McTear Williams & Wood

In the roadrunner cartoon series Wile E Coyote runs off the end of the cliff so fast that he defies gravity for a few seconds but when he looks down, realising his predicament, he falls to earth. Is this us in Britain right now?

In spite of the current double and possibly triple dip recession bank/creditor forbearance and ultra low interest rates have enabled over indebted consumers and businesses to avoid crashing to earth. The corporate insolvency rate is just 0.9% compared to 3.6% in the milder recession of the early 1990s, a third of mortgages have had capital repayments converted to interest only and between 5% and 8% of mortgages have had some sort of forbearance. At some point the nation will have to face up to its accumulated debts, banks will need to realise losses and like the coyote the weaker debtors will fall to earth and default.

At the end of November the Bank of England implored UK banks to raise yet more capital presumably to insure against exactly this. In our own way we have tried to help business owners protect their capital by issuing a briefing sheet on “financing distressed businesses” which you can find at www.mw-w.com/briefing-sheets

The outlook for family/SME businesses is as uncertain as ever. The economy is flat lining at best and bank lending criteria remains tight. So new investment in businesses often relies on cash injections or bank guarantees from family and friends. Investing in a distressed business, perhaps to fund a turnaround, can be particularly hazardous but with a bit of forward planning an investment can be made quite properly at little or no risk. To help business owners navigate this difficult area we are just finalising a briefing sheet on “financing distressed businesses” which will be published on our web site later this month. We hope you find this helpful.

‘Insolvencies keep falling’ – is the recent headline in the financial press.   Amazingly personal insolvency bankruptcies and IVAs are down 27% and 10% on a year ago and corporate insolvencies are down 2% if you ignore a bunch of companies associated with Southern Cross.   How does that work when the economy has just shrunk by 0.7% in the last 6 months?

The truth remains that the economy is still just about flat lining and people and Companies are hanging on.   No creditors are really pushing the pace and private sector employment is steady.  In previous recessions where the numbers of insolvencies explode either unemployment went through the roof or interest rates went sky high forcing insolvencies – neither applies today.  So how long can this benign environment continue?

No one knows but it is unlikely to carry on indefinitely, perhaps not long beyond the end of this year.   After a long economic boom 1995 – 2007 there has to be a bust with a shakeout phase before the economy gets going again.  If you or any of your clients are in financial difficulty don’t wait for events to overtake you get a grip now – there will be many more options and better potential outcomes available today.

One of the biggest issues that we see at the moment for directors is unlawful dividends. Basically dividends can only be paid out of distributable reserves when the correct process is followed. But when a company heads towards or becomes insolvent even if it is the right decision to continue to trade it is almost certainly the wrong decision to continue to pay director/shareholders by way of dividends that can be clawed back by a liquidator. Instead if they work in the business they should be employed and paid a fair wage/salary through the payroll. An added advantage is that in any insolvency process if the directors have continuous service with the company after 12 weeks the new rate of pay is applied to any redundancy or PILN payments from the Government. If in doubt talk to your accountant or give us a call.

The recent release of the National insolvency statistics by the Insolvency Service for Q1 2012 has brought the usual rush of press releases trying to put the numbers into context. Here is my spin on it.

Most of the headlines concentrate on liquidations being up 0.2% on the previous quarter and 4.3% on the same period last year and administrations being up 10% on the previous quarter. Whilst true I think these rather miss the key point which is that overall corporate insolvencies are flat lining at historically very low levels, especially given that the UK economy has officially slipped back into recession. Since 2008 we have not seen the volume of business failure we would normally expect in a recession which seems to be because banks and other creditors are showing remarkable levels of forbearance. This had resulted in thousands of “zombie” companies – insolvent and making losses but with just about sufficient cash flow to trade – stumbling on.

For directors of companies in this position we understand how difficult this is and are here to help – if early advice is taken there are always more options – just call us on our free helpline number 0800 085 5070.

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.

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.

In a 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.

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.