Description
This booklet is divided into three sections.
Copyright © 2002 R3 Association of Business Recovery Professionals
THE OSTRICH’S
GUIDE TO
BUSINESS SURVIVAL
Published by R3 (2002)
Copyright © 2002 R3 Association of Business Recovery Professionals
SECTION ONE
FAILURE AND RESCUE
Can financial crisis be averted? Are real business rescues possible? How
can you help yourself and other people survive the tough times in business?
This booklet is divided into three sections. This, the first section, describes the
rescue culture in Britain today. It looks at the facts behind business rescue
and describes how a philosophy of enlightened self-interest can help you and
the companies you do business with overcome financial crisis.
The second section helps you deal with customers whose financial problems
could affect your own financial health. The third and last section aims to help
you understand the steps you can take if financial crisis ever knocks on your
company’s door. We hope you never need it.
Copyright © 2002 R3 Association of Business Recovery Professionals
ABOUT THE BOOKLET
What’s the Problem
In the five years from 1991, an average of 23,294 businesses failed every
year. Our research shows that, if you have a customer that goes bust, you will
be lucky to get back more than 10p in the pound on any outstanding debts.
How many bad debts like that could your business cope with, before it too
became an insolvency statistic? And, if your business were to go bust, what
would happen to you? Would you lose your job? Would your house go to pay
the business’s debts? Could you be forced into personal bankruptcy? Could
your inaction lead to disqualification as a director? Might you find yourself
facing fines or even prison? Worst of all – would your relationships with those
near and dear to you survive the failure of your business?
Sadly, too many businesses fail because directors seem to believe it can
never happen to them. It can – many businesses find themselves in an
unexpected crisis. Hard choices may need to be made. But, if symptoms were
recognised early enough, many more businesses would find themselves in the
recovery ward – not the mortuary.
You may never face these problems. However, reading this booklet should
ensure you recognise the signs of crisis, whether it affects your business or
that of a client or supplier. We also hope that it will help you to act decisively
and appropriately, should the need arise.
Copyright © 2002 R3 Association of Business Recovery Professionals
Insolvency Definitions
A company is insolvent if:
- it is unable to pay its debts when they fall due: the value of assets is less than
the liabilities.
A NEW APPROACH
Be prepared
The majority of business insolvencies could have been prevented by early
management action. In many cases, managers just do not have the
information they need to recognise a crisis. The worst managers just ignore
the warning signs. Thinking the unthinkable might just make the difference
between weathering the storm and sinking without trace.
Who’s insolvent?
Cash is king when it comes to avoiding insolvency. Companies are often
plunged into failure because a creditor asks for money and cannot be paid.
You may be on target to make a profit at the end of the year, but, if you cannot
pay the tax man, the bank, or a big trade creditor when you should, you are
insolvent and your business may be wound up.
Businesses whose asset base has been worn down over time are often more
difficult to rescue than those that are merely strapped for cash.
It is not just current owings that determine whether you are technically
insolvent. Liabilities that only normally arise if the company stops trading or
goes bust are also taken into account. These include items like redundancy
payments and penalties for non-completion of contracts.
It’s up to every director to be aware of the company’s financial position and to
take action if insolvency is likely. The legal penalties for failure to act can be
harsh. Added to which, there is the waste of hard graft, hope and life that is
bound up in every company failure.
Tight financial management, good communication with creditors and a
willingness to ask for advice early would see far fewer businesses go to the
wall.
Copyright © 2002 R3 Association of Business Recovery Professionals
Successful Rescues – The Ground Rules
- consider supporting your customer, do not just turn off the lifeline of your orders
to your customer if this means the source of their income (and thus your
income) is restricted:
- be flexible with your debtors but don’t extend your exposure or allow endless
extensions of credit if they continue to default;
- renegotiate or pay your own suppliers on time;
- communicate with your bankers, suppliers and advisers, do not leave them in
the dark;
- take advice from a licensed insolvency practitioner if a problem persists for your
company or a customer.
What is The Rescue Culture?
Historically, British insolvency law and practice has always put the interests of
creditors first. This objective is often compatible with business rescue: a ‘going
concern’, revived or sold on, will almost always produce more for creditors
than one that is closed down and whose assets are sold off at auction. R3
research into the ‘intensive care’ work done by licensed insolvency
practitioners shows that an arrangement with creditors (or even a sale of a
business as a going concern) is likely to produce more than a liquidation or
fire sale.
Where informal rescues turn into formal insolvency, creditors get a great deal
less than when rescue is achieved. In 59 per cent of formal insolvencies,
returns of less than 10p in the pound were likely to be achieved. Returns of
more than 50p in the pound were likely in only 9 per cent of cases. In rescues,
the returns to creditors are considerably better: in 70 per cent of cases
creditors got every penny they were due (even if they had to compromise and
accept some jam tomorrow). Liability write-offs higher than 75 per cent (i.e. a
return to creditors of less than 25 per cent), were reported in just one per cent
of cases.
Rescues can only work where creditors are convinced they will get a larger
return than would be achieved through insolvency. However, creditors must
be prepared to compromise too.
It is easy to place blame on the company in difficulty, but the rescue culture is
based on us all having an active role in identifying and solving problems
without destroying our own position. Licensed insolvency practitioners can
assist – with or without the aid of formal insolvency procedures.
Copyright © 2002 R3 Association of Business Recovery Professionals
CONTRARY TO THE VIEW OF MANY BUSINESS PEOPLE, THE BANKS ARE
VERY RELUCTANT TO FORCE BUSINESSES INTO INSOLVENCY
Rescue Facts
- 98,000 jobs saved in 1995-6, 800,000 jobs saved between 1990-96:
- 1600 – 1900 informal company rescues in 1996:
- Receiverships – 50 per cent rescued:
- CVAs – 75 per cent rescued.
How Successful Is The Rescue Culture
In 1995-1996, insolvency practitioners rescued around 50 jobs for each
member of the profession – about 98,000 in total. This, in a year when the
economy was growing and business insolvencies had fallen far below
recessionary levels.
Outside formal insolvencies, the intensive care process rescues many
businesses and saves thousands of jobs, largely as a result of the banks’
willingness to play an active part in allowing businesses to be reconstructed,
rather than just cutting their losses. Contrary to the view of many business
people, the banks are very reluctant to force businesses into insolvency and
will be patient and constructive if they are kept informed and presented with a
viable rescue plan.
However, companies still continue to fail in significant numbers. In 1995 – 96
companies were being liquidated at a rate of around 3,500 per quarter. This is
a far cry from the dark days of the recession – in 1992 liquidations reached a
peak of 6,200 in three months. Some of these were failures which no one
could have prevented. But, management failure is a major contributory factor
in the majority of all insolvencies.
Copyright © 2002 R3 Association of Business Recovery Professionals
A Surprisingly Common Story
The morning post includes a notice that a long-standing customer is insolvent, or a
phone call chasing an overdue account is answered with details of the licensed
insolvency practitioner who is now dealing with the company’s affairs. This is the
first you have heard of any problem!
Questions are asked immediately. Why did the salesman allow them further credit
when the account was overdue? Why didn’t the credit controller put the account on
stop? Are we going to get any more money?
Answering these questions may help you learn from the experience. But,
recriminations are useless – and you have passed the point where you can have
any real influence on when and if you get paid.
Be careful you don’t get the wrong answers too. If you ask what went wrong and get
told the following (usually with a shrug of the shoulders) you can be sure your
company has no real strategy for minimising bad debt problems:
- In the commercial world failure is bound to happen.
- We take account of bad debts in our profit margins.
- We were just unlucky.
Too few people really understand the implications of insolvency and the simple
steps that can be taken to avoid some of the risks of other people’s business failure.
SECTION TWO
THE EFFECTIVE CREDITOR
When do you get tough with someone who owes you money? When should
you believe the hard luck stories and help out?
This section aims to help you deal with customers whose financial crisis
could hurt your business – perhaps fatally. You will find practical steps you
can take to reduce the risk of a bad debt to the minimum.
This section also gives advice on dealing with the terminally ill customer and
helps you make the choice between tough and tender. If the worst happens,
and your customer goes bust, this section outlines your rights and how to
exercise them.
Copyright © 2002 R3 Association of Business Recovery Professionals
WHEN YOU ARE OWED MONEY
MINIMISING THE IMPACT ON YOUR BUSINESS OF OTHER PEOPLE’S
INSOLVENCY.
Other people’s problems are your problem too. A bust customer who owes
you money could mean the end of your business. A supplier you have failed to
pay on time might cease trading – leaving you short of vital stock or services.
To work, the rescue culture relies on business understanding that effective co-
operation is as important a success factor as effective competition.
Bad Debt Prevention
Joining the rescue culture does not exclude protecting yourself: your business
can be jeopardised if a customer fails. In a formal insolvency ordinary ‘trade’
or ‘unsecured’ creditors come last in a strict pecking order, after banks, the
government, employees, HP/lease companies (sometimes) and landlords.
Returns to unsecured creditors in formal insolvencies are usually very low. So
concentrating on making legal, ethical deals is likely to provide a better return
for you – as long as you continue to believe that the company that owes you
money can overcome its problems, with your support.
There are court processes to pursue intractable debtors including writs and
winding up petitions. To pursue these to the end may lead to the liquidation of
the debtor – so they may not be appropriate whilst some prospect of doing
business with a supplier still exists. The value of court processes cannot be
underestimated but they can take time and be costly. Some creditors, like the
taxman, the VAT man, landlords and chargeholders (e.g. banks) can act more
quickly and leave the unsecured creditor at the end of the queue.
Unfortunately, if a company is in difficulties, drastic action may trigger the
action of other creditors who are higher in the pecking order than you. So
what can be done to protect your own position?
Communication
Even bad news is better than no news. The more informed you are, the more
likely your actions will be realistic and successful. Talking and meeting with
your customers will ensure you understand their problems and requirements
and vice versa. An honest and open relationship with a trustworthy customer
cannot be underestimated. But, make sure all the appropriate people in your
company know what is going on too – and that you make your decisions
based on complete knowledge of your own company’s current financial
situation and prospects.
