rights with Commercial Rent Arrears post. However, there are some circumstances that may see your landlord, and your company, continue on with the lease after forfeiture; this is known as relief from forfeiture.
If you and your landlord agree to continue after forfeiture of commercial lease, this is, effectively, known as reinstating the lease. Usually, this will mean you have succeeded in paying your commercial rent arrears.
Should you look to reinstate your lease, you will have to go through a long process to do so. As the tenant, you must apply to the court for relief under section 146 of the Law of Property Act 1925. This application is to set the forfeiture lease aside, and the court has the discretion to grant relief from forfeiture or withhold, in favour of landlord’s rights.
Courts will generally grant relief if the tenant has remedied the breach or paid compensation, for example. They can also grant relief if they believe your business will be able to pay and stick to the terms of the lease in the future. Your company’s conduct will therefore be a consideration when applying for relief from forfeiture of a commercial lease.
Before you undertake this process, however, you must consider the costs of the application.
The process of relief from forfeiture is costly for a company, especially as you are already suffering from commercial rent arrears and inability to trade without a premises. In most cases, the tenant will have to pay for their costs and legal fees, as well as those of the landlord when applying for relief. Therefore, applying for relief from the courts may not be the most cost-effective process for your company.
There is a six month time limit to seek relief from forfeiture if your landlord has opted for terminating the lease. Where the landlord has obtained an order for possession by the court, you do not have a right to claim. However, if they have not and your landlord has forfeited by re-entry, you do not have a time limit to claim.
The costs of the proceedings could outweigh the benefits of applying. If you are not granted relief, this could pose a further threat to your business, as the business will be without premises. In such cases, an alternative to the situation could be voluntary liquidation.
Creditors voluntary liquidation could be a viable option if you are suffering from commercial rent arrears, and your landlord is looking into terminating the lease. As we have outlined how the process of relief from forfeiture is costly for a tenant, and voluntary liquidation allows you to take control of the situation.
With voluntary liquidation, the company’s director/s choose to end the business and stop trading. By appointing a liquidator, you choose to liquidate all company assets before insolvency is forced on your business; a very real possibility if you have cash flow problems.
Seeking advice in relation to voluntary liquidation will lead you to discuss your concerns with a licenced insolvency practitioner. They will be able to suggest how your current business could be rescued in its current form or by way of a new company buying the assets, potentially via a pre-pack asset sale. You can find more information on the voluntary liquidation procedure with our comprehensive guide.
To discuss your options if you are suffering from commercial rent arrears, or have any questions regarding voluntary liquidation, feel free to contact one of our business rescue experts today.
A Scottish decree and diligence is the civil court route for debt recovery through the local sheriff court. A decree must first be obtained; then there are several diligence options available for a creditor to enforce against the debt against your business. These include:
After a creditor has exhausted the informal methods to pursue you for a debt, they may commence the decree process. This is done by sending a note to the local Sheriff court. The court due is £100, and is recoverable if the final decree is granted, making the process cost-effective. Once an application for a Scottish decree is issued, you have a short period to respond if you do not believe the debt is properly due.
When the sheriff court has granted the decree, it is returned to the applicant, confirming how much money is due and details of how interest should be treated. The creditor must then serve the decree along with a charge for payment. A charge for payment gives you 14 days, known as the induciae, to pay the debt. If the decree debt remains outstanding at the end of the charge for payment period, the creditor may commence diligence against your business through the above methods, which we will now explain.
Arrestment is a diligence process which is effective over assets held by third parties. This prevents the third party of the debtor from disposing of the assets without reference to the creditor. Trade creditors, generally, find this process efficient, as they do not need to serve a charge for payment before commencing the arrestment. However, public bodies, such as councils or HM Revenue & Customs, must first serve a charge for payment before commencing the arrestment process.
