Insolvency

Nina Chun

I have a client who has had a great business untill this year where everything has effected the business (floods in July being a big factor). The business is going to be insolvent unless they are able to find an investor.

If they are unable to find an investor, would you please be able to advise me what steps I need to take to close this business down, taking into consideration they have creditors, PAYE and VAT. As I would like to do this as straight forward as possible.

I look forward to any advice.

Nina

peugeot

Hi Nina,

I'm sorry to hear about your client. It is terrible watching a thriving business going from what it was to what it is.

The first thing to do is to try and save the business. Insolvency isn't always a final absolute.

HMRC will only ever agree to payment arrangements over a maximum period of 3 months. If they do not get an investor, a way around this is to get an Insolvency firm (e.g. Mazars or Begbies Traynor and such like) to go in and see how viable it is for a firm to remain in a trading capacity. If they think it is viable, and the director wants to, they may be able to save the company. They do this by negotiating with the creditors to pay the arrears off over, say, 3 years. This is called a Company Voluntary Arrangement (CVA). They pay a certain amount of money over 3 years to the insolvency practitioner and they pass it on to the creditors. I think this might be a way forward for your client if the company was profitable up until earlier this year. I think the problem might just be cashflow, where alternatives can be found e.g. invoice discounting/factoring or bank finance (if the company can prove to be profitable going forward once it overcomes its difficulties). Ask your client to consider these options. I doubt your client will be balance sheet insolvent if they have been significantly profitable over the years.

There are rules which the company has to adhere to in a CVA and it is usually concerning bonus years (i.e. years in which profits are exceptional) whereby the company has to pay more to the creditors and give guarantees that any money the directors have put in to keep the company trading will not be withdrawn. Any insolvency firm, investor or bank would want to see profit and loss projections and/or projected cash flow predictions to ensure they are not funding a "dead" company.

This may be an option before ultimate closure is considered, in which case if the CVA route is not viable then you would have to appoint a Liquidator to liquidate the firm.

Best wishes
Steve

blobbyh

Thanks for the above Steve and as you already know, my company is also now in an insolvent (in my opinion) situation. I've called our external accountants to come in tomorrow who will now advise us the best route to pursue. Sadly, our situation is rather worse than Nina's above being both cash flow and balance sheet insolvent and I can see no hope of survival, however can I ask a question over CVA's? I've been told by someone close to me that they rarely work since once a company has entered one, it often sounds a death knell for suppliers i.e. they'll refuse to extend any further credit and will only supply COD - not really viable for a critically cash strapped firm. In your own experience, what often happens? Do CVA's work?

When I spoke to the Revenue myself before I passed our non-payment of PAYE/VAT matter on to our accountants, they (HMRC) offered us the three month repayment plan but did also advise this can be extended - in extreme circumstances - pending a list of twenty financial/strategical questions being answered. These can only be answered over the phone and are not available in written form so our answers cannot be pre-prepared. Have you heard of this too?

Many thanks.

peugeot

I have not heard of the twenty question option from HMRC but it doesn't surprise me. Invariably in many cases of a company going under, HMRC are usually the main creditors!

CVA's can (and do) work, however, like any arrangement with suppliers it does carry a detriment in the company's credit risk and invariably suppliers may insist on "cash on delivery" or waiting for cheques to clear before supplying goods.

The problem, I have found, with CVA's is that the Directors usually consider it as a concession for them to continue withdrawing funds from the company to fund their lifestyle (indeed one company I dealt with thought that). In this case CVA's will fail but if the company sticks to the rules and strives to turn the company around they can work.

Ultimately, the decision on whether a CVA will work or not is made by the Insolvency Practitioner, not the directors. If the IP feels there is no scope for the company to turn around, then they will more than likely advise to liquidate.

Kind regards
Steve

Nina Chun

Hi Steve,

Thankyou very much for your advice and guidance, I will discuss these with my client this week.

Many Thanks

Nina

sarahwilson

I've got a question re insolvency. The firm I used to work for factored invoices. During the last 15 months I was there they regularly used to invoice up orders that hadn't gone in order to draw the money off the factoring company to pay the payroll. Due to the dire financial situation they were in many of these orders were waiting for a pro forma paying, so some people were invoiced weeks before the goods even came into us.

Is this legal, would this class as being insolvent and would the accountants have had to notify someone if it was?

peugeot

This is called "creative accounting" and is illegal (punishable by up to 5 years imprisonment and/or a hefty fine).

The factoring company should have undertaken regular audits to ensure this was not happening. It would be quite easy to spot because fictitious invoices would never get paid, resulting in either a lot of "bad debts" or a lot of "reversal type" credit notes.

I have seen this happen in practice whereby an invoice discounting client made up invoices to drawdown monies, the invoice discounting company found out, withdrew their support and the company collapsed.

Kind regards
Steve

sarahwilson

They weren't fictitious invoices, they were invoicing actual orders they were just doing it many weeks before the invoice should have actually been raised in order to get the money to pay the wages. I don't think its legal and if it is its certainly not a practice that should be done as it absolutely hammered their cash flow which has led to them being in a CVA now.