Credit Control
Copyright © 2002 R3 Association of Business Recovery Professionals
Is Your Customer in Danger?
these are just some of the warning signs which may mean your customer is facing
financial crisis:
- late payments or non-payment of invoices:
- lump-sum payments on account:
- payments by post-dated cheques;
- old invoices cleared only on receipt of new deliveries;
- using disputes to delay payment
- ACTION: Where any one of these factors is present – talk to your customer and
consider reducing your exposure.
A clear credit control procedure should be in place which sets out the system
for dealing with overdue accounts. This should help identify problem
customers. Do not extend customers’ limits without due consideration and
discussions. Try to stick to this no matter how well you think you know the
customer.
Credit Checks
Check potential customers’ credit references before giving them a credit
account and regularly review credit limits. A company having difficulties may
get by on smaller deliveries, made and paid for on a just-in-time basis. For
larger customers whose payment period suddenly lengthens, why not
consider visiting to review their accounts and projections – are they as ‘blue
chip’ as they look?
Contract Terms
If your products are suitable, you may be able to include retention of title
clauses (RoT) in your terms of trading. These enable stocks of your product to
be repossessed from a customer in the event of non-payment, provided they
can be identified and that they have not become an integral part of the
customer’s product. For example, a brick supplier may be able to repossess
his bricks – but not if they have been cemented into a wall.
Whether or not you have RoT clauses in your business conditions, do not
assume you can just go along and pick up your products – it is not a
presumption in law that unpaid goods belong to the supplier. Seek
professional advice in any event.
Copyright © 2002 R3 Association of Business Recovery Professionals
- KNOW YOUR RIGHTS; PROTECT YOURSELF – BUT PLAN YOUR
STRATEGY CAREFULLY. ALL BUSINESSES WILL HAVE PROBLEM
CUSTOMERS AND SHOULD HAVE A STRATEGY TO DEAL WITH THEM.
Credit Insurance
It may be possible to obtain insurance against a customer’s failure to pay. In
addition, if you are factoring your invoices, or invoice discounting, a non-
recourse arrangement will cost more – but it will mean you get paid a known
proportion of every invoice.
Guarantees
Guarantees from directors or other group companies are sometimes available.
There may be circumstances where they are appropriate so their potential
should not be ignored. Apart from providing additional security they can help
focus the debtors’ minds in their obligations!
Know your rights; protect yourself – but plan your strategy carefully. All
businesses will have problem customers and should have a strategy to deal
with them. Customers who appreciate you have sound credit control
procedures are likely to respect them. Those that don’t – and who refuse to
communicate with you – are the candidates for drastic action.
Copyright © 2002 R3 Association of Business Recovery Professionals
THE ENLIGHTENED CREDITOR
Dealing With Customers in Difficulties Or In Insolvency
So, you have done everything you can to protect yourself. You have taken
every reasonable step to ensure you are doing business with people who can
and will pay. But, things still look shaky – what can you do? Should help be
offered or a tough approach taken?
The Critically Ill Customer
This will depend upon your customer and the impact your actions may have
on your own business. Aggressive action by you made lead to the downfall of
a valued customer. However, this is one area where you must lead with the
head, not the heart: too many businesses have found themselves critically
injured because they continued to extend credit for the sake of a friendly
relationship with a long established customer.
The Customer in Formal Insolvency
It may seem ludicrous to supply a company that is in a formal insolvency
procedure – especially if monies are already due to you.
In an administration or administrative receivership, when trading continues,
payment is not guaranteed. However, the administrator or administrative
receiver is acting as the insolvent company’s agent and he should ensure that
any creditors incurred by the company with his authority are paid – even
before his fees.
This normally is enough guarantee for a supplier to make further supplies!
In a company voluntary arrangement (CVA – see below) or in an informal
arrangement, terms of supply are normally strict, but will usually include some
credit period. The arrangement will usually fail if the company does not stick to
its supply terms. As this would almost certainly mean the end of the road for
the company, this is a strong incentive to pay on time. There is always scope
for terms to be altered as time passes.
An insolvent company that is unable to gain any supplies will not survive.
There is less chance of an enhanced realisation value for the assets through
either continued trading or a successful sale of the business – so, failure to
supply could mean an even smaller return on the debts the company owed to
you at the point of insolvency. Continuing to supply, after carefully considering
whether you will be paid for future deliveries, could increase the chances of a
better return on a bad debt and might provide future trade from an otherwise
defunct customer.
Copyright © 2002 R3 Association of Business Recovery Professionals
Tough or Tender?
Use this checklist to help decide whether to support a customer in trouble:
- is the customer trustworthy?
- are the customer’s problems short term of long term, resolvable or
terminal?
- do I need to maintain business from this customer?
- is my continued support critical to my customer’s business?
- are there contractual reasons for me to continue supplying?
- can I help and cut my exposure over time?
- what is the downside if the customer fails?
- is my customer being professionally guided?
- What are my rights?
- ACTION: keep the answers to these questions under review until you are
certain your customer’s crisis has passed. If you cannot answer these questions
for yourself, you should take professional advice.
Yours Rights as a Creditor
The best way to protect your rights as a creditor is to take an active role in the
case. There is obviously commercial judgement involved as to whether time
and effort spent chasing old debt is worth more than the same time spent
prospecting for new business. Attending, or being represented at the initial
creditors’ meeting, will help you to make that judgement.
Sometimes, prospects of a reasonable return exist, but considerable effort
may be required by the licensed insolvency practitioners to realise that return.
It is particularly in these cases that an active creditors’ committee can do
much to ensure that good money is not spent chasing bad. Sadly, few
creditors take up the challenge of representing their peers on creditors’
committees. Were more to do so, there would certainly be less ignorance of
what happens to insolvent companies and, given the specialist market and
industry knowledge creditors are able to bring to bear, there would probably
also be better and earlier returns for all.
The committee of creditors is entitled to detailed information about the cost of
liquidations, administrations, voluntary arrangements and bankruptcies, under
Statement of Insolvency Practice 9 (SIP9), published by the Society of
Practitioners of Insolvency (SPI).
SIP9 ensures that those charged with agreeing insolvency costs (generally
the creditors’ committee) have the information they need, including details of
time spent, work done, expenses incurred, monies recovered and distributions
made to creditors.
Licensed insolvency practitioners must provide creditors’ guides explaining
how fees and costs are charged and what creditors should do if dissatisfied.
Copyright © 2002 R3 Association of Business Recovery Professionals
- CONSIDERABLE EFFORT MAY BE REQUIRED BY THE LICENSED
INSOLVENCY PRACTITIONER TO REALISE THAT RETURN
This information should be made available to every identifiable creditor before
any resolution is passed to fix or approve a licensed insolvency practitioner’s
remuneration.
Finally, licensed insolvency practitioners acting as receivers of companies are
required on behalf of unsecured creditors to provide the liquidators, who will
eventually replace them, with reasonable justification of the fees they have
charged.
Copyright © 2002 R3 Association of Business Recovery Professionals
SECTION THREE
SURVIVING A CRISIS
What could be the personal consequences of your company’s insolvency?
How do you preserve your relationship with the bank manager when the
money isn’t coming in?
This section will help you recognise the signs of financial crisis in time to
ensure rescue is more of a possibility than burial. It will help you understand
your lender’s point of view and outlines the kind of rescue options that may be
open to you.
Finally, it helps you determine who to turn to for advice and outlines how you
can complain effectively if you deal with a licensed insolvency practitioner
and your case is badly handled.
Copyright © 2002 R3 Association of Business Recovery Professionals
CLOSE TO HOME
YOUR RIGHTS AND RESPONSIBILITIES AS A DIRECTOR OR
OWNER OF A BUSINESS IN CRISIS
It’s Always Your Problem
As a director, the law says it is up to you to keep a finger on your company’s
pulse and to call for help if necessary. Directors of limited liability companies
are personally liable for the debts of a company if trading continues after there
is no longer any reasonable prospect of avoiding insolvency.
Since 1986, the Company Directors’ Disqualification Act has raised the
spectre of disqualification for directors who do not take their responsibilities
seriously. This is no idle threat. 1767 directors were disqualified in the two
years up to 1997. Most were disqualified for periods of between two and five
years but nearly 30 per cent were banned for more than six and up to 15
years.
Company failure does not automatically lead to being disqualified as a
director, to being criminally charged or to the enforcement of personal liability.
The likelihood is still that the vast majority of the unaware or incompetent will
not be penalised while resources are concentrated on cases where other,
more serious offences appear to have been committed.
A lawyer will tell you that your potential liabilities may arise due to either
wrongful trading, fraudulent trading, preferences, transactions at an
undervalue or misfeasance. As a director you may have considered your
actions were justified at the time and you may be able to defend that position.
However, the responsible director should not ignore the problems until either
they go away or the company is forced into liquidation. The other extreme,
that of ceasing to trade as soon as problems appear may seem low risk – but
is hardly going to appeal to the determined, but struggling entrepreneur.
Fortunately, as this booklet shows, there are other options.
Do not forget that you may be personally liable for some debts. Personal
liability can often occur when personal guarantees have been given by
directors either solely or jointly. Bank borrowings, leases on properties and
HP/lease agreements often require personal guarantees. Sometimes, a
personal guarantee is the only way that a creditor will supply goods. It is not
uncommon for a director to have forgotten that these guarantees exist, only
for them to re-emerge – as a rude shock – post insolvency. Their effect can be
shattering: more than one in six of 1996’s personal insolvencies were caused
by personal guarantee liabilities.
Copyright © 2002 R3 Association of Business Recovery Professionals
- DO NOT FORGET THAT YOU MAY BE PERSONALLY LIABLE FOR SOME
DEBTS. PERSONAL LIABILITY CAN OFTEN OCCUR WHEN PERSONAL
GUARANTEES HAVE BEEN GIVEN BY DIRECTORS EITHER SOLELY OR
J OINTLY.
These responsibilities apply to all directors – not just those with a stake in the
business. And, it’s no excuse if you are ‘just the
sales/manufacturing/personnel director’: all directors have a legal
responsibility to be aware of their business’s financial position.
