What is a Statement of Affairs?
A statement of affairs (SOFA) is a structured document which provides important information on the assets and liabilities a company has at a given moment in time and any other relevant information pertinent to its financial situation.
Read
HMRC To Become Preferential Creditors
Since 1 December 2020 a change in the law has meant that the way in which some liabilities due to H M Revenue & Customs (“HMRC”) are dealt with in an insolvency situation has changed. Previously, monies due to HMRC are dealt with in exactly the same way as monies due to trade suppliers, landlords, utility companies and so on. However, as of 1 December 2020 this changed and some monies due to HMRC will become “preferential” and will therefore come before other creditors.The reform only applies to taxes which are collected and held by businesses on behalf of other taxpayers, i.e VAT, PAYE, Income Tax. For taxes owed by businesses, the changes are non-applicable i.e for corporation tax and employer’s national insurance contributions.It’s believed that this decision will add £185 million to the treasury’s overall tax intake, over a year.HMRC will continue to offer time to pay arrangements if viable businesses with tax debts need to avoid insolvency. The measure is expected to combat tax avoidance. But doubts arise in that it will transfer the losses to the private sector, have a knock-on effect of borrowing costs and leave employees and suppliers with smaller pots when businesses go bust. However, the Treasury states that most unsecured creditors are unable to recover their debts anyway, so will be unaffected.On the face of it, this might not seem too important, but it could really impact on both your company and any personal guarantees you may have given to say banks or other lenders. What are the implications for directors that have given personal guarantees? The issue is that many banks and other lenders rely on what is called a debenture, which creates fixed and floating charges, to give them security over the assets of a company. In essence, this means that in a formal insolvency, such as liquidation or administration, monies realised from the sale of assets, or the collection of book debts, go to repay any sums due to the bank or other lender. However, where the assets are covered by a floating charge (usually plant, machinery, vehicles, stock, cash balances, book debts which are not subject to a factoring agreement), then any monies realised from those assets MUST first go to pay any preferential creditors.At the moment, the only preferential creditors are certain employee claims which are usually fairly modest, so the bank or lender gets most (c80%) of the money realised after payment of the modest preferential claims and after providing a percentage of the monies to deal with the claims of all other creditors. This is known as the Prescribed Part, it is set down in statute and usually equates to somewhere just over 20% of the monies realised.However, after 1 December 2020, the claims of the preferential creditors might be significantly higher due to monies due to HMRC. This would therefore mean that the monies paid to the bank or other lender might be significantly reduced. If this results in a shortfall to the bank or lender which you as a director have personally guaranteed, this could be a MAJOR concern. It might also result in significant concerns for your bank or other lender!Obviously, not all companies are the same and each companies' individual circumstances may vary. However, this could be quite a problem for some companies and directors. See Below Creditors Priority
Read
Insolvency Advisors? Know who you are dealing with!
It should be remembered that there is less legal protection for businesses than there is for consumers as business owners are expected to be able to make informed decisions. Unfortunately, when businesses find themselves in distress the directors may make decisions in haste.
Read
I Can’t Pay Staff Wages – What Can I Do?
if you worry you cannot pay the staff wages at the end of the month then it is likely that your business is insolvent and you will need to take action. There are options if you act quickly.
Read
Personal Liability Notice or PLN Explained
A personal liability notice (PLN) is issued by HMRC and governed by Section 121C of the Social Security Administration Act 1992. It gives HMRC the power to issue a notice to an individual officer of the company to be personally liable for National Insurance Contributions or NIC.
ReadResigning As A Director Of An Insolvent Company?
Resigning as a director of a company Directors resign all the time, for various reasons be it retirement, desiring a new venture or relocation, but to name a few. The process tends to be quick and easy, however certain considerations need to be made. This page firstly describes the resignation process of directors and then addresses some certain considerations. The resignation process for directors:Write a letter, informing your fellow company directors of your intention of a resignation. Note that a justification is not needed, but an official termination date is. If the fellow directors approve your intention, form TMO1 is to be filled out and sent to companies’ house, notifying them the intention. When companies house receive the form, they will remove you from the list of directors for the companies records. You may wish to inform suppliers and customers of your resignation, informing them with the right direction for contact, in your departure. So long as you complied with the law during your time in lead, you can now walk away freely.Things to consider: If your company has limited liability and falls into debt either before, after or during your resignation, there is no effect for you as a director. Limited liability enables you to benefit as you are not held personally responsible if the company cannot meet its liabilities. Instead, insolvency procedures such as liquidation commence as a means of bringing matters to a conclusion. Only the directors who oversee at the time of the insolvency have the power to begin or prevent the particular procedure – as soon as you resign you have no control over how the company continues to be run. What about debts or personal guarantees? Once being removed from the records, your liabilities with the company are complete so long as limited liability is involved. In terms where personal guarantees are involved, the situation gets a bit sticky. It is a common question which we are asked…and the sad truth is that No, when you resign, you do not lose your personal guarantees, they continue to remain – it is not invalidated upon your departure!! This means that if during your directorship, you signed a personal guarantee for a company loan, credit card or other financial deal, then if the company has insufficient funds to pay it back, you will be held liable and you will be chased. Until the money is paid back in full, the debt is the responsibility of you, being the guarantor. Therefore, you should ask to be released from the personal guarantee once you have left.If you have resigned from the company make sure you pay back any loans that you have had from the company as otherwise you will be chased for them.Anything which occurred during your time being the director, can come back to haunt you. For example, if the company goes insolvent years later and administrators are called in, they will investigate the director’s actions of the past 3 years – hence you may be held responsible if any wrongful actions occurred. Therefore, consider your actions as a director carefully.Another thing to consider is, do you have shares? Often directors are also shareholders. In such cases, you must check the articles of association found at companies’ house – in these circumstances are the shares to be transferred? Are they automatically to be sold? Can they be kept?Finally, are you owed any money yourself? Have you been paid your salary to date in full?See this page about selling your company just because it is insolvent!