In certain circumstances, creditors may commence arrestment in dependance, meaning they can apply for the arrestment before the decree has been finalised. This can only be done if they can prove assets may be dilapidated. Assets which can be subject to arrestment include:
Debtor balances and cash at bank are the most common forms of arrestment, as these are quickly realisable and there is no uncertainty about the value. Where a bank account is arrested, the sum of £494.01 must be left in the account after the deductions. The arrestee has a formal duty to respond to the creditor, confirming whether they have caught any assets. With trade debtors, if the creditor is aware of who your largest clients are, this can be crippling if they are unable to pay you the outstanding balances if the decree balance is large. However, the amount retained by the debtor cannot exceed the amount due to the creditor.
The downside for creditors with arrestment is that the automatic release period is 14 weeks after the date the decree is finalised. This is the point funds will be transferred to the creditor. If your company commences winding up proceedings or other insolvency proceedings shortly after diligence has commenced, the goods arrested over will revert to the estate. Alternatively, if you wish to allow the arrestment and be released from the decree, a voluntary mandate for release of the funds can be given to allow them to be paid ahead of the 14 weeks.
Attachment over goods is a form of diligence, which can be taken against moveable goods at your business premises. Unlike arrestment, attachment over goods can only be executed after a decree has been made final, and a charge for payment has been served and expired. However, an interim attachment can be granted as a provisional diligence.
There are limits to when a Sheriff officer can attend your premises, between 8am and 8pm. If they have commenced attachment, but not finished by 8pm, they must leave your premises at this time. They can also not attend on a Sunday or bank holiday. However, there is an exception that they can attend outside of these hours with a court order. If your business is a bar, they could apply to attend at 11pm, around last orders to maximise what can be uplifted under this and a money attachment, as described below.
Attachment over goods will be carried out by a Sheriff officer from the Sheriff court. The Sheriff officer will enter your premises and make a list of items which will be subject to the attachment. They will report to the Sheriff within 14 days. If the decree balance is outstanding at this time, goods will be uplifted and sold at auction. Any proceeds will first be used to pay the Sheriff’s fees and expenses, with the balance being paid to the creditor. Any items which do not sell will be delivered to the creditor, and they will own the asset.
As the process can escalate quickly, receiving a charge for payment is the time to act and seek independent advice if you are unable to pay the debt. It may be necessary to seek the court liquidation route, or an alternative insolvency procedure if the company debts are escalating.
Money attachment is very similar to attachment of goods, often executed at the same time. A sheriff officer will, again, enter your business premises. If they find any cash on the premises, they can immediately seize this towards the debt. Sheriff officers also have the power to “open shut and locksafe places”. This, essentially, means they can open cash registers and other lock boxes without a court order.
Companies particularly vulnerable to money attachment are retail sites and restaurants. Sheriff officers will aim to attend at the end of the business day, uplifting the full day's takings.
A money attachment also includes any cheques payable to the company. The Sheriff officer will apply for a payment order to release funds to the creditor, enabling them to bank cheques payable to your business. From the date of the attachment, you have 14 days to appeal against the attachment. The Sheriff will retain the monies for this time period. Grounds for appeal include:
Companies particularly vulnerable to money attachment are retail sites and restaurants. Sheriff officers will aim to attend toward the end of the business day and uplift the full day's takings. If the company commences insolvency proceedings before funds have been paid to the creditor, these funds must be paid over the the liquidation or administration estate.
Inhibition is a form of preventative diligence, rather than an active form, such as arrestment or attachment. This can only be employed against your company if it owns any heritable property, i.e. land or buildings. The inhibition restricts the activities you can take in relation to the heritable property and prevents:
It should be noted that inhibitions are registered against the entity and not individual items of heritable property. This can be crippling if you are a property developer, as the inhibition will affect your entire portfolio. Third party purchases are not protected against the inhibition, and any transfer without the inhibition being dealt with are deemed voidable contracts. The inhibition does not allow the creditor to force the sale of the property, and will expire after 5 years and must be renewed.