However, for business owners, it is even more important to keep one eye
always on the business’s financial health – financial failure means losing your
investment. For those with personal guarantees, it could even mean losing
your home. For some, the prospect of personal bankruptcy could be looming.
The difficulties facing directors and business owners need not be faced alone.
Financiers and trade creditors are often willing to assist and government
creditors (e.g. Inland Revenue & Customs and Excise) are not always totally
uncompromising. Advisors, such as lawyers and accountants, also have a
vital role to play, especially when a director’s actions can lead to personal
liability.
If you think your company could be heading towards insolvency, seek early,
professional advice, both on your responsibilities as a director and on your
personal position.
The success of any rescue attempt is dependent upon early identification of
the problems. It requires honesty and openness from everyone involved and it
requires a commitment to enlightened self-interest.
Copyright © 2002 R3 Association of Business Recovery Professionals
A director of an insolvent company might be liable for:
- issuing cheques when it is clear they will never be honoured
- incurring credit when there is little or no prospect of payment:
- taking customer deposits when goods or services will not be supplied;
- returning goods to a creditor when the creditor has not retained title;
- selling goods at less than their true open market value.
- ACTION: make sure you know your company’s financial position. Take
professional advice. If you are unsure where you stand see a licensed
insolvency practitioner.
RECOGNISING AND DEALING WITH A FINANCIAL CRISIS IN YOUR OWN
COMPANY
A recent survey by R3 indicated the following main causes of company failure:
loss of market 29%
management failure 22%
bad debts 10%
lack of working capital 20%
Bad debt is, at least in part, a problem that is solved by effective credit control.
Well-run businesses find it relatively easy to obtain capital. Therefore, it is
probably reasonable that greater management acumen could help prevent
nearly two thirds of failures.
Copyright © 2002 R3 Association of Business Recovery Professionals
THE KEYS TO AVOIDING FAILURE
- be aware of your business’s weaknesses and problems;
- be aware of the general business and economic environment;
- take action when there may be a problem, do not wait until the problem has
occurred.
Recognising a Problem
Any business can have a financial crisis: no business is immune from the
impact of recession. Survivors, however, know where they are and know
where they are going. They have a clear idea of the problems they face and
they have plans to deal with them. They know the market never stands still
and they constantly strive to improve the product or service they offer.
IF YOU ARE NOT SURE WHETHER YOUR COMPANY IS A SURVIVOR OR
NOT, ASK THE FOLLOWING QUESTIONS:
Do you have a current business plan?
Do you review costs and overheads as well as sales?
Was your last set of audited accounts more than 12 months ago?
Do you prepare regular management accounts?
Do you prepare annual projections and cashflow forecasts?
Is actual performance regularly reviewed against plan?
Do you prepare and use aged debtor and creditor lists?
Do you and your co-directors meet regularly to formally review progress? Or,
if you are on your own, do you set aside time just to understand your financial
position?
IF YOU ARE DOING ALL THESE THINGS, THEN YOU ARE LIKELY TO BE
IN A POSITION TO NOTICE THE SIGNS OF IMPENDING CRISIS. IF THEY
OCCUR. YOU’LL KNOW YOU ARE STANDING AT THE TOP OF A
SLIPPERY SLOPE IF YOUR PROCEDURES REVEAL THE FOLLOWING:
If any of the above makes you feel uncomfortable, try the list below. If any of
these statements are true, chances are you are over the edge of the slope
and heading downhill. It’s time to seek help if any of these statements apply.
Copyright © 2002 R3 Association of Business Recovery Professionals
- FOUR PER CENT OF CASES WERE CAUSED BY THE BANK SAYING
‘ENOUGH IS ENOUGH’. RESEARCH INDICATES THAT 76 PER CENT OF
INTENSIVE CARE CASES ARE STARTED BY THE BANK.
Poor collection of debtor book (greater than 45 days is considered poor in
many business sectors).
Extended lines of credit – is exposure to key customers worsening?
Rising work in progress that is not billed on time.
Diminished cash balances – is the bank balance steadily reducing; are
planned purchases being put off or are they being made by expanding
payment periods, rather than cash?
Over reached overdraft facilities.
Poor cost control with too many people responsible for purchasing, leading to
lack of organised discount opportunities.
Lack of long standing relationships with suppliers: Are you giving up on them
– or are they giving up on you? Or are you widening your range of suppliers
simply to make more credit available?
Rising stock levels and static sales
Contract disputes
Final demands and writs being received
Your business is largely reliant on one or two customers – and those
customers are not paying as well as they were.
You are increasing borrowings just to keep the business running.
Your outstanding debtors or potential bad debts seem to have increased
suddenly.
Are you still unsure how much you owe, and how much you are owed?
You are more than one month adrift in payments to the Inland Revenue or the
Customs and Excise.
The bank is calling you to say you have exceeded your overdraft limit.
You have received a statutory demand for payment, which could lead to a
winding up petition.
Copyright © 2002 R3 Association of Business Recovery Professionals
The Investigating Accountant’s Report is often a starting point for the business’s
route to recovery and should be embraced by the directors, especially when they
take into account their personal responsibilities. At a time of crisis professional help
should be sought.
Remember, the report is not a foregone conclusion. It is an independent review.
If things have got this far, you should seek professional advice immediately.
Getting On With The Bank
In many cases, a company insolvency will be triggered by the company’s
bankers finally giving up all hope of seeing the business keep up with the
terms of its facility. In nearly every case, this only happens after the bank has
explored every other avenue – or when the bank completely loses confidence
in the company. Company insolvency surveys show that only 4 per cent of
cases are caused by the bank saying ‘enough is enough’. Indeed, intensive
care research indicates that 76 per cent of intensive care cases are started by
the bank. In well over half (57 per cent) of these cases, a rescue is achieved
outside insolvency. In a further 14 per cent of cases, an insolvency procedure
(either administrative receivership or a Company Voluntary Arrangement) is
used to achieve rescue.
Bank rescues usually start with the appointment of an investigating
accountant (normally also a licensed insolvency practitioner). This figure is a
bit of a bogeyman simply because, if insolvency is inevitable, he often is
appointed as the administrative receiver. However, as we have shown, most
bank investigations end in an informal rescue or reconstruction – not
insolvency.
Part of the investigating accountant’s doom-laden reputation must be due to
the fact that, traditionally, his appointment is sudden and unexpected: if a
company is communicating effectively with its banks, this is much less likely to
be the case. The reasons for the appointment are more likely to be
understood and the outcome is much more likely to be a good one for the
business.
The British Bankers Association (BBA) has published a Statement of
Principles ‘Banks and Businesses: Working Together’, codifying banks’
policies concerning the treatment of companies in difficulties. It also shows
what sort of information banks usually look for.
This makes it clear that the banks will support a realistic rescue proposal, as
long as a client company communicates with them effectively and tries to
keep to its commitments to the bank. You can get a free copy of the statement
from the BBA by telephoning 020 7216 8846.
Copyright © 2002 R3 Association of Business Recovery Professionals
A RESCUE CAN BE ACHIEVED BY A NUMBER OF METHODS, DEPENDING
ON THE PROBLEMS THAT NEED TO BE ADDRESSED.
Investigating Accountant Reports (or viability reports)
It’s not only a bank that can ask a company to put in an investigating
accountant. Occasionally larger trade creditors may do so.
When preparing the report, the investigating accountant relies upon the co-
operation of a company’s management- and one of the first things he will
notice is whether the directors are truly on top of their financial situation or not,
and whether they have a clear view of the future.
The investigating accountant’s report is a review of the current position, a
summary of future prospects and a recommendation of a way forward for a
continued relationships between the company and its financier.
These confidential reports are intended to provide an objective view of the
company. Although financial information is important (the report will normally
provide an opinion on the viability of the company – or, perhaps, part of the
company), these reports will usually include information about business trends
in the company’s marketplace.
The commissioning of the report is rarely the beginning of the end; more often
than not it is the beginning of a way forward. In most cases (80 per cent,
according to SPI research), this recommendation will not be the appointment
of an administrative receiver.
Most directors find that such reports add value to their businesses and some
may request a report to provide them with comfort that their company is
neither insolvent nor that there is a problem looming on the horizon. Such
formal ‘health checks’ are rare but may follow when a licensed insolvency
practitioner’s advice on the company is sought through a company’s other
advisers.
Even if a report is initiated by a third party (and must meet that third party’s
needs), it is the target business that is paying for it: the directors should
therefore ensure that the report is of benefit to their own company.
It is unlikely that a third party will commission such a report without good
reason. However, sadly, a number of investigations are carried out each year
simply because the directors have been unable (or unwilling) to come up with
the financial information requested by their bank.
Often the report will make recommendations which may involve further
monitoring of the position by the licensed insolvency practitioner to review the
effectiveness of the proposals when enacted. Some of these
recommendations may involve a voluntary or contractual arrangement.
Copyright © 2002 R3 Association of Business Recovery Professionals
Sometimes corrective action is necessary within the company. This might
entail cutting costs, strengthening the management team, raising additional
capital or selling the company or merging with a third party to provide the
financial resources necessary to overcome the difficulties. Sometimes a
formal insolvency procedure is recommended, but it will only be suggested if
that is the appropriate way forward: that procedure itself can enable the
rescue of a business.
Rescues
A rescue can be achieved by a number of methods, depending on the
problems that need to be addressed and on the attitude of the company’s
creditors, particularly any secured creditor – such as the bank.
A company can negotiate with its lenders to reschedule debt or allow
additional facilities. Banks will have an intensive care programme for these
circumstances. This will often involve the use of a licensed insolvency
practitioner to investigate the company’s affairs. This investigation may lead to
a report for the lender. As we have said, and contrary to popular belief, the
end result of such a report more often than not leads to a rescue strategy
without any formal insolvency.
Negotiations with government and trade creditors to reschedule payments.
