What is a deficiency account?
Prior to a company entering voluntary liquidation, alongside the statement of affairs, a pack of explanatory information will also be provided to creditors. This information will include a reconciliation of the position between the last set of published accounts and the statement of affairs, known as the deficiency account. Here we will look at how the deficiency account can be interpreted and how it can be used to explore whether wrongful trading has taken place on the part of the director.
What can be interpreted from the deficiency account?
It should be noted that a deficiency account is only prepared when a company is to enter an insolvent voluntary liquidation. An example of a deficiency account can be found below.
ESTIMATED DEFICIENCY ACCOUNT
for the period from 31 March 2017 to 02 October 2018
|Profit and Loss Account Balance at 31 March 2017||-449,823|
|Exceptional losses incurred or amounts written off since the date of the last accounts: –||-4,044|
Pay in Lieu of Notice
Termination of Contract
|Amounts written off for the purposes of the Estimated Statement of Affairs: –|
|ESTIMATED TRADING LOSS FOR THE PERIOD 31 MARCH 2017 TO 02 OCTOBER 2018||-264,952|
|DEFICIENCY AS PER ESTIMATED STATEMENT OF AFFAIRS||-1,020,095|
As can be seen from the above example, the account starts from the last set of accounts, which in this case shows the business was already trading at a loss around 18 months before the company started the voluntary liquidation procedure. From this figure, deductions are made to take into account any assets that have been written off or sold for less than book value since the last set of accounts.
Once the initial deduction has been made, items which cause a loss to the company as a direct result of the insolvency of the company are listed. As these items arise purely due to the insolvency, they are specifically accounted for in showing the difference between the last accounts and statement of affairs. Some examples appear in the account above, however, this can include:
- Monies due to employees for failure to give notice and as a result of redundancy.
- Termination charges under a lease agreement or factoring agreement.
- Consequential liabilities for breach of a contract.
The final adjustment on the deficiency account is the difference between the book value for the assets of the company and the estimated to realise value in the statement of affairs. Where a company enters voluntary liquidation, unless a sale of the business can be achieved, it is likely assets will be sold on a break up basis which will reduce their value.
Estimated trading loss and trading whilst insolvent
The final figure discussed in the deficiency account is the estimated trading loss for the period between the last accounts and the statement of affairs. When all other items have been covered off as above, it must be assumed that the remaining difference between the statement of affairs position and the last accounts must be a trading loss. The size of this trading loss is telling as to the state of the business.
If the last accounts show that the company has previously carried significant losses, potentially making it insolvent, the estimated trading losses in the deficiency account can then reflect the additional losses to creditors since the company became insolvent. This is however a very basic view of the test for the this and many other variables must be taken into account, including establishing when was the point of no return and what actions were taken by the board to support the company at the time.
If a director cannot demonstrate they have taken steps to wind up their company, when they have become aware that it is insolvent with no prospect of recovery, they may be held liable for wrongful trading, requiring them to contribute personally to the assets of the insolvent company. If a director can show they took every step to try and mitigate losses to creditors, including introducing their own funds to the business, then their liability may be reduced or extinguished.
If you are concerned that your business is facing financial difficulties and find you are unable to pay creditors on time or at all, taking early advice from our business rescue experts on the next steps for your business could be the responsible action to take, and will help you avoid becoming personally liable for company debts. Please feel free to contact one of our business rescue experts and we will be happy to provide a free, informal initial consultation.