The outlook for business next year looks depressing. A glance around the news items this week points to poor prospects on the High Street and no sign of the Eurozone crisis being resolved. Haulage businesses and construction look like they are in for a bad run and even accountants don’t appear to be immune to the effects of the current economic climate.

So the prospects are poor but you are still in business right? But for how long? Most businesses have cut and cut again hoping that the answer to their problems lies just around the corner. The insolvency world has coined a new phrase for these businesses – Zombies. Companies that have no prospect of recovery, yet they are not closing down. You may think this is a good thing but I say that it is only delaying the inevitable.

Directors will often put money into a company that is insolvent without thinking about it. This can take many forms

• · Paying for essential supplies with personal credit cards
• · Not taking a salary
• · Putting your savings into the business
• · Borrowing on a personal loan

But stop and think before you do this. I have seen a number of businesses recently where if they had sought my advice six months ago it would have a made a big difference to their lives both personal and business. They would have had the resources to restart their lives but instead they ploughed it into a lost cause.

It is always a difficult time to contemplate the closure of your business. The emotional tie to the customers, suppliers and employees can cloud your judgement. But before you think about investing in your insolvent business think the unthinkable. Could you use those resources in another way? Should the business be restructured or cease being in business. Call me on 07974 458101 and chat it through – I’m sure I’ve seen worse and I like solving problems. There is always an answer to the problem.

Chris McKay, 19 December 2011

It is a common assumption that insolvency practitioners (”IPs”) are only there to shut down businesses. The advice that we give to the directors of companies is often by far the most valuable advice that the directors receive and usually a good proportion of that is given at the first meeting and is normally free of charge.

If you are concerned about talking to an IP don’t be. A high proportion of the people that ask for my advice don’t end up shutting their businesses down.

At a first meeting the IP is going to want to try and understand your business – warts and all. You need to think about whether the business is generating a profit, or could it be capable of generating a profit if changes are made – what are those changes?

At any early stage of the meeting the IP is going to want to ask about the cashflow. What money is due in over the next few weeks, what is due out, what can be delayed. All of this information helps to workout how long the business has got to devise a rescue plan. It could be just days or hopefully weeks.

Usually the IP will then sketch out a statement of the companies assets and liabilities called a statement of affairs. This tells him who is going to get paid and if not everyone what the short fall is. This is a very important tool especially if the directors have given any guarantees to the bank or other creditors.

At this stage it is also important to understand what the directors want the outcome to be. It is at this stage that the IP’s experience in dealing with distressed businesses really pays off. For an experienced IP there is not much that they have not seen before. For the directors this is usually the first time this has happened and although they may have an idea of what is possible, the IP has the expertise to guide them through the many different options that are available to try and achieve the directors desired outcome.

Having established the financial state of the company and the desired outcome, the directors and the IP can then formulate a plan to turnaround the business.

Chris McKay, 12 September 2011

Recent media reports have carried a ‘warning’ from the head of the Citizens Advice Bureaux (CAB) that public sector cuts will force the charity to close many of its centres. Gillian Guy, head of the CAB, told the BBC:

“We are facing a real threat to vital funds at a time when demand is increasing, and will continue to increase, as all the financial and social changes come into effect. Hundreds of thousands of people may not be able to get much-needed help next year.”

This comes at a time, of course, when personal debt levels remain high and getting the right sort of impartial (and free) advice has become more difficult. Some observers have called for greater resources to ensure that those struggling with debt are able to get the advice they need. The reality is that such a reversal is very unlikely. In all probability, the spending cuts could begin to bite deeper.

Historically, the Citizen’s Advice Bureau has provided invaluable free advice and assistance to thousands of people facing financial difficulties. However, like many other public sector bodies, the CAB has been badly affected by the government spending cuts particularly as they have had direct knock-on effects on spending on ‘front line’ debt advisory services.

These ‘front line’ debt advisory services are funded by the Financial Inclusion Fund, which ends at the end of March. As a result, the CAB has announced that it has had to cut five hundred debt advisor positions.

The CAB is not however ending specialist debt advice services altogether. Their chosen option is to reduce the number of advisors in line with the funding cutbacks. Bad news is always bad news of course and these cutbacks will come as a disappointment to the thousands of people seeking debt advice. In some cases the situation does indeed look serious.

As an example Birmingham city council funding has ended completely leading the CAB to announce that the city’s five centres will close down this month.

The picture nationally is not as clear-cut. CAB debt advisory services are likely to still be available but with less staff, shorter hours and much longer queues. The story of the umbrella not working just as it started to rain comes to mind.