Read
HMRC VAT Security Deposits for Struggling Companies
We have received a letter from HMRC and they have demanded a security deposit. What does that mean?
Read
Business and Personal Objectives in Insolvent Situations
Is your Business Insolvent? How to establish your objectives in such circumstances? Now that you have established that the business is insolvent or facing insolvency, we believe it is vital to establish just what your business and personal objectives are? Clearly, this process cannot be "all things to all men", but we have set out here the main objectives for business people, their family, their employees and their creditors. Using the links in the text below will take you to the relevant techniques highlighted. But if you want a general outline first, click here Your Options. Personal Objectives Getting rid of the pressure Look, in our experience, few people set out to run an insolvent business. Because of many different circumstances, the business is under pressure. As a senior part of that business, you are under pressure too. Often this can be because of procrastination – or the failure to make a decision. Often this pressure is much reduced when a decision is taken. Whether the decision is made to close, or to fight on or to drive a rescue and restructuring, there will still be pressures, of a different kind! Crystallising the position – “Where Are We”? Related to above. It is important to draw a line in the sand. Even if the decision is to explore all options, compare and discuss and then wait for other pieces of the jigsaw to fall into place - that is a decision. But monitor progress and ensure that together you are achieving the set objectives.Set out a list of all debts, assets and the good and bad parts of the business. This helps you work out “where you are”. This will be helped by doing a simple cashflow projection – we even provide you a free cashflow model to get this done. Getting on with your life Perhaps it is just time to walk away and get on with something else. It is rarely as bleak as you think to close a business - life does go on. Saving your marriage The pressures can be very difficult to leave at work. Your spouse may also be part of the business. If so then involve them in the decision making process. They often have an ability to see past the pressure points to the bigger picture. Decide if the business pressure is worth losing your marriage? If it is viable and you are determined, then think of how to improve the day to day effects on your marriage. Protecting your family As saving your marriage. Remember a family is much more important than ANY business. Protecting your health As saving your marriage, alcoholism, stress-related illness and other problems can be caused by business pressure and failure. Consider yourself carefully. Are you the right person for this job? Is being in business a good idea? Is the business viable?Learn more about CVA, Administration, Trading Out, or Refinance. If it all seems too much for your health and you cannot change lifestyle to avoid the symptoms of business pressure, then consider closure. Avoiding personal liability or personal guarantees This is a perfectly reasonable objective from a human nature perspective. However, be warned that trying to avoid this can lead to problems. Remember the mantra: "maximise creditors interests first". Of course, you are a creditor or perhaps a contingent creditor, but you are connected to the company and therefore have to (effectively) put all other creditors interests above yours. For example, liquidating a company after paying off the bank overdraft might get rid of a nasty personal guarantee - but this could be a "preference" and a liquidator may seek repayment. Please ask us for free guidance on this by calling 0800 9700539. Not letting people down This is an area that affects most people we talk to. But, be honest with your assessment of the business’s viability, decide on an appropriate action and explain the decision. If you are strongly in favour of this course of action and demonstrate leadership to achieve it, this is the best way not to let people down. Failure to act is letting people down. Business Objectives Keeping the business alive It is possible to keep the business alive but only if there is a reasonable prospect of restructuring, attracting more finance or even a sale of the business. If this is a key objective consider a CVA , pre pack Administration, Trading Out, or Refinance. Achieving a sale in the timeframe available may be very difficult and the value of the business may be very low (or nil) but at least this objective may be achieved. In addition, some of the other objectives on this page will be too. Maximising interests of creditors By law this should be your main objective. If by continuing to trade, creditors interests are compromised, think about closure. CVL, or administration,. However, if the business is viable and if the meltdown of the assets of the business would lead to a minimal return for creditors then consider rescue and restructure. Maximising interests of employees Another very important area. Sometimes a rescue and restructure that costs jobs is more valuable - it saves the other jobs. However, if the business is not viable, the continuation of trade may work against this aim. Employment and insolvency is a very specialist area, you must take advice on this area. Call our experts on 0800 9700539 Maximising your own interests Consider the personal objectives above. Crystallising a difficult position It is sometimes easier not to make a decision for fear of getting it wrong. After all your business is a living, changing, moving thing... BUT we always recommend making a decision and working hard to achieve the outcome. In our experience, the uncertainty that insolvency creates can be very debilitating. You will become less and less effective as a manager and the business will suffer. Crystallising Liabilities For example, this could be a long-term lease or contract. Conventionally this could be only be avoided in liquidation. However, speak to our experts with regard to how to crystallise such liabilities, whilst also restructuring the business. Complying with the law As you may know, this is a difficult area, obviously, we all have to comply with laws we are aware of. But if you do not know what the fiduciary duties of a director are or what transactions you may or may not undertake when insolvent - how can you comply? Take advice, email us, speak to a commercial lawyer or speak to an IP. Our free advice line is 0800 9700539. Not letting creditors and customers down Again, perfectly reasonable and achievable, sometimes a pragmatic approach to this is closure. CVL, Administration. However once again if the company is viable think about the rescue options. Not letting people down This is an area that affects most people we talk to. But be honest with your assessment of the business viability, decide on the appropriate action and explain the decision. If you are strongly in favour of this course of action and demonstrate leadership to achieve it, this is the best way not to let people down. Failure to act is not. Avoiding personal Guarantees This is a favourite question of directors and or shareholders. If you have signed these documents we cannot take that away. But if the business is VIABLE and by using appropriate techniques you may be able to mitigate, reduce or even pay off the debt thereby reducing the PG's.