The Scottish decree and diligence system is a very effective debt collection model and can cripple your business until the balance is settled. If you are receiving multiple threats of these actions, this is often a sign of insolvency and that you should seek professional advice. Contact one of our business rescue experts for advice on how to deal with the situation. If you have already been considering formal insolvency, but are worried about the costs, there are ways these can be kept to a minimum as described here.
The Budget, 2017, has been announced and we are detailing what it means for companies.
Despite all the doom and gloom, the UK economy is, generally, doing well. Economic growth forecasts may have dropped. However, there is no sign of a recession on the horizon. Annual borrowing is forecast to be £8.4bn lower than forecast this year, and it is anticipated there will be a net increase of 600,000 jobs by 2022. With Brexit a serious concern for business, an additional £3bn has been set aside for planning for all eventualities.
As part of the budget 2017, the national living wage will rise to £7.83 per hour, from April 2018. Any employees aged 25 or older will be entitled to this as a minimum. In terms of personal allowances, income tax will not be payable for employees earning less than £11,850. The higher rate tax threshold will not kick in until someone is earning £46,350.
Changes are also to be made meaning no benefit in kind taxes are payable for electric cars charged at work. Could this be the return of the Company car as a feasible benefit? However, if employees need to fly, it may be worth considering scrapping any first-class ticket schemes with air duty frozen for standard class, due to increase in premium tickets and private charters.
There is good news in the budget, 2017, for innovative businesses. Those creating new technologies could be entitled to an even greater R&D tax credit up to 12%. A further £2.3bn has been set aside to cover this. Consideration was also given to adjusting the turnover threshold at which your business must pay VAT. However, this is to remain at £85,000 for the next two years.
Those with large fleets of vans may have been concerned about the increase in vehicle tax, in relation to diesel vehicles. It has been announced this change will only affect cars to reduce the burden on business. The bigger environmental concern from businesses at present is the use of single-use plastic items. A future tax on these items is not coming in as of yet, but appears to be on the horizon in a future budget. Now could be the time to consider alternative packaging.
For those involved in the sale and manufacture of alcoholic beverages, duty on beer wine and spirits is to remain frozen with the budget 2017. However, duty on high strength white cider is to increase dramatically. As anticipated, cigarette prices will continue to increase, spelling bad news for the tobacco industry. This could encourage more and more people to become healthier and quit.
Operating tech companies overseas for tax incentives is also set to become less appealing, with taxes being payable on any royalties claimed in low tax jurisdictions.
In terms of business rates, the changes scheduled for April 2020 have been brought forward to April 2018. This means any business rates increases will rely on the much lower CPI figure, rather than the RPI figure. It has been estimated this will save businesses £2.3bn over the next two years.
At the same time, an uplift on council tax premiums of 100% has been added for empty properties. This measure has been introduced to help renters, and push private rents down, leaving a high cost to holding out for a tenant who will pay the rent they are seeking. This will, of course, cause some concern for landlords and property management companies.
Developers are being pushed to, essentially, get on with building. Compulsory purchase has been streamlined, where land is being held hoping for future market movements, stopping delays in building. Any delays in permitted developments commencing will be investigated with due prejudice. It will also be more attractive for developers to appeal to first time buyers, with stamp duty abolished for any properties worth less than £300,000, and reduced for those worth less than £500,000. It is anticipated these changes will produce 300,000 more homes per year.
While still largely being an austerity budget, there is still investment for new innovations. £500m has been promised in developing new technologies, including 5g mobile networks, improving fibre broadband and artificial intelligence. A further £540m has also been promised to develop electric cars, focused on charging infrastructure and speed. Now is a good time to develop in these areas.
There is good news for the north east following the SSI fallout, with £123 million pledged to redevelop the site. North sea oil and gas are also to be encouraged with additional tax breaks offered to promote further investment.
While there is still a long way to go for the UK economy, there are still significant plans for new and innovative businesses moving forward. If you have any concerns that the budget may adversely affect your business and you may need help, do not hesitate to contact one of our business rescue experts.