Chris McKay, 17 March 2011

In a recent legal case  BNY Corporate Trustee Services Ltd v Eurosail – UK 2007 – 3bl Plc & Ors [2011] EWCA Civ 227 the Court was asked to consider S123 (2) of the Insolvency Act 1986, the so called “balance sheet” test.  A company is deemed to be insolvent if the value  of its assets is less than it liabilities taking into account its contingent and prospective liabilities.

The court of appeal has held in this case that the question whether section 123(2) applies does not simply turn on the question whether the liabilities of a company (however they are assessed) exceed its assets (however they are assessed).  As the judge puts it “In practical terms, it would be rather extraordinary if section 123(2) was satisfied every time a company’s liabilities exceeded the value of its assets.”

Instead each case must be taken on its own merits and judged on whether or not the company will reasonably be able to pay its debts in full.

Chris McKay, 10 March 2011

A letting agent who used thousands of pounds of clients’ money in an unsuccessful bid to prop up his ailing business has been jailed for 12 months.

He had set up  an estate agents and letting agent in Rugby in 1985, and was the sole director and shareholder until it closed for business in October 2009, and went into liquidation in November owing a total of £382,000.

When he was arrested he said he had run into financial difficulties with people who owed him money and he was taking money from different accounts to pay bills to continue running his business.

Whilst it is tempting to try and continue running a business to try and turn it around, this story shows how easy it is to step over the line and end up in more trouble.  As always seek advice early.

Chris McKay, 16 February 2011

It has been widely reported that the numbers of corporate insolvencies are falling.  But why is that?  Does it really mean that we are over the worse?

No one really believes that we are over the recession yet corporate insolvencies are falling.  I think there are a number of reasons for this.

1. The falls are in relation to year on year comparisons.  They were a lot higher last year so it makes sense that they seem to be falling now,  yet they are still higher than prior to the credit crunch.
2. Banks, whilst not lending “good money after bad” are not rushing to close companies
3. HMRC time to pay agreements have kept business going
4. Creditors are generally not forcing companies out of business.

But I think the main reason is indecision.  Everyone I speak to says that while there are opportunities for businesses it is difficult to get a decision.  Projects are put back or cancelled.  This feeds into underperforming businesses as well.   They keep themselves going hoping that the promised order comes through.  Yet frequently it does not.

Will the number of insolvencies continue to fall?  Well that depends on whether you believe all the problems are out of the system.  Debt levels are still high and while interest rates are low, servicing is not the biggest problem, but the capital still needs to be repaid.  Creditors who are patient now may just be waiting for the right moment.

Even if we are on our way to recovery some businesses are going to struggle to get the working capital to take advantage.  Having downsized to survive can they gear themselves back up; do they even want to?

The next few months are going to be interesting.

Chris McKay, 20 July 2010

Running a business is very much like a game of football.  Your sales team play up front trying to score a goal (get a sale).  While your services and products are delivered by the midfield.  In defence you have got the back office.   In goal?  Why that’s you, the business owner.  Trying to fend off attacks on your business and keeping your company in the game.

You start your business with a kickoff and after a fairly eventful first half your sales team take the lead with a well placed order.

You come out for the second half believing that you are winning.  The midfield let you down and before you know it you are on the back foot.  You take you eye off the ball and you are back to where you started.   With pressure mounting you approach full time.  The game moves into extra time and the pressure is on to keep the creditors at bay.

The final whistle blows and it’s your worst nightmare.  Penalties!   When was the last time you won on penalties?  As the keeper you are on your own.  Stepping up to the spot is your main supplier.  He takes aim and you manage to deflect his shot with the old “cheques in the post” routine.   You survive this round but next you face the taxman. His more powerful shot is harder to deflect.  At best you save this month’s attempt but next time you know it won’t be so easy.

This is it.  The final kick of the ball.  You decide that you must take that final shot.  Just you against the old enemy.  His goalie the local manager – Mr Overdraft.  Nearing the limit  you step up to the ball and take aim with your best shot, the weekly wages.  The ball seems to hang in the air.  It’s going to dip just below the bar but at the last moment the keeper knocks it over the bar – over the limit no more chances.  You lose the match.

And the moral of the story?  Don’t leave it to extra time and penalties to try and save the game.  Bring on a sub (or insolvency practitioner) early to save the day!  Otherwise all the commentators will be shouting is “they think it’s all over – it is now.

Chris McKay, 10 June 2010