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A Guide to Business Rescue & the Insolvency Process

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A Guide to Business Rescue & the Insolvency Process A guide to business rescue & the insolvency process Foreword Contents Foreword Sean Cavanagh is a founding This guide will be of interest to accountants, Foreward 1 Partner in CavanaghKelly and solicitors, banks, credit unions and other advisory heads CavanaghKelly’s Business bodies and professionals who wish to be aware of Recovery & Insolvency division. Financial difficulties – The people test 2 Sean is a Licensed Insolvency the options open to their clients who may be in Practitioner and is a regular financial difficulty. Taking decisive action & responsibilities 3 speaker at professional seminars on insolvency issues. Developed by Sean Cavanagh and Michael Drumm Financial difficulties – The options 4 of CavanaghKelly, it is prepared in an informal style and provides a general overview of the practical Sean Cavanagh Company options 5 options available to businesses and individuals. It forms part of a suite of guides developed on Michael is dedicated Partner Trading out / Informal arrangements 5 for the firm’s Advisory offering. this topic. As a Licensed Insolvency Formal arrangements 6 Practitioner, he works alongside Company Voluntary Arrangement (CVA) 6 CavanaghKelly is a leading provider of Sean in leading the Business professional advice to help businesses and Recovery & Insolvency division. Administration 6 individuals in financial difficulty and has over 30 Michael is a respected and Administrative Receivership 8 trusted advisor who uses a years’ experience in delivering solutions to help combination of knowledge, Liquidation 8 businesses overcome these difficulties and make experience and commercial a fresh start. Michael Drumm thinking to advise corporate Personal options 11 clients, individuals and advisors. Whilst every effort has been made to ensure the Trading out / Informal arrangements 11 contents of this guide are factually correct, we Individual Voluntary Arrangement (IVA) 11 strongly recommend that specific advice and Debt Relief Order (DRO) 11 guidance be sought for a more detailed appraisal Bankruptcy 12 of each individual case. The law is stated as at September 2018 in Partnership options 13 Northern Ireland. Trading out / Informal arrangements 13 Partnership Voluntary Arrangement (PVA) 13 Separate Interlocking IVAs 13 Partnership Administration 13 Insolvency of LLPs 13 1 Financial difficulties - The people test Taking decisive action and responsibilities Financial difficulties – Taking decisive action Events requiring urgent attention The people test The key challenge for advisors and responsibilities Statutory demand Court orders is to provide a platform and a Winding up petition HMRC enforcement of debt First and foremost, business rescue is about realistic solution based upon both If a client is facing the prospect of insolvency, it Bank calling in overdraft/ Unable to pay wages people. Advising a client in financial difficulty the financial position and the is vital that the warning signs are spotted so that Loan facility can be daunting both for the advisor and the client. people involved. action is taken to remedy the problem as soon as Generally, most people in financial possible. The earlier advice is sought, the wider the In the event of the above, to prevent a formal difficulty fall into one of these categories: range of options available, increasing the likelihood insolvency procedure, immediate action is required. The client or advisor should seek insolvency advice Those who have the strength of character to of a positive resolution for the client. The approach and strategy to be applied will as soon as possible. cope with the demands of debt pressures, are of course be dependent on each individual case. Initial warning signs willing to take decisive action and manage the Directors’ responsibilities The key challenge for advisors is to provide a Extending payment terms Ignoring calls/letters transition back to financial stability In recent years there has been increased focus in platform and a realistic solution whereby clients VAT/PAYE arrears Bad debts Those who may be in need of reassurance, who can, at the end of the process, move forward in a the courts and within the Insolvency Service on Loss of turnover/trading losses Overtrading will ‘over-worry’ if immediately presented with a positive manner with renewed hope and energy the responsibility of directors when a company Delay in preparing/filing Lack of management or business fails. It is vital to remind directors that very negative outlook for the future. financial accounts information failure to take appropriate action can (and often Those who ignore the warning signs and appear Poor cash flow Applying for additional credit does) result in director disqualification or even unable to take decisive action to weather the personal liability. storm. Very often if these issues are only short-term problems they can be managed and normal Some key actions the client should take include: This is the well-known ‘Know Your Client’ test and trading restored. When they continue over a longer often our initial approach is to reassure the client Be aware that in an insolvency scenario, directors term serious issues can arise. Often the client is that various rescue options are available. have a duty to act in the best interests of creditors unaware of these signs and the advisor can provide Prepare realistic financial projections to support invaluable assistance in spotting a negative trend ongoing trading and document key decisions and highlighting this to the client. Review position regularly and document it Serious issues Preserve the value of and safeguard the company’s assets Legal letters Legal judgements Keep customer deposits separate from normal Legacy VAT/PAYE arrears Final demands trading bank accounts Bank overdrawn beyond Extreme creditor pressure Do not prefer individual creditors or connected facility parties Bounced cheques Supplier withdrawing supply Do not worsen the creditor position Seek professional advice – this is a key matter These arise when the initial concerns persist and considered by the courts. If a director has sought action isn’t taken. Contacting a professional advisor advice early in the process, it can assist in is vital at this stage to provide an opportunity to avoiding any personal liability action. avoid formal insolvency. 2 3 Financial difficulties - The options Company options Financial difficulties – Company options Business rescue is always our Commentary The options primary aim and there is often Trading out / Informal When advising clients, the general objective is to a variety of options available to If relations have historically been good, there avoid the ‘nuclear option’ if at all possible. Business those involved. arrangements can be an opportunity to agree an informal rescue is always the primary aim at CavanaghKelly Where there is a viable core trading business to be arrangement with creditors. and there is often a variety of options available to saved and there are robust and realistic financial However, this process is only likely to succeed if those involved. Company options projections going forward, this can provide an there are a small number of key creditors. The first (and most vital step to appraising options) Trading out of difficulty / Informal arrangement appropriate platform for an informal arrangement. Company Voluntary Arrangement (CVA) In addition, these arrangements are generally is to ensure that the current Statement of Affairs A proposal for such an arrangement can be Administration not legally-binding and therefore it only takes (SOA) is accurate. This is the most overlooked submitted to creditors and an agreement reached Administrative Receivership one creditor to break rank for the whole rescue aspect of the entire process as, in the attempt to for trading on without the need for a formal Liquidation (either Creditors Voluntary or process to collapse (and formal insolvency produce a quick solution, extreme pressure is often insolvency procedure. procedures normally follow). applied to produce an SOA within a very narrow Compulsory) The advantages of informal arrangements include time-frame. In addition, HMRC are often a key creditor and their flexibility, less stigma, less publicity, normally Individual options are likely to insist on either a formal procedure Our experience as insolvency practitioners (IPs) less costs and that it can avoid a formal insolvency Trading out of difficulty / Informal arrangement or payment of 100% of the debt. indicates that critical liabilities are often omitted Individual Voluntary Arrangement (IVA) procedure. In addition, the directors will remain in from the SOA whilst assets can also be overvalued. Debt Relief Order (DRO) control of the company. Therefore, extreme care must be taken in Bankruptcy In terms of recording all information this should producing this document. Options to fund an informal arrangement include: Partnership options Restructure Cost-cutting Director / In addition to the above, it is vital that robust A documented external review of the SOA unprofitable areas Shareholders financial projections and cash flows are reviewed Trading out of difficulty / Informal arrangement of the business invest funds and financial projections. We recommend an in conjunction with the SOA. Current creditor Partnership Voluntary Arrangement (PVA) Refinance Mortgage property Third party external review as all too often the internal pressure should also be reviewed. Separate Interlocking IVAs unencumbered investor assumptions made are
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