Business expenditure can be classed as trading expenditure or capital expenditure. If an item has lasting benefit for the company (such as plant and machinery), then it is typically considered capital expenditure. Capital allowances are forms of tax relief on certain types of capital expenditure. The primary aim of capital allowances is to claim a proportion of the cost of the expenditure back against your company’s taxable income or profits. In turn, this reduces your tax bill and allows you to write off the cost of capital expenditure over time.
Trading or revenue business expenses are items that last for shorter periods. For example, office stationery is a revenue expense; as most day to day accounting items will be. However, capital expenditure, or capital expense, is a more significant item of expenditure, usually benefitting the company over a longer period of time. You would expect the company asset to benefit the company for more than a year for it to be considered capital expenditure.
Capital allowances are available on the fixed contents of your business. As mentioned above, they have to be regarded as a benefit for your company for the tax relief. The UK government states you can claim capital allowances on company assets that are used to keep you in business. The tax relief can refer to allowances for plant and machinery expenditure, equipment and business vehicles, for example. The capital allowances list can also include heating for your company building, as well as lifts, computers, air conditioning; anything that benefits your business over a fixed term.
Annual Investment Allowance enables companies to claim 100% of the cost of plant and machinery for the business, in the year that you buy it. The AIA is an important form of tax relief for all business owners, providing relief at 100% for assets up to £200,000.
However, it is important to note that you can only use your AIA within the first year that you buy the company asset. If you choose not to claim the Annual Investment Allowance in the year that you buy the plant or machinery, you will not be able to claim tax relief the next year. You can not claim AIA for equipment that is leased, that you have previously purchased and moved to your new premises, or items for business entertainment.
The Writing Down Allowance (WDA) refers to tax relief if you have already claimed the full Annual Investment Allowance on items within the first year. WDA is also an alternative to tax relief, should your company assets not qualify for AIA. These assets could include items that you had bought before you claimed the AIA or even items such as cars.
Writing Down Allowances are split into separate groups, depending on the tax relief. They need to be grouped into ‘whole life assets’ - such as heating systems - and ‘short life assets,' including vehicles.
Enhanced capital allowance is another form of capital allowance. The Enhanced Capital Allowance (ECA) was introduced in 2001, to encourage the use of energy-saving plant and machinery, as well as low carbon dioxide emission cars and other similar items.
Qualifying for the ECA provides fantastic tax saving for companies, allowing you to claim 100% on company assets. You can claim the Enhanced Capital Allowance in the first year of the installation.
Research and development tax relief is available to businesses in the science and technology market. You can claim up to 150% on HMRC R&D tax relief.
You can also claim on other capital allowances, such as renovating business premises, extracting minerals, intellectual property, patents and dredging.
A business can make significant savings by understanding what capital allowances are and which purchases qualify for capital allowances.
Dependant on the severity of financial difficulty, a corporation may be able to escape company insolvency and the threat of a winding-up petition. We have outlined possible options for companies that believe they are at the end of their business life.
A CVA, or Company Voluntary Arrangement, is a formal ‘arrangement’ between the company facing difficulties, and their creditors, for the reorganisation of the business debts over a set time. The contractually binding arrangement allows the company to repay creditors only what it can afford, based on what its cash flow allows. The arrangement is in full and final settlement with any outstanding balances being written off, while your interests and charges are frozen with a CVA.
A Company Voluntary Arrangement is often not the most suitable restructuring tool for your business, and they only account for a small amount of processes in the insolvency market. However, if it is chosen, a licensed insolvency practitioner will create a proposal for the creditors, asking them to consider accepting smaller payments as opposed to facing a full write off in liquidation. It’s important to note that 40% of CVA’s fail, so look into all options before considering a CVA.
Administration is a favourable option for businesses which may be turned around. You enter administration with the aid of a licensed insolvency practitioner, who will detail a recovery plan for your company - generating a better return to creditors. Administration also means that any legal action against your company is frozen, leaving your company with space to plan and attempt to deal with debts.