Read
My accountant told me to do it!
Accountants do not know everything about insolvency! Following the increasing numbers of insolvencies of limited companies accountants are being warned to be vigilant as many insolvent companies are blaming their accountants for poor advice.In many instances illegal dividends and loans are being made to company directors as a way of reducing tax payments. A dividend becomes illegal if the company does not have enough profit to cover it. In fact HMRC are so concerned that they have contacted insolvency practitioners as they believe it is a way of evading tax.It should be remembered that a company director has a legal duty to act responsibly. If a company becomes insolvent (ie meets any one of the insolvency tests) then the legal duty of the director changes and they must act in the best interests of the creditors. (all of them being treated in the same way). If the directors do not act in the creditors' interests and they act "wrongfully", then they can be made personally liable for the company’s debts from the time they knew the company was insolvent!So saying my accountant told me to do it may not impress a creditor, liquidator or judge in a civil law action.Talk to KSA Group for advice or have a look at our comprehensive guides on overdrawn directors accounts
Read
UK SME companies run by women are less likely to go bust than companies run by men.
UK SME companies run by women are less likely to go insolvent than companies run by men.KSA Group Limited, one of the UK’s leading insolvency practitioners, has researched the UK SME market of over 4m businesses in an attempt to see if there was a gender bias on the board of companies that become insolvent.The study was designed to investigate if the insolvency rate was higher for male or female-run companies. In the first study of its kind in the UK, companies were investigated to determine the gender of the board of companies that had either gone into administration or liquidation over the last twelve months, to see if there was any correlation between gender and the general financial health of a business.Key findingsInsolvency rate is 70% higher in male run companies 8 times as many companies are run by men than women There is little difference in the industry sectors of companies run by men or run by women Only 12 out of 347 companies that went into administrations were female run.It was found that the insolvency rate of male-dominated businesses was 0.34% and those in female-dominated businesses was 0.20%. So, the insolvency rate is 70% higher in male-run businesses. Most interesting was the difference in companies that were likely to go into administration as opposed to liquidation. Administration is a more complex and costly insolvency mechanism and is more likely to be used on larger businesses which are disproportionally more male-dominated but, the fact being that out of 347 administrations in our data sets, only 12 were female-dominated.What conclusions can we draw from these findings? Robert Moore at KSA Group said; “It is apparent that the insolvency rate is higher in male run businesses, but this may be due to a number of factors that have nothing to do with whether men are inherently worse at running businesses than women. It may well be that the businesses that tend to be more likely to become insolvent due to the nature of the industry or recent economic events are coincidently run by men.”The study found that only real estate and letting businesses are overly represented in the data set of female-dominated businesses that have become insolvent. See the pie charts below which have categorised businesses into the established Standard Industry Classification.About the Study For the analysis Robert Moore (Marketing Manager) and Rebecca Dunne (A marketing intern from the University of Hertfordshire) researched Creditsafe’s database of 4m companies in the UK.In order to do the analysis, 4 data sets were collected:A count of all active companies with just 2 men on the board or a majority of 75% of the board that have been actively trading in the last 12 months > 461048 A count of boards containing just 2 women or a majority of 75% of the board that have been actively trading in the last 12 months > 56654 A count of all companies that went into administration or liquidation in male-run businesses as above > 1561 A count of all companies that went into administrator or liquidation in female-run businesses as above > 117Single person directors were excluded as were businesses with less than a 75% gender bias. The thinking behind this was that single director companies are made up of a significant amount of personal service companies that are not small businesses employing people and needing complex financial controls, but rather just a way of paying less tax. In addition, certain rule changes in the last year has led to large increases in insolvency rates of personal service companies to do with allowable expenses.The question of whether male or females are better at running businesses has been researched in America. The researchers found that there was no discernible difference. However, research done after the financial crisis did show that female-run banks were less likely to go bustClearly more studies could be done in this area to see if there really are any gender influences in business failures. Given that many business failures are caused by not acting early enough and not taking advice then the old cliché that men don’t follow instructions or ask for help in many aspects of their lives may just be true in their roles as Directors of companies.