This aims to avoid action, like winding up petitions, which might force a
company into insolvency. This involves communication with creditors, often
assisted by a licensed insolvency practitioner acting as an intermediary to
form an understanding (usually not binding to any party) between debtor and
creditors. Using an intermediary often helps to ensure the debate remains
objective and is not clouded by the emotional issues and hot tempers that
often come to the fore in a crisis. The larger the number of creditors, the less
likely that such an informal arrangement will work. Instead, a licensed
insolvency practitioner may recommend a CVA which, once agreed, is binding
on all parties.
The options outside formal insolvency are often put together with the
assistance of a licensed insolvency practitioner acting on behalf of either
debtors or creditors. Such options have no formal framework and are often
unreported. If they became public knowledge, particularly in the case of
quoted companies, then the company’s ability to rescue itself would be
instantly- and savagely- diminished.
Informal procedures will only work if the rescue culture attitude of ‘enlightened
self-interest’ is adopted by the debtor and creditors involved. A licensed
insolvency practitioner can assist in helping all parties to see the need for
careful co-operation and by ensuring that everyone is satisfied that the
proposed actions are within the law.
Copyright © 2002 R3 Association of Business Recovery Professionals
CVA’S ARE NEVER AN EASY OPTION FOR THE COMPANY, AS THE
CREDITORS ARE UNLIKELY TO AGREE TO ANYTHING THAT DOES NOT
OFFER SUBSTANTIALLY BETTER TERMS THAN A LESS RESCUE-
ORIENTATED INSOLVENCY PROCEDURE.
The End?
Sometimes a formal insolvency is unavoidable. But, this does not
automatically mean a rescue is impossible. Once a business is in any form of
formal insolvency procedure, the licensed insolvency practitioner’s first
responsibility is to the company’s creditors. However, as we have pointed out,
rescue (in whole or in part) is still likely to be the best possible option for
creditors as well as for the business. The options in each form of insolvency
can be summarised as follows.
Liquidations
Liquidations are not normally rescue procedures. The liquidator only has a
limited power to continue the trade of a company. Therefore, a going concern
sale of the business is uncommon- although possible if done almost
immediately. The liquidator can sell the assets piecemeal to enable a new
business to be established speedily, and this can include the sale of the name
if it has value.
Administrative Receivership
Normally, the administrative receiver has all the powers he needs to decide
whether to continue to trade the company and attempt to achieve a going
concern sale. Around half of all administrative receiverships end in rescue of
all or part of the business. In many cases the business is sold back, free of
debt, to its existing managers. So, receivership need not necessarily mean the
end of a director’s connection with a business – management buyouts are
often the best solution for all concerned, including the creditors. Most
administrative receivers are appointed as agents of the company and can
exercise contracts on behalf of the company. The administrative receiver has
wide powers to sell the assets and goodwill of the business but it is usual that
the liabilities will remain with the company to be settled from the proceeds of
sale.
Copyright © 2002 R3 Association of Business Recovery Professionals
Company Voluntary Arrangement (CVA)
In a CVA, proposals are drawn up which may involve delayed or reduced
payments of debt, capital restructuring and an orderly realisation of assets.
Creditors must usually agree to accept less than they are owed and, usually,
to be repaid over a longer period of time. CVAs are never an easy option for
the company, as creditors are unlikely to agree to anything that does not offer
substantially better terms than a less rescue–orientated insolvency procedure.
A meeting will be held to present the directors’ proposals to creditors, 75 per
cent (by value) of creditors present or by proxy must vote in favour of the
arrangement for it to be binding on all parties. The arrangement is supervised
by a licensed insolvency practitioner who, in many cases, will have advised
the directors on the structure of the arrangement. However, on successful
completion of the CVA the company’s legal entity will remain substantially
unaltered and the directors will be free to grow the business in whatever way
they choose. Putting a CVA in place, however, does not necessarily tie the
directors to the company: it can provide a vehicle to sell a business to new
management too.
Administration
An administration order is an order of the court and an administrator is an
officer of the court with similar powers to an administrative receiver. An
administration order will only be granted if one or more of the following is
possible: survival of the business (or part of it); better realisations than from a
winding up; a CVA or arrangement with creditors that the court is satisfied has
a realistic prospect of success.
Other Procedures
Schemes of Arrangements and Members’ Voluntary Liquidations can also be
used to ensure the survival of part of the business. Within the context of a
rescue these procedures are usually only used in specific circumstances – for
example, schemes of arrangement are often used as an alternative to
liquidation for insurance companies.
Copyright © 2002 R3 Association of Business Recovery Professionals
WHO CAN HELP?
Getting Professional Advice from The Right Source
Your existing accountant, auditor or solicitor may be in a position to provide
you with the advice you need. The provision of advice on insolvency matters
invariably requires involvement of licensed insolvency practitioners and it is
important to ensure that your existing advisors have this expertise (if formal
insolvency is inevitable, your existing advisors will not be able to help, but may
be able to point you in the right direction). If existing advisors cannot help, you
are best advised to contact a licensed insolvency practitioner. Most, if not all,
will offer you an initial free consultation. And, if your concern is not with your
own insolvency but with that of a customer, a licensed insolvency practitioner
will, in many cases, represent you free of charge at any creditors’ meeting.
Details of licensed insolvency practitioners close to you can be found in R3’s
annual directory.
Any Port in A Storm?
Reading this booklet means you are unlikely to be one of the many directors
who, every year, are duped into taking advice from unregulated advisors who
claim to be able to remove all the worry of insolvency. You will be fully aware
of your company’s financial position, you will talk to your bankers and you will
take advice from professionals before it is too late. If crisis is inevitable, you
will be prepared to make the right move towards the best possible resolution.
The unregulated advisor’s typical victims are usually those who, having seen
financial crisis creeping up on them, month after month, do nothing even when
county court judgements and winding up petitions start piling up. Then,
seemingly out of the blue, a letter will appear from a company offering
salvation.
Whilst there are some genuine, skilled and professional company doctors who
operate this way, the best that is likely is that the directors are charged a fee
for the advice that they consult an insolvency practitioner. The worst is that
the directors may be promised the moon, charged the earth and see nothing
for it – they certainly won’t escape their creditors.
Only licensed insolvency practitioners can take formal insolvency
appointments (other than Law of Property Act (LPA) receiverships, which are
only used to take control of mortgaged property). They also have enormous
experience in the arena of informal rescue and reconstruction.
It is true that many people could advise and assist you with informal
reconstructions. You do not necessarily need to deal with a licensed
insolvency practitioner. Our advice, however, is to ensure you deal with a
regulated professional (such as an accountant, solicitor or even, in the case of
property-related insolvencies, a chartered surveyor) whose code of ethics and
discipline will ensure they deal fairly with your interests and those of your
Copyright © 2002 R3 Association of Business Recovery Professionals
DEAL WITH A REGULATED PROFESSIONAL (SUCH AS AN ACCOUNTANT,
SOLICITOR OR EVEN, IN THE CASE OF PROPERTY-RELATED
INSOLVENCIES, A CHARTERED SURVEYOR) WHOSE CODE OF ETHICS AND
DISCIPLINE WILL ENSURE THEY DEAL FAIRLY WITH YOUR INTERESTS AND
THOSE OF YOUR CREDITORS.
creditors. At the very worst, if things go badly wrong, you will be able to
complain to their regulatory body and have the satisfaction of seeing action
taken against them if your complaint is justified. Deal with an unregulated
advisor and you have no guarantees or propriety, knowledge or skills.
Complaining Effectively
If you have a complaint about the way in which a licensed insolvency
practitioner has dealt with your case, you should, in the first instance contact
the practitioner concerned: most complaints are based on misunderstandings.
If you are still dissatisfied, you should contact the practitioner’s recognised
professional body (RPB). If you are unsure of this, contact the Association of
Business Recovery Professionals (R3), who will be pleased to point you in the
right direction.
Your complaint will be greatly assisted if you keep accurate notes of your
experience during the case (make them at the time – not later) as well as
copies of all correspondence received. It is as well to confirm critical details in
writing.
Insolvency law and practice is a hugely complicated area, further complicated
by the fact that a business crisis is normally an intensely stressful experience
for everyone involved. Complaints are rare (567) complaints against 18,297
insolvency cases in 1995) and most turn out to be misunderstandings. But,
they are always investigated and, if necessary, dealt with by the disciplinary
procedures of the practitioner’s licensing body who can reprimand, levy fines
and even take away a person’s license. In 1995, the RPBs received 567
complaints. Of these, 534 merited further investigation and 56 led to full
disciplinary hearings. As a result of this 51 practitioners were fined and 10 lost
their licence.
The insolvency profession is proud of its reputation and anxious to ensure that
all poor practice or, worse, malpractice, is eliminated.
Copyright © 2002 R3 Association of Business Recovery Professionals
WE ESTIMATE THAT, IN 1995 – 1996, LICENSED INSOLVENCY
PRACITIONERS RESCUED COMPANIES WITH A TOTAL TURNOVER OF £23
BILLION AND SAVED 98,000 J OBS. WE HOPE YOUR BUSINESS WILL NEVER
NEED OUR SERVICES. BUT, IF IT DOES, HAVING READ THIS BOOKLET WILL
HELP YOU ENSURE THAT YOUR BUSINESS IS ONE OF THE ‘SAVED’-
RATHER THAN ONE OF THE ‘BURIED’.
About The Insolvency Profession
The insolvency profession consists of fewer than 2000 individuals who are
authorised to undertake or supervise company and personal insolvencies.
These licensed insolvency practitioners are all authorised by one of eight
recognised professional bodies (RPB), or by the Secretary of State for Trade
and Industry.
Because licensed insolvency practitioners come from a wide range of
professional backgrounds they are usually licensed by the body from whom
they obtained their first professional qualification. Any practitioner joining the
profession since 1986 has undertaken around three years further specialised
training and has had to pass the examination of the Joint Insolvency
Examination Board (JIEB) before he or she can be licensed.
All insolvency practitioners are subject to the same rules regarding their
conduct. They have a common ethical code and the same set of rules
concerning the information they must provide to creditors. Their work is also
subject to regular scrutiny and monitoring.
doc_278424887.pdf
This booklet is divided into three sections.