Entering the administration process is considered the best deal for creditors, as funds realised in administration are higher than in liquidation. The moratorium allows the company breathing space to produce a better outcome for the creditors. This procedure can also add credibility to that of the pre-packaged sale of the business, used to shed historic debt which could be holding back the business. More on this insolvency procedure can be found with our Advantages and Disadvantages of Administration article.
Liquidation is the legal process of ending the company. The business will not employ people or continue to trade.
Members’ voluntary liquidation, or MVL for short, refers to the process initiated by solvent companies to close their business. After this is done, the proceeds of the sale are distributed to shareholders. Alternatively, Creditors’ Voluntary Liquidation involves closure of a company that is insolvent but still done so voluntarily. However, the proceeds of this sale are returned to the creditors.
As this is also a formal insolvency process, it must be carried out by a licensed insolvency practitioner, putting in place certain time restrictions and legal obligations for the business. If you are one of the many UK companies that have been issued a winding-up petition or is facing the threat without looking into advice; we have produced a Voluntary Liquidation vs Compulsory Liquidation post to plan your next steps.
A winding-up petition is one of the most damaging threats any business can take. A winding-up petition refers to a creditor actively seeking a court order for winding up of a company. We have more information for any business that may be facing this prospect, with our timeline of a winding-up petition.
The process of administrative receivership, or receivership, is started by a holder of a charge, such as a bank. The administrative receiver (private insolvency practitioner), aims to recover enough money to pay the preferential creditors (employees of the company etc.), as well as the floating charge holder’s debt and their own costs. The court is not typically involved.
We have outlined the differences between Administration and Receivership for those that may not understand both insolvency procedures.
If you believe your company could soon be deemed insolvent, the first thing you must do is get in touch with someone who can outline all of your possible options and aid in the attempt of business recovery. The longer you wait, the more costly it is for the company as well as risking personal liabilities for trading whilst insolvent.
A zombie company is a company which is not productive on the one hand, nor seeking to enter formal insolvency proceedings, such as voluntary liquidation, on the other. Zombie companies will often be burdened by large amounts of historic debt, but are just able to manage existing liabilities. This leaves them effectively in quarantine. The zombie company has no capital for growth and is vulnerable to market changes, leaving it in a never-ending business purgatory.
Zombie companies will generally be in payment agreements with finance providers where they are only making interest payments, but may even struggle to make these. (This was also the demise of zombie banks in 2008, where mortgages were provided at 125% loan to value. They were surviving purely on the interest repayments until cash flow became an issue.)
If a bank or finance provider has identified a potential zombie company, they are likely to be unwilling to take action against the historic debt, as long as they receive interest payments. Likewise, directors may have provided personal guarantees against these debts, and as a result, they may be dead set against triggering these guarantees by entering voluntary liquidation.
Interest rates remaining at historic lows means that zombie companies are in a position to stagnate. With the Bank of England monetary policy meetings threatening to increase interest rates shortly, a number of zombie companies may be fine this month. However, 28 days later, they may find they have a serious problem.
The main effect of zombie companies on the economy is that they weaken economic growth. The Office for Budget Responsibility has blamed low investment by firms and low-interest rates for sustaining some zombie companies - otherwise, those same companies would have entered voluntary liquidation many years ago.
Recently, Lord O’Donnell has said that the economic recovery of the UK has been employment strong as a result of these zombie companies. However, due to the reduced prospects of increasing wages, after having to deal with historic debts, the productivity per worker is in fact much lower.
It may also be the case that some employees, with serious talent, are simply propping up zombie companies. With real opportunities, it is likely that they may be able to produce something more innovative.
The lack of productivity also keeps tax receipts at a lower level than they could otherwise achieve, resulting in continued austerity.