Read
Advice from Family and Friends
Health Warning for Directors - Well-Meaning Advice from Friends and Family This page has been difficult to write because all too often we see that directors of companies turn to members of their family for advice when they realise that their business is in a tricky financial situation. Unfortunately this advice is quite often completely wrong and potentially damaging.Family members offer advice about what to do but they are too close to the situation and, to be honest, are unlikely to have any actual expertise or experience of how best to act when a business is facing severe financial difficulty. All too often, family members and loved ones will tell directors what they want to hear!The danger is that directors in a stressed frame of mind will not necessarily act rationally and such advice from family reinforces the illogical thinking. What’s more, friends and family may not have the same exposure personally and therefore actions taken probably won’t affect them as much. So what sort of poor advice are we talking about? Borrow more money!Often money is seen as the cure. Of course, normally the people who advise this are not the ones having to guarantee the loans! Most loans direct to businesses often need to be personally guaranteed. Is more money the answer? Really? You have to look at the reasons why the business is running out of money? It might be the fact that the director(s) are incompetent on the financial side and need help. Fancy saying that to your nearest and dearest?Just put more personal money inThis advice is better than borrowing money but only if you can afford to! Remember that any money that is put in to a struggling business is at serious risk. Take out security if you’re prepared to put more money in. It costs a little bit more as you will have to register a debenture at companies house but if the company fails then you will rank above trade creditors and HMRC when it comes to getting paid.You will be disqualified if the business failsThis is completely wrong. Only if you have been fraudulent or deliberately misled creditors knowing the business is going to fail will you face disqualification or be personally liable for the debts (note that if you have personally guaranteed loans then yes you will be liable ). This worry tends to make directors “freeze up” and take no action out of sheer panic.You can’t be a director again if the company fails – Completely wrong again (see above).Your credit rating will be shot if the company goes into liquidation – Only if you have personally guaranteed loans to creditors and are unable to pay (see above about taking on more debt). Know the difference between creditors voluntary liquidation and compulsory liquidation. A compulsory liquidation will look worse on your record than a voluntary one if an extended credit check is done (sometimes these are requested if you are working in defence, financial services, insurance and other sensitive areas).You must pay creditor X before creditor Y This is a minefield. Paying one creditor over another can be construed as granting a “preference” and can be reversed by the court or a liquidator if the business fails as a result of the preference or it was insolvent at the time. What is more this can still happen up to 2 years after the transaction.Move some of the assets to another company for a £1 and start again?Careful as any transaction that is not deemed to have been done at fair value can be reversed by the court. In fact there are lots of Insolvency Practitioners who make a living getting these cases to court on behalf of creditors that feel they have been stitched up.HMRC will not negotiate and will just wind the company upHMRC enforcement are tasked with collecting 100% of the debt. If this is simply not possible then they can negotiate on a reduced pay out over a period if the company proposes a CVA. This is handled by another department of HMRC ( the voluntary arrangement service ) and they will take the case off enforcement.Don’t do a Company Voluntary Arrangement (CVA) as they don’t workOh really? They are often the only chance that a business has and for the record the majority of them do. The ones that fail are poorly put together or the company has not changed sufficiently to meet the rigours of paying back debts over a 3-5 year period.So if you are close to a director of a distressed business the best advice you can give is GET ADVICE from SOMEONE ELSE WHO IS AN EXPERT!This all sounds quite blunt but we want to help directors. We are currently dealing with a company where the director’s brother gave such poor advice that the director is now likely to lose everything; His house and a £1m business. This inspired me to write this page as a warning to others.
Read