Copyright © 2002 R3 Association of Business Recovery Professionals
THE OSTRICH’S
GUIDE TO
BUSINESS SURVIVAL
Published by R3 (2002)
Copyright © 2002 R3 Association of Business Recovery Professionals
SECTION ONE
FAILURE AND RESCUE
Can financial crisis be averted? Are real business rescues possible? How
can you help yourself and other people survive the tough times in business?
This booklet is divided into three sections. This, the first section, describes the
rescue culture in Britain today. It looks at the facts behind business rescue
and describes how a philosophy of enlightened self-interest can help you and
the companies you do business with overcome financial crisis.
The second section helps you deal with customers whose financial problems
could affect your own financial health. The third and last section aims to help
you understand the steps you can take if financial crisis ever knocks on your
company’s door. We hope you never need it.
Copyright © 2002 R3 Association of Business Recovery Professionals
ABOUT THE BOOKLET
What’s the Problem
In the five years from 1991, an average of 23,294 businesses failed every
year. Our research shows that, if you have a customer that goes bust, you will
be lucky to get back more than 10p in the pound on any outstanding debts.
How many bad debts like that could your business cope with, before it too
became an insolvency statistic? And, if your business were to go bust, what
would happen to you? Would you lose your job? Would your house go to pay
the business’s debts? Could you be forced into personal bankruptcy? Could
your inaction lead to disqualification as a director? Might you find yourself
facing fines or even prison? Worst of all – would your relationships with those
near and dear to you survive the failure of your business?
Sadly, too many businesses fail because directors seem to believe it can
never happen to them. It can – many businesses find themselves in an
unexpected crisis. Hard choices may need to be made. But, if symptoms were
recognised early enough, many more businesses would find themselves in the
recovery ward – not the mortuary.
You may never face these problems. However, reading this booklet should
ensure you recognise the signs of crisis, whether it affects your business or
that of a client or supplier. We also hope that it will help you to act decisively
and appropriately, should the need arise.
Copyright © 2002 R3 Association of Business Recovery Professionals
Insolvency Definitions
A company is insolvent if:
- it is unable to pay its debts when they fall due: the value of assets is less than
the liabilities.
A NEW APPROACH
Be prepared
The majority of business insolvencies could have been prevented by early
management action. In many cases, managers just do not have the
information they need to recognise a crisis. The worst managers just ignore
the warning signs. Thinking the unthinkable might just make the difference
between weathering the storm and sinking without trace.
Who’s insolvent?
Cash is king when it comes to avoiding insolvency. Companies are often
plunged into failure because a creditor asks for money and cannot be paid.
You may be on target to make a profit at the end of the year, but, if you cannot
pay the tax man, the bank, or a big trade creditor when you should, you are
insolvent and your business may be wound up.
Businesses whose asset base has been worn down over time are often more
difficult to rescue than those that are merely strapped for cash.
It is not just current owings that determine whether you are technically
insolvent. Liabilities that only normally arise if the company stops trading or
goes bust are also taken into account. These include items like redundancy
payments and penalties for non-completion of contracts.
It’s up to every director to be aware of the company’s financial position and to
take action if insolvency is likely. The legal penalties for failure to act can be
harsh. Added to which, there is the waste of hard graft, hope and life that is
bound up in every company failure.
Tight financial management, good communication with creditors and a
willingness to ask for advice early would see far fewer businesses go to the
wall.
Copyright © 2002 R3 Association of Business Recovery Professionals
Successful Rescues – The Ground Rules
- consider supporting your customer, do not just turn off the lifeline of your orders
to your customer if this means the source of their income (and thus your
income) is restricted:
- be flexible with your debtors but don’t extend your exposure or allow endless
extensions of credit if they continue to default;
- renegotiate or pay your own suppliers on time;
- communicate with your bankers, suppliers and advisers, do not leave them in
the dark;
- take advice from a licensed insolvency practitioner if a problem persists for your
company or a customer.
What is The Rescue Culture?
Historically, British insolvency law and practice has always put the interests of
creditors first. This objective is often compatible with business rescue: a ‘going
concern’, revived or sold on, will almost always produce more for creditors
than one that is closed down and whose assets are sold off at auction. R3
research into the ‘intensive care’ work done by licensed insolvency
practitioners shows that an arrangement with creditors (or even a sale of a
business as a going concern) is likely to produce more than a liquidation or
fire sale.
Where informal rescues turn into formal insolvency, creditors get a great deal
less than when rescue is achieved. In 59 per cent of formal insolvencies,
returns of less than 10p in the pound were likely to be achieved. Returns of
more than 50p in the pound were likely in only 9 per cent of cases. In rescues,
the returns to creditors are considerably better: in 70 per cent of cases
creditors got every penny they were due (even if they had to compromise and
accept some jam tomorrow). Liability write-offs higher than 75 per cent (i.e. a
return to creditors of less than 25 per cent), were reported in just one per cent
of cases.
Rescues can only work where creditors are convinced they will get a larger
return than would be achieved through insolvency. However, creditors must
be prepared to compromise too.
It is easy to place blame on the company in difficulty, but the rescue culture is
based on us all having an active role in identifying and solving problems
without destroying our own position. Licensed insolvency practitioners can
assist – with or without the aid of formal insolvency procedures.
Copyright © 2002 R3 Association of Business Recovery Professionals
CONTRARY TO THE VIEW OF MANY BUSINESS PEOPLE, THE BANKS ARE
VERY RELUCTANT TO FORCE BUSINESSES INTO INSOLVENCY
Rescue Facts
- 98,000 jobs saved in 1995-6, 800,000 jobs saved between 1990-96:
- 1600 – 1900 informal company rescues in 1996:
- Receiverships – 50 per cent rescued:
- CVAs – 75 per cent rescued.
How Successful Is The Rescue Culture
In 1995-1996, insolvency practitioners rescued around 50 jobs for each
member of the profession – about 98,000 in total. This, in a year when the
economy was growing and business insolvencies had fallen far below
recessionary levels.
Outside formal insolvencies, the intensive care process rescues many
businesses and saves thousands of jobs, largely as a result of the banks’
willingness to play an active part in allowing businesses to be reconstructed,
rather than just cutting their losses. Contrary to the view of many business
people, the banks are very reluctant to force businesses into insolvency and
will be patient and constructive if they are kept informed and presented with a
viable rescue plan.
However, companies still continue to fail in significant numbers. In 1995 – 96
companies were being liquidated at a rate of around 3,500 per quarter. This is
a far cry from the dark days of the recession – in 1992 liquidations reached a
peak of 6,200 in three months. Some of these were failures which no one
could have prevented. But, management failure is a major contributory factor
in the majority of all insolvencies.
Copyright © 2002 R3 Association of Business Recovery Professionals
A Surprisingly Common Story
The morning post includes a notice that a long-standing customer is insolvent, or a
phone call chasing an overdue account is answered with details of the licensed
insolvency practitioner who is now dealing with the company’s affairs. This is the
first you have heard of any problem!
Questions are asked immediately. Why did the salesman allow them further credit
when the account was overdue? Why didn’t the credit controller put the account on
stop? Are we going to get any more money?
Answering these questions may help you learn from the experience. But,
recriminations are useless – and you have passed the point where you can have
any real influence on when and if you get paid.
Be careful you don’t get the wrong answers too. If you ask what went wrong and get
told the following (usually with a shrug of the shoulders) you can be sure your
company has no real strategy for minimising bad debt problems:
- In the commercial world failure is bound to happen.
- We take account of bad debts in our profit margins.
- We were just unlucky.
Too few people really understand the implications of insolvency and the simple
steps that can be taken to avoid some of the risks of other people’s business failure.
SECTION TWO
THE EFFECTIVE CREDITOR
When do you get tough with someone who owes you money? When should
you believe the hard luck stories and help out?
This section aims to help you deal with customers whose financial crisis
could hurt your business – perhaps fatally. You will find practical steps you
can take to reduce the risk of a bad debt to the minimum.
This section also gives advice on dealing with the terminally ill customer and
helps you make the choice between tough and tender. If the worst happens,
and your customer goes bust, this section outlines your rights and how to
exercise them.
Copyright © 2002 R3 Association of Business Recovery Professionals
WHEN YOU ARE OWED MONEY
MINIMISING THE IMPACT ON YOUR BUSINESS OF OTHER PEOPLE’S
INSOLVENCY.
Other people’s problems are your problem too. A bust customer who owes
you money could mean the end of your business. A supplier you have failed to
pay on time might cease trading – leaving you short of vital stock or services.
To work, the rescue culture relies on business understanding that effective co-
operation is as important a success factor as effective competition.
Bad Debt Prevention
Joining the rescue culture does not exclude protecting yourself: your business
can be jeopardised if a customer fails. In a formal insolvency ordinary ‘trade’
or ‘unsecured’ creditors come last in a strict pecking order, after banks, the
government, employees, HP/lease companies (sometimes) and landlords.
Returns to unsecured creditors in formal insolvencies are usually very low. So
concentrating on making legal, ethical deals is likely to provide a better return
for you – as long as you continue to believe that the company that owes you
money can overcome its problems, with your support.
There are court processes to pursue intractable debtors including writs and
winding up petitions. To pursue these to the end may lead to the liquidation of
the debtor – so they may not be appropriate whilst some prospect of doing
business with a supplier still exists. The value of court processes cannot be
underestimated but they can take time and be costly. Some creditors, like the
taxman, the VAT man, landlords and chargeholders (e.g. banks) can act more
quickly and leave the unsecured creditor at the end of the queue.
Unfortunately, if a company is in difficulties, drastic action may trigger the
action of other creditors who are higher in the pecking order than you. So
what can be done to protect your own position?
Communication
Even bad news is better than no news. The more informed you are, the more
likely your actions will be realistic and successful. Talking and meeting with
your customers will ensure you understand their problems and requirements
and vice versa. An honest and open relationship with a trustworthy customer
cannot be underestimated. But, make sure all the appropriate people in your
company know what is going on too – and that you make your decisions
based on complete knowledge of your own company’s current financial
situation and prospects.