As the growth of the company has stalled and the company is burdened with historic debts, it may be difficult to obtain new funding. Bank finance is likely to be out of the question. However, you may be able to seek:
It may well be that you have already sought to obtain these finance methods, and they are unwilling to provide finance to the existing company. This may be taken as a warning sign that you should consider insolvency advice. Some funders may be more willing to provide finance if the business is bought out of voluntary liquidation and unburdened of its historic debt. Further details of funding available to struggling companies can be found here.
If you think your company might be a zombie company, even a small interest rate rise may leave you feeling like the sky has fallen. While it may be a big step to pull the plug and seek insolvency advice, it may become a relief once the company is dead and buried. The team at business rescue expert provides a full review of the options available to you, including but not limited to:
It is likely that if you have been running a zombie company, there is also a historic debt to you as a director regarding your salary entitlements. You might not be aware that you may be able to make a claim for unpaid employment entitlements from the redundancy payments office.
You should also remember that there is a serious risk if you are trading while insolvent. You could incur personal liabilities if you do not take reasonable steps to deal with the problem. If personal guarantees are of particular concern, there is no need to disappear to a cabin in the woods. Depending on your circumstances, it may be possible to propose an individual voluntary arrangement to satisfy these debts.
One of the notable effects of an increase in interest rates is that it will also be likely to increase the value of the pound. This is because an increase in interest rates demonstrates confidence in the currency, which in turn increases demand, which then increases value.
This will mainly affect your business if you import or export goods to other countries. If you import goods, a strong pound will be good news for your business as you will be able to buy them cheaper. If you export goods a stronger pound will mean they are more expensive for your purchasers in other countries so you may experience a drop in demand. You should prepare for this by focusing on increasing domestic sales if your business model allows for it. This will hopefully counteract the fall in foreign demand.
If your business owns mortgaged property odds are that your mortgage will be on a variable rate, unless it is a relatively new product. Variable rate mortgages tend to follow the Bank of England base rates very closely so if these rise it is likely the interest rate on your mortgage will also rise very quickly in response.
On a mortgage of £200,000 a rise of even 0.5% is an extra £1,000 your business needs to find each year before considering any other costs you may incur. Whilst interest rates are their lowest and unlikely to fall any further, now may be the best time to try and negotiate a fixed rate with your current lender or shop around to try and remortgage the property at a more competitive rate.
An increase in interest rates will generally mean that there is a reduction in bank lending. Whilst it becomes more profitable for a bank to lend money, loans become higher risk due to the higher interest rates attached to them. The criteria to obtain loans, therefore, becomes more stringent than it would be otherwise.
When interest rates rise it will, therefore, become more difficult to obtain finance and will also be more expensive. If you are considering applying for additional funding in the near future it may be worth bringing your plans forward. More information about the funding which may be available for your business can be found here.
Increasing and lowering interest rates is also used as a tool to affect consumer behaviour. When interest rates are lower, consumer spending will generally increase due to poor returns on savings. They will be more likely to make impulse purchases on lower value items.
As interest rates increase consumer spending will generally drop in favour of saving in the short term. However in the long term, with saving being more beneficial, consumers will generally make larger purchases of bigger items which they have made a long term decision to purchase.
This is where your marketing department should be ready to highlight that the product or service you are offering is a necessity and something consumers feel they need rather than a luxury.
Like many other UK businesses, it is likely that you will have a commercial credit card and a business overdraft facility. Whilst it is well known that when interest rates increase as do mortgage rates increase, (as they are the most reactive), it is lesser know that the rates on these other products are also likely to increase shortly after any rate rise. To assess whether you are exposed to this you should review your terms and conditions provided by your lender.
Unfortunately, their are a number of businesses which are currently just surviving at their overdraft limit after bills have been paid and making minimum payments on the commercial credit card. The effect of a rise in interest rates could push these businesses over the edge due to the increased cost of the finance.
If you feel that your business may be adversely affected by an increase in interest rates, now may be the time to do something about it and get a fresh start by contacting one of our business rescue experts.