Debt Management Guide for Limited Companies – Company Debt Advice Guide

COMPANY DEBT ANALYSER

Debt Management Guide for Limited Companies – Company Debt Advice Guide

Corporate insolvency ranges from a small business, with two employees owing a few thousand pounds, to the collapse of large groups owing upwards of a billion pounds. Some of the wrong reasons are:

  • Lack of financial management
  • Insufficient investment capital (cash): too much credit
  • Lack of general business skills (especially marketing skills)
  • Poor product/service
  • Too much cash taken from the business
  • Falling out with business partner/s
  • Fraud

Many owners of failed businesses would tell you that a lack of cash flow was responsible for the insolvency of their company. Cash flow is a symptom of one of the above reasons, not the cause of them.

Cash flow should only affect you if you had a customer who represented a large percentage of your sales, and they could not pay you (this is the danger of large orders in small businesses) or you overtrade.

A registered company can suffer a number of different forms of insolvency:

  • Compulsory Liquidation
  • Creditors Voluntary Liquidation
  • Members Voluntary Liquidation
  • Administrative Receivership
  • Administration Order
  • Company Voluntary Arrangement

Creditors Voluntary Liquidation

Contrary to what it seems: a creditors voluntary liquidation is not initiated by the creditors, but by the directors of the company who approach an insolvency practitioner with a view to winding-up the company: this being due to the directors assessment that the company is, or will be, insolvent.

The relevance of ‘creditors’ in this type of insolvency is the right of the ‘creditors’ to reject (by value of vote) the choice of the liquidator chosen by the company director’s. There is a possibility of a ‘friendly’ liquidator, who may be less than vigilant in tracking the company’s demise, and running of.

There is a cost to liquidate the company payable by the company, for the fees of the liquidator. This fee, usually being a fraction of the debt owed by insolvent companies, is an attractive alternative (issues aside) to continuing to trade, or indeed, applying for a Company Voluntary Arrangement (CVA).

Striking Off

The alternative to a CVL (and the company is insolvent) is to cease to trade: ‘striking off’. There are two ways to do this:

a) Contact all interested parties (creditors, shareholders, employees…) and formally apply to the Registrar (of Companies) to be struck off the list. There are many conditions to be met, and not least that this option is not an alternative to insolvency action (however, with your creditors approval it is possible).

b) Do nothing, and wait for Companies House to strike off the company due to non-compliance of legislation (i.e. the lack of a yearly ‘return’, and or accounts), or the return of post as a ‘gone away’. This way will affect your standing as a future director of a company.

Neither of the above can liquidate your creditors without their authorization, prior or after striking off: a creditor can appeal where they were not informed or little attempt was made to inform them.

Members Voluntary Liquidation (MVL)

To wind-up a solvent company the directors swear a declaration of solvency stating that they can/will pay all creditors within twelve months. Followed within five weeks by a meeting of the shareholders (members) to adopt a resolution to wind-up the company: having the effect of placing the company in members voluntary liquidation: a liquidator is appointed who realizes all assets, and distributes funds within twelve months of the start of the members voluntary liquidation.

Administrative Receivership

An administrative receivership comes as a result of a company defaulting on secured borrowing. The borrowing is usually from a bank. To provide a business with a significant finance facility, a bank requires a ‘floating charge’ (can be fixed and floating charge) in the form of a debenture.

When the bank believes that the company is about to become insolvent, or the company is insolvent, the bank will appoint an administrative receiver (thereby putting the company into administrative receivership) to run the company with the objective of recovering the outstanding bank finance, through any means .

The receiver has to discharge the fixed charge first, followed by the preferential credi tors, and finally the floating charge. The receiver (who controls the administrative receivership) then hands the company back to the directors, together with any surplus funds.

In some cases where a liquidator has been appointed, and a floating charge exists, the receiver can still be appointed to discharge the banks charge. The receiver would then hand the company, and surplus funds back to the liquidator.

Although it is unlikely that payment problems will exist where the Administrator orders goods/services while controlling the affected company, it is possible that you may not get paid where non-connected events cause the Administrator to re-evaluate the cash flow position (and more than likely at an early stage of the Administration). You may want to consider ‘cash with order’ (where special orders are involved), or ‘cash on delivery’.

The purpose of an administration order is to use the courts protection to enhance the survivability of a company that is experiencing short/medium term financial problems and/or the better realization of the company’s assets. The protection, in the form of a court order, forbids any form of legal or insolvency action without the courts permission. For instance, only an administration order can protect a lessee, from a lessor who is looking to recover goods. Also, an administration order can offer full protection to a voluntary arrangement.

Although it is unlikely that payment problems will exist where the Administrator orders goods/services while controlling the affected company, it is possible that you may not get paid where non-connected events cause the Administrator to re-evaluate the cash flow position (and more than likely at an early stage of the Administration). You may want to consider ‘cash with order’ (where special orders are involved), or ‘cash on delivery’.

Company Voluntary Arrangement [CVA]

A company, not suffering from terminal insolvency, but suffering from short/medium term financial difficulties can offer its creditors a company voluntary arrangement that will give the creditor, say, 40p in the £1, over two years: with the alternative being a creditors voluntary liquidation.

A meeting of the creditors is held to hopefully achieve 75% of the vote (in value of debt).

Compulsory Liquidation

A winding-up petition is usually initiated by a credit or, or a government department, due to an outstanding debt that the company has not paid.

The petition on is served on the company, then advertised in the press with a date set for a court hearing. If the company has not paid the debt for which the petition was issued, and/or further debtors and/or company irregularities come to light, the court will usually approve a winding-up order.

The official receiver (OR) immediately takes control of all aspects of the company. The OR has twelve weeks in which to decide whether or not to hold a meeting of creditors: a meeting will usually be called if there is a prospect of payment to a creditor/s.

If there is no prospect of payment, and no sign of irregularity by directors, the matter is closed.

If you have information about a company in liquidation that you want to divulge, or you want to register as a creditor and you are not sure where to contact, there will usually be an OR in the debtors area who will be dealing with the case

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