Credit Control
Copyright © 2002 R3 Association of Business Recovery Professionals
Is Your Customer in Danger?
these are just some of the warning signs which may mean your customer is facing
financial crisis:
- late payments or non-payment of invoices:
- lump-sum payments on account:
- payments by post-dated cheques;
- old invoices cleared only on receipt of new deliveries;
- using disputes to delay payment
- ACTION: Where any one of these factors is present – talk to your customer and
consider reducing your exposure.
A clear credit control procedure should be in place which sets out the system
for dealing with overdue accounts. This should help identify problem
customers. Do not extend customers’ limits without due consideration and
discussions. Try to stick to this no matter how well you think you know the
customer.
Credit Checks
Check potential customers’ credit references before giving them a credit
account and regularly review credit limits. A company having difficulties may
get by on smaller deliveries, made and paid for on a just-in-time basis. For
larger customers whose payment period suddenly lengthens, why not
consider visiting to review their accounts and projections – are they as ‘blue
chip’ as they look?
Contract Terms
If your products are suitable, you may be able to include retention of title
clauses (RoT) in your terms of trading. These enable stocks of your product to
be repossessed from a customer in the event of non-payment, provided they
can be identified and that they have not become an integral part of the
customer’s product. For example, a brick supplier may be able to repossess
his bricks – but not if they have been cemented into a wall.
Whether or not you have RoT clauses in your business conditions, do not
assume you can just go along and pick up your products – it is not a
presumption in law that unpaid goods belong to the supplier. Seek
professional advice in any event.
Copyright © 2002 R3 Association of Business Recovery Professionals
- KNOW YOUR RIGHTS; PROTECT YOURSELF – BUT PLAN YOUR
STRATEGY CAREFULLY. ALL BUSINESSES WILL HAVE PROBLEM
CUSTOMERS AND SHOULD HAVE A STRATEGY TO DEAL WITH THEM.
Credit Insurance
It may be possible to obtain insurance against a customer’s failure to pay. In
addition, if you are factoring your invoices, or invoice discounting, a non-
recourse arrangement will cost more – but it will mean you get paid a known
proportion of every invoice.
Guarantees
Guarantees from directors or other group companies are sometimes available.
There may be circumstances where they are appropriate so their potential
should not be ignored. Apart from providing additional security they can help
focus the debtors’ minds in their obligations!
Know your rights; protect yourself – but plan your strategy carefully. All
businesses will have problem customers and should have a strategy to deal
with them. Customers who appreciate you have sound credit control
procedures are likely to respect them. Those that don’t – and who refuse to
communicate with you – are the candidates for drastic action.
Copyright © 2002 R3 Association of Business Recovery Professionals
THE ENLIGHTENED CREDITOR
Dealing With Customers in Difficulties Or In Insolvency
So, you have done everything you can to protect yourself. You have taken
every reasonable step to ensure you are doing business with people who can
and will pay. But, things still look shaky – what can you do? Should help be
offered or a tough approach taken?
The Critically Ill Customer
This will depend upon your customer and the impact your actions may have
on your own business. Aggressive action by you made lead to the downfall of
a valued customer. However, this is one area where you must lead with the
head, not the heart: too many businesses have found themselves critically
injured because they continued to extend credit for the sake of a friendly
relationship with a long established customer.
The Customer in Formal Insolvency
It may seem ludicrous to supply a company that is in a formal insolvency
procedure – especially if monies are already due to you.
In an administration or administrative receivership, when trading continues,
payment is not guaranteed. However, the administrator or administrative
receiver is acting as the insolvent company’s agent and he should ensure that
any creditors incurred by the company with his authority are paid – even
before his fees.
This normally is enough guarantee for a supplier to make further supplies!
In a company voluntary arrangement (CVA – see below) or in an informal
arrangement, terms of supply are normally strict, but will usually include some
credit period. The arrangement will usually fail if the company does not stick to
its supply terms. As this would almost certainly mean the end of the road for
the company, this is a strong incentive to pay on time. There is always scope
for terms to be altered as time passes.
An insolvent company that is unable to gain any supplies will not survive.
There is less chance of an enhanced realisation value for the assets through
either continued trading or a successful sale of the business – so, failure to
supply could mean an even smaller return on the debts the company owed to
you at the point of insolvency. Continuing to supply, after carefully considering
whether you will be paid for future deliveries, could increase the chances of a
better return on a bad debt and might provide future trade from an otherwise
defunct customer.
Copyright © 2002 R3 Association of Business Recovery Professionals
Tough or Tender?
Use this checklist to help decide whether to support a customer in trouble:
- is the customer trustworthy?
- are the customer’s problems short term of long term, resolvable or
terminal?
- do I need to maintain business from this customer?
- is my continued support critical to my customer’s business?
- are there contractual reasons for me to continue supplying?
- can I help and cut my exposure over time?
- what is the downside if the customer fails?
- is my customer being professionally guided?
- What are my rights?
- ACTION: keep the answers to these questions under review until you are
certain your customer’s crisis has passed. If you cannot answer these questions
for yourself, you should take professional advice.
Yours Rights as a Creditor
The best way to protect your rights as a creditor is to take an active role in the
case. There is obviously commercial judgement involved as to whether time
and effort spent chasing old debt is worth more than the same time spent
prospecting for new business. Attending, or being represented at the initial
creditors’ meeting, will help you to make that judgement.
Sometimes, prospects of a reasonable return exist, but considerable effort
may be required by the licensed insolvency practitioners to realise that return.
It is particularly in these cases that an active creditors’ committee can do
much to ensure that good money is not spent chasing bad. Sadly, few
creditors take up the challenge of representing their peers on creditors’
committees. Were more to do so, there would certainly be less ignorance of
what happens to insolvent companies and, given the specialist market and
industry knowledge creditors are able to bring to bear, there would probably
also be better and earlier returns for all.
The committee of creditors is entitled to detailed information about the cost of
liquidations, administrations, voluntary arrangements and bankruptcies, under
Statement of Insolvency Practice 9 (SIP9), published by the Society of
Practitioners of Insolvency (SPI).
SIP9 ensures that those charged with agreeing insolvency costs (generally
the creditors’ committee) have the information they need, including details of
time spent, work done, expenses incurred, monies recovered and distributions
made to creditors.
Licensed insolvency practitioners must provide creditors’ guides explaining
how fees and costs are charged and what creditors should do if dissatisfied.
Copyright © 2002 R3 Association of Business Recovery Professionals
- CONSIDERABLE EFFORT MAY BE REQUIRED BY THE LICENSED
INSOLVENCY PRACTITIONER TO REALISE THAT RETURN
This information should be made available to every identifiable creditor before
any resolution is passed to fix or approve a licensed insolvency practitioner’s
remuneration.
Finally, licensed insolvency practitioners acting as receivers of companies are
required on behalf of unsecured creditors to provide the liquidators, who will
eventually replace them, with reasonable justification of the fees they have
charged.
Copyright © 2002 R3 Association of Business Recovery Professionals
SECTION THREE
SURVIVING A CRISIS
What could be the personal consequences of your company’s insolvency?
How do you preserve your relationship with the bank manager when the
money isn’t coming in?
This section will help you recognise the signs of financial crisis in time to
ensure rescue is more of a possibility than burial. It will help you understand
your lender’s point of view and outlines the kind of rescue options that may be
open to you.
Finally, it helps you determine who to turn to for advice and outlines how you
can complain effectively if you deal with a licensed insolvency practitioner
and your case is badly handled.
Copyright © 2002 R3 Association of Business Recovery Professionals
CLOSE TO HOME
YOUR RIGHTS AND RESPONSIBILITIES AS A DIRECTOR OR
OWNER OF A BUSINESS IN CRISIS
It’s Always Your Problem
As a director, the law says it is up to you to keep a finger on your company’s
pulse and to call for help if necessary. Directors of limited liability companies
are personally liable for the debts of a company if trading continues after there
is no longer any reasonable prospect of avoiding insolvency.
Since 1986, the Company Directors’ Disqualification Act has raised the
spectre of disqualification for directors who do not take their responsibilities
seriously. This is no idle threat. 1767 directors were disqualified in the two
years up to 1997. Most were disqualified for periods of between two and five
years but nearly 30 per cent were banned for more than six and up to 15
years.
Company failure does not automatically lead to being disqualified as a
director, to being criminally charged or to the enforcement of personal liability.
The likelihood is still that the vast majority of the unaware or incompetent will
not be penalised while resources are concentrated on cases where other,
more serious offences appear to have been committed.
A lawyer will tell you that your potential liabilities may arise due to either
wrongful trading, fraudulent trading, preferences, transactions at an
undervalue or misfeasance. As a director you may have considered your
actions were justified at the time and you may be able to defend that position.
However, the responsible director should not ignore the problems until either
they go away or the company is forced into liquidation. The other extreme,
that of ceasing to trade as soon as problems appear may seem low risk – but
is hardly going to appeal to the determined, but struggling entrepreneur.
Fortunately, as this booklet shows, there are other options.
Do not forget that you may be personally liable for some debts. Personal
liability can often occur when personal guarantees have been given by
directors either solely or jointly. Bank borrowings, leases on properties and
HP/lease agreements often require personal guarantees. Sometimes, a
personal guarantee is the only way that a creditor will supply goods. It is not
uncommon for a director to have forgotten that these guarantees exist, only
for them to re-emerge – as a rude shock – post insolvency. Their effect can be
shattering: more than one in six of 1996’s personal insolvencies were caused
by personal guarantee liabilities.
Copyright © 2002 R3 Association of Business Recovery Professionals
- DO NOT FORGET THAT YOU MAY BE PERSONALLY LIABLE FOR SOME
DEBTS. PERSONAL LIABILITY CAN OFTEN OCCUR WHEN PERSONAL
GUARANTEES HAVE BEEN GIVEN BY DIRECTORS EITHER SOLELY OR
J OINTLY.
These responsibilities apply to all directors – not just those with a stake in the
business. And, it’s no excuse if you are ‘just the
sales/manufacturing/personnel director’: all directors have a legal
responsibility to be aware of their business’s financial position.
However, for business owners, it is even more important to keep one eye
always on the business’s financial health – financial failure means losing your
investment. For those with personal guarantees, it could even mean losing
your home. For some, the prospect of personal bankruptcy could be looming.
The difficulties facing directors and business owners need not be faced alone.
Financiers and trade creditors are often willing to assist and government
creditors (e.g. Inland Revenue & Customs and Excise) are not always totally
uncompromising. Advisors, such as lawyers and accountants, also have a
vital role to play, especially when a director’s actions can lead to personal
liability.
If you think your company could be heading towards insolvency, seek early,
professional advice, both on your responsibilities as a director and on your
personal position.
The success of any rescue attempt is dependent upon early identification of
the problems. It requires honesty and openness from everyone involved and it
requires a commitment to enlightened self-interest.
Copyright © 2002 R3 Association of Business Recovery Professionals
A director of an insolvent company might be liable for:
- issuing cheques when it is clear they will never be honoured
- incurring credit when there is little or no prospect of payment:
- taking customer deposits when goods or services will not be supplied;
- returning goods to a creditor when the creditor has not retained title;
- selling goods at less than their true open market value.
- ACTION: make sure you know your company’s financial position. Take
professional advice. If you are unsure where you stand see a licensed
insolvency practitioner.
RECOGNISING AND DEALING WITH A FINANCIAL CRISIS IN YOUR OWN
COMPANY
A recent survey by R3 indicated the following main causes of company failure:
loss of market 29%
management failure 22%
bad debts 10%
lack of working capital 20%
Bad debt is, at least in part, a problem that is solved by effective credit control.
Well-run businesses find it relatively easy to obtain capital. Therefore, it is
probably reasonable that greater management acumen could help prevent
nearly two thirds of failures.
Copyright © 2002 R3 Association of Business Recovery Professionals
THE KEYS TO AVOIDING FAILURE
- be aware of your business’s weaknesses and problems;
- be aware of the general business and economic environment;
- take action when there may be a problem, do not wait until the problem has
occurred.
Recognising a Problem
Any business can have a financial crisis: no business is immune from the
impact of recession. Survivors, however, know where they are and know
where they are going. They have a clear idea of the problems they face and
they have plans to deal with them. They know the market never stands still
and they constantly strive to improve the product or service they offer.
IF YOU ARE NOT SURE WHETHER YOUR COMPANY IS A SURVIVOR OR
NOT, ASK THE FOLLOWING QUESTIONS:
Do you have a current business plan?
Do you review costs and overheads as well as sales?
Was your last set of audited accounts more than 12 months ago?
Do you prepare regular management accounts?
Do you prepare annual projections and cashflow forecasts?
Is actual performance regularly reviewed against plan?
Do you prepare and use aged debtor and creditor lists?
Do you and your co-directors meet regularly to formally review progress? Or,
if you are on your own, do you set aside time just to understand your financial
position?
IF YOU ARE DOING ALL THESE THINGS, THEN YOU ARE LIKELY TO BE
IN A POSITION TO NOTICE THE SIGNS OF IMPENDING CRISIS. IF THEY
OCCUR. YOU’LL KNOW YOU ARE STANDING AT THE TOP OF A
SLIPPERY SLOPE IF YOUR PROCEDURES REVEAL THE FOLLOWING:
If any of the above makes you feel uncomfortable, try the list below. If any of
these statements are true, chances are you are over the edge of the slope
and heading downhill. It’s time to seek help if any of these statements apply.
Copyright © 2002 R3 Association of Business Recovery Professionals
- FOUR PER CENT OF CASES WERE CAUSED BY THE BANK SAYING
‘ENOUGH IS ENOUGH’. RESEARCH INDICATES THAT 76 PER CENT OF
INTENSIVE CARE CASES ARE STARTED BY THE BANK.
Poor collection of debtor book (greater than 45 days is considered poor in
many business sectors).
Extended lines of credit – is exposure to key customers worsening?
Rising work in progress that is not billed on time.
Diminished cash balances – is the bank balance steadily reducing; are
planned purchases being put off or are they being made by expanding
payment periods, rather than cash?
Over reached overdraft facilities.
Poor cost control with too many people responsible for purchasing, leading to
lack of organised discount opportunities.
Lack of long standing relationships with suppliers: Are you giving up on them
– or are they giving up on you? Or are you widening your range of suppliers
simply to make more credit available?
Rising stock levels and static sales
Contract disputes
Final demands and writs being received
Your business is largely reliant on one or two customers – and those
customers are not paying as well as they were.
You are increasing borrowings just to keep the business running.
Your outstanding debtors or potential bad debts seem to have increased
suddenly.
Are you still unsure how much you owe, and how much you are owed?
You are more than one month adrift in payments to the Inland Revenue or the
Customs and Excise.
The bank is calling you to say you have exceeded your overdraft limit.
You have received a statutory demand for payment, which could lead to a
winding up petition.
Copyright © 2002 R3 Association of Business Recovery Professionals
The Investigating Accountant’s Report is often a starting point for the business’s
route to recovery and should be embraced by the directors, especially when they
take into account their personal responsibilities. At a time of crisis professional help
should be sought.
Remember, the report is not a foregone conclusion. It is an independent review.
If things have got this far, you should seek professional advice immediately.
Getting On With The Bank
In many cases, a company insolvency will be triggered by the company’s
bankers finally giving up all hope of seeing the business keep up with the
terms of its facility. In nearly every case, this only happens after the bank has
explored every other avenue – or when the bank completely loses confidence
in the company. Company insolvency surveys show that only 4 per cent of
cases are caused by the bank saying ‘enough is enough’. Indeed, intensive
care research indicates that 76 per cent of intensive care cases are started by
the bank. In well over half (57 per cent) of these cases, a rescue is achieved
outside insolvency. In a further 14 per cent of cases, an insolvency procedure
(either administrative receivership or a Company Voluntary Arrangement) is
used to achieve rescue.
Bank rescues usually start with the appointment of an investigating
accountant (normally also a licensed insolvency practitioner). This figure is a
bit of a bogeyman simply because, if insolvency is inevitable, he often is
appointed as the administrative receiver. However, as we have shown, most
bank investigations end in an informal rescue or reconstruction – not
insolvency.
Part of the investigating accountant’s doom-laden reputation must be due to
the fact that, traditionally, his appointment is sudden and unexpected: if a
company is communicating effectively with its banks, this is much less likely to
be the case. The reasons for the appointment are more likely to be
understood and the outcome is much more likely to be a good one for the
business.
The British Bankers Association (BBA) has published a Statement of
Principles ‘Banks and Businesses: Working Together’, codifying banks’
policies concerning the treatment of companies in difficulties. It also shows
what sort of information banks usually look for.
This makes it clear that the banks will support a realistic rescue proposal, as
long as a client company communicates with them effectively and tries to
keep to its commitments to the bank. You can get a free copy of the statement
from the BBA by telephoning 020 7216 8846.
Copyright © 2002 R3 Association of Business Recovery Professionals
A RESCUE CAN BE ACHIEVED BY A NUMBER OF METHODS, DEPENDING
ON THE PROBLEMS THAT NEED TO BE ADDRESSED.
Investigating Accountant Reports (or viability reports)
It’s not only a bank that can ask a company to put in an investigating
accountant. Occasionally larger trade creditors may do so.
When preparing the report, the investigating accountant relies upon the co-
operation of a company’s management- and one of the first things he will
notice is whether the directors are truly on top of their financial situation or not,
and whether they have a clear view of the future.
The investigating accountant’s report is a review of the current position, a
summary of future prospects and a recommendation of a way forward for a
continued relationships between the company and its financier.
These confidential reports are intended to provide an objective view of the
company. Although financial information is important (the report will normally
provide an opinion on the viability of the company – or, perhaps, part of the
company), these reports will usually include information about business trends
in the company’s marketplace.
The commissioning of the report is rarely the beginning of the end; more often
than not it is the beginning of a way forward. In most cases (80 per cent,
according to SPI research), this recommendation will not be the appointment
of an administrative receiver.
Most directors find that such reports add value to their businesses and some
may request a report to provide them with comfort that their company is
neither insolvent nor that there is a problem looming on the horizon. Such
formal ‘health checks’ are rare but may follow when a licensed insolvency
practitioner’s advice on the company is sought through a company’s other
advisers.
Even if a report is initiated by a third party (and must meet that third party’s
needs), it is the target business that is paying for it: the directors should
therefore ensure that the report is of benefit to their own company.
It is unlikely that a third party will commission such a report without good
reason. However, sadly, a number of investigations are carried out each year
simply because the directors have been unable (or unwilling) to come up with
the financial information requested by their bank.
Often the report will make recommendations which may involve further
monitoring of the position by the licensed insolvency practitioner to review the
effectiveness of the proposals when enacted. Some of these
recommendations may involve a voluntary or contractual arrangement.
Copyright © 2002 R3 Association of Business Recovery Professionals
Sometimes corrective action is necessary within the company. This might
entail cutting costs, strengthening the management team, raising additional
capital or selling the company or merging with a third party to provide the
financial resources necessary to overcome the difficulties. Sometimes a
formal insolvency procedure is recommended, but it will only be suggested if
that is the appropriate way forward: that procedure itself can enable the
rescue of a business.
Rescues
A rescue can be achieved by a number of methods, depending on the
problems that need to be addressed and on the attitude of the company’s
creditors, particularly any secured creditor – such as the bank.
A company can negotiate with its lenders to reschedule debt or allow
additional facilities. Banks will have an intensive care programme for these
circumstances. This will often involve the use of a licensed insolvency
practitioner to investigate the company’s affairs. This investigation may lead to
a report for the lender. As we have said, and contrary to popular belief, the
end result of such a report more often than not leads to a rescue strategy
without any formal insolvency.
Negotiations with government and trade creditors to reschedule payments.
This aims to avoid action, like winding up petitions, which might force a
company into insolvency. This involves communication with creditors, often
assisted by a licensed insolvency practitioner acting as an intermediary to
form an understanding (usually not binding to any party) between debtor and
creditors. Using an intermediary often helps to ensure the debate remains
objective and is not clouded by the emotional issues and hot tempers that
often come to the fore in a crisis. The larger the number of creditors, the less
likely that such an informal arrangement will work. Instead, a licensed
insolvency practitioner may recommend a CVA which, once agreed, is binding
on all parties.
The options outside formal insolvency are often put together with the
assistance of a licensed insolvency practitioner acting on behalf of either
debtors or creditors. Such options have no formal framework and are often
unreported. If they became public knowledge, particularly in the case of
quoted companies, then the company’s ability to rescue itself would be
instantly- and savagely- diminished.
Informal procedures will only work if the rescue culture attitude of ‘enlightened
self-interest’ is adopted by the debtor and creditors involved. A licensed
insolvency practitioner can assist in helping all parties to see the need for
careful co-operation and by ensuring that everyone is satisfied that the
proposed actions are within the law.
Copyright © 2002 R3 Association of Business Recovery Professionals
CVA’S ARE NEVER AN EASY OPTION FOR THE COMPANY, AS THE
CREDITORS ARE UNLIKELY TO AGREE TO ANYTHING THAT DOES NOT
OFFER SUBSTANTIALLY BETTER TERMS THAN A LESS RESCUE-
ORIENTATED INSOLVENCY PROCEDURE.
The End?
Sometimes a formal insolvency is unavoidable. But, this does not
automatically mean a rescue is impossible. Once a business is in any form of
formal insolvency procedure, the licensed insolvency practitioner’s first
responsibility is to the company’s creditors. However, as we have pointed out,
rescue (in whole or in part) is still likely to be the best possible option for
creditors as well as for the business. The options in each form of insolvency
can be summarised as follows.
Liquidations
Liquidations are not normally rescue procedures. The liquidator only has a
limited power to continue the trade of a company. Therefore, a going concern
sale of the business is uncommon- although possible if done almost
immediately. The liquidator can sell the assets piecemeal to enable a new
business to be established speedily, and this can include the sale of the name
if it has value.
Administrative Receivership
Normally, the administrative receiver has all the powers he needs to decide
whether to continue to trade the company and attempt to achieve a going
concern sale. Around half of all administrative receiverships end in rescue of
all or part of the business. In many cases the business is sold back, free of
debt, to its existing managers. So, receivership need not necessarily mean the
end of a director’s connection with a business – management buyouts are
often the best solution for all concerned, including the creditors. Most
administrative receivers are appointed as agents of the company and can
exercise contracts on behalf of the company. The administrative receiver has
wide powers to sell the assets and goodwill of the business but it is usual that
the liabilities will remain with the company to be settled from the proceeds of
sale.
Copyright © 2002 R3 Association of Business Recovery Professionals
Company Voluntary Arrangement (CVA)
In a CVA, proposals are drawn up which may involve delayed or reduced
payments of debt, capital restructuring and an orderly realisation of assets.
Creditors must usually agree to accept less than they are owed and, usually,
to be repaid over a longer period of time. CVAs are never an easy option for
the company, as creditors are unlikely to agree to anything that does not offer
substantially better terms than a less rescue–orientated insolvency procedure.
A meeting will be held to present the directors’ proposals to creditors, 75 per
cent (by value) of creditors present or by proxy must vote in favour of the
arrangement for it to be binding on all parties. The arrangement is supervised
by a licensed insolvency practitioner who, in many cases, will have advised
the directors on the structure of the arrangement. However, on successful
completion of the CVA the company’s legal entity will remain substantially
unaltered and the directors will be free to grow the business in whatever way
they choose. Putting a CVA in place, however, does not necessarily tie the
directors to the company: it can provide a vehicle to sell a business to new
management too.
Administration
An administration order is an order of the court and an administrator is an
officer of the court with similar powers to an administrative receiver. An
administration order will only be granted if one or more of the following is
possible: survival of the business (or part of it); better realisations than from a
winding up; a CVA or arrangement with creditors that the court is satisfied has
a realistic prospect of success.
Other Procedures
Schemes of Arrangements and Members’ Voluntary Liquidations can also be
used to ensure the survival of part of the business. Within the context of a
rescue these procedures are usually only used in specific circumstances – for
example, schemes of arrangement are often used as an alternative to
liquidation for insurance companies.
Copyright © 2002 R3 Association of Business Recovery Professionals
WHO CAN HELP?
Getting Professional Advice from The Right Source
Your existing accountant, auditor or solicitor may be in a position to provide
you with the advice you need. The provision of advice on insolvency matters
invariably requires involvement of licensed insolvency practitioners and it is
important to ensure that your existing advisors have this expertise (if formal
insolvency is inevitable, your existing advisors will not be able to help, but may
be able to point you in the right direction). If existing advisors cannot help, you
are best advised to contact a licensed insolvency practitioner. Most, if not all,
will offer you an initial free consultation. And, if your concern is not with your
own insolvency but with that of a customer, a licensed insolvency practitioner
will, in many cases, represent you free of charge at any creditors’ meeting.
Details of licensed insolvency practitioners close to you can be found in R3’s
annual directory.
Any Port in A Storm?
Reading this booklet means you are unlikely to be one of the many directors
who, every year, are duped into taking advice from unregulated advisors who
claim to be able to remove all the worry of insolvency. You will be fully aware
of your company’s financial position, you will talk to your bankers and you will
take advice from professionals before it is too late. If crisis is inevitable, you
will be prepared to make the right move towards the best possible resolution.
The unregulated advisor’s typical victims are usually those who, having seen
financial crisis creeping up on them, month after month, do nothing even when
county court judgements and winding up petitions start piling up. Then,
seemingly out of the blue, a letter will appear from a company offering
salvation.
Whilst there are some genuine, skilled and professional company doctors who
operate this way, the best that is likely is that the directors are charged a fee
for the advice that they consult an insolvency practitioner. The worst is that
the directors may be promised the moon, charged the earth and see nothing
for it – they certainly won’t escape their creditors.
Only licensed insolvency practitioners can take formal insolvency
appointments (other than Law of Property Act (LPA) receiverships, which are
only used to take control of mortgaged property). They also have enormous
experience in the arena of informal rescue and reconstruction.
It is true that many people could advise and assist you with informal
reconstructions. You do not necessarily need to deal with a licensed
insolvency practitioner. Our advice, however, is to ensure you deal with a
regulated professional (such as an accountant, solicitor or even, in the case of
property-related insolvencies, a chartered surveyor) whose code of ethics and
discipline will ensure they deal fairly with your interests and those of your
Copyright © 2002 R3 Association of Business Recovery Professionals
DEAL WITH A REGULATED PROFESSIONAL (SUCH AS AN ACCOUNTANT,
SOLICITOR OR EVEN, IN THE CASE OF PROPERTY-RELATED
INSOLVENCIES, A CHARTERED SURVEYOR) WHOSE CODE OF ETHICS AND
DISCIPLINE WILL ENSURE THEY DEAL FAIRLY WITH YOUR INTERESTS AND
THOSE OF YOUR CREDITORS.
creditors. At the very worst, if things go badly wrong, you will be able to
complain to their regulatory body and have the satisfaction of seeing action
taken against them if your complaint is justified. Deal with an unregulated
advisor and you have no guarantees or propriety, knowledge or skills.
Complaining Effectively
If you have a complaint about the way in which a licensed insolvency
practitioner has dealt with your case, you should, in the first instance contact
the practitioner concerned: most complaints are based on misunderstandings.
If you are still dissatisfied, you should contact the practitioner’s recognised
professional body (RPB). If you are unsure of this, contact the Association of
Business Recovery Professionals (R3), who will be pleased to point you in the
right direction.
Your complaint will be greatly assisted if you keep accurate notes of your
experience during the case (make them at the time – not later) as well as
copies of all correspondence received. It is as well to confirm critical details in
writing.
Insolvency law and practice is a hugely complicated area, further complicated
by the fact that a business crisis is normally an intensely stressful experience
for everyone involved. Complaints are rare (567) complaints against 18,297
insolvency cases in 1995) and most turn out to be misunderstandings. But,
they are always investigated and, if necessary, dealt with by the disciplinary
procedures of the practitioner’s licensing body who can reprimand, levy fines
and even take away a person’s license. In 1995, the RPBs received 567
complaints. Of these, 534 merited further investigation and 56 led to full
disciplinary hearings. As a result of this 51 practitioners were fined and 10 lost
their licence.
The insolvency profession is proud of its reputation and anxious to ensure that
all poor practice or, worse, malpractice, is eliminated.
Copyright © 2002 R3 Association of Business Recovery Professionals
WE ESTIMATE THAT, IN 1995 – 1996, LICENSED INSOLVENCY
PRACITIONERS RESCUED COMPANIES WITH A TOTAL TURNOVER OF £23
BILLION AND SAVED 98,000 J OBS. WE HOPE YOUR BUSINESS WILL NEVER
NEED OUR SERVICES. BUT, IF IT DOES, HAVING READ THIS BOOKLET WILL
HELP YOU ENSURE THAT YOUR BUSINESS IS ONE OF THE ‘SAVED’-
RATHER THAN ONE OF THE ‘BURIED’.
About The Insolvency Profession
The insolvency profession consists of fewer than 2000 individuals who are
authorised to undertake or supervise company and personal insolvencies.
These licensed insolvency practitioners are all authorised by one of eight
recognised professional bodies (RPB), or by the Secretary of State for Trade
and Industry.
Because licensed insolvency practitioners come from a wide range of
professional backgrounds they are usually licensed by the body from whom
they obtained their first professional qualification. Any practitioner joining the
profession since 1986 has undertaken around three years further specialised
training and has had to pass the examination of the Joint Insolvency
Examination Board (JIEB) before he or she can be licensed.
All insolvency practitioners are subject to the same rules regarding their
conduct. They have a common ethical code and the same set of rules
concerning the information they must provide to creditors. Their work is also
subject to regular scrutiny and monitoring.
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