The factoring company did audits but for some reason didn't notice that about the same time every month 35k worth of invoicing went through. They had been told that we invoiced people early on our ledgers (at the customers request) but they thought we didn't post the amount to the factoring company until we issued the invoice to the customer. As I left they came in and told the directors that the only way they would continue to factor our invoices would be if they did the credit control, I assume this was because they were onto them and thought this would stop the practice. Within weeks of that happening they were forced into a CVA.

Surely the directors are obliged to tell someone, they were effectively robbing Peter to pay Paul and then when Peter wanted his money back Paul had run off!!

blobbyh

I can empathise with this situation Sarah because it's something we've also unfortunately indulged in through the misguided belief that it "needs to be done to keep going" and as you say, it inevitably leads to the Peter and Paul situation.

The invoices in question are strictly speaking 'pro-forma invoices' i.e. the contract exists and work may already have been partially undertaken but not fully completed. I don't know about it being illegal but it certainly breaches the terms and conditions agreed between the factoring house and the client company involved. Funnily enough, the factorers I know seem to turn a blind eye to this as long as they retain the business which is certainly profitable for them and disastrous for everyone else. Unfortunately, we were forced into factoring by our bank manager when in a vulnerable position last year - 20 months later and our factoring charges are just under £48k at time of writing. Shame the UK doesn't have the same laws as Italy where banks are not allowed to exploit weak companies to their own advantage.

peugeot

I tend to agree with Robert here. Factoring and invoice discounting is very lucrative for the banks and the charges they levy for providing this source of finance are astronomical.

The problem Companies have is if they return to profitability and positive cash flow, it is quite expensive to disperse with the service.

As banks have come under fire quite recently from the personal banking sector, it may be that they are forced by the regulatory authorities to review their charges for corporate clients if the corporate sector kick up a big enough fuss. Who knows??

Best regards
Steve

claudialowe

I agree with everything that has been said on this thread about factoring. My only bad debt in over 5 years was from a company who factored their invoices, and then pulled the factoring company pulled the rug.

I advise any company to beg, borrow or steal from anyone - other than factoring their invoices. It is the beginning of the slippery slope, and if they are to survive their prices have to become uncompetitive to those of their competitors to stay in the market place.

Claudia

blobbyh

Doomsday for our company in twenty minutes. The accountants are coming in to see if we're still solvent or not which is unlikely considering everything that's happened in the last year...

:crying::crying::crying:

Cullen

Where will that leave you? Are you a co owner or shareholder of the company? Are there many opportunities in your neck of the woods? Good luck.

sarahwilson

I hope everything works out for you Robert, at least your firm aren't too far in. My old firm were into the factoring company to the tune of 465k when I left:scared: I don't know how they slept at night.

blobbyh

Well, a few things came out including flaws in some of the training I received from the previous Financial Controller. He did pick up on our pro-forma invoice financing and wasn't too happy with the directors ignoring their statutory duties or some of the 'creative' things I've done to keep us going possibly a little bit longer than we should have done. So a bit of a confession time all round really.

Amazingly, he thinks all is not lost yet as long as fundamental changes in the direction of the company are adhered to but we'll know more by the end of this week whether we're still considered a going concern or dead amongst the ashes.

Cullen

What flaws in your training? Did not your AAT studies help? I would be careful about admitting to being "creative" on this forum as it might affect your membership status. The AAT have been known to rescind membership if they are aware of illegal or fraudulent activities.

deanshepherd

Cullen wrote: »

The AAT have been known to rescind membership if they are aware of illegal or fraudulent activities.

Really?

I've always thought the AAT applied a very soft touch in disciplinary matters.

P.S. I think Blobby means on the job training from his peers rather than AAT training..

sarahwilson

That sounds hopeful Robert, at least they've not written it off at first glance which is promising.

Cullen

The AAT have rescinded membership of someone I knew. She had been involved in some sort of scam. She was reported to the AAT and they investigated and as a result cancelled her membership. Unfortunately she was studying ACCA and they booted her out too, and then her employers, a firm of Accountants, gave her the bullet.
I understand that these professional bodies have to protect their integrity and do act accordingly when their members' actions warrant investigation.
Regarding Blobby's training, I just wondered in what area his training was remiss as the AAT are supposed to provide a good general grounding in accounts. I would have hoped that if not providing specific answers, the AAT could have at least provided a direction for him to research.

blobbyh

Dean was correct - my AAT training is/was fine but this alone was not sufficient for everything I've had to do as Financial Controller. Looking back, I - and my directors - now know I probably wasn't quite ready to take over the role when I did and the training provided by the previous FC was nowhere near up to scratch. For my first major accounts job I really needed a mentor but there wasn't one available. As such, many things I've had to learn by myself such as CIS, PAYE and payroll - even VAT which wasn't as straightfoward as they teach you in PRR at Intermediate. This was in addition to all the other non-accounts responsibilities I have with the company.

However, I wouldn't be where I was if it hadn't been for the AAT training but there is also so much that you can only learn by being in the role rather than reading from a textbook. It's been a real trial by fire and I've been down more than up - especially recently - but I know my skills are now so much better and fuller than they were nine months ago and even if this particular ship does go down, I hope I'm now decent enough to go somewhere else.

Thanks for the kind words everyone anyway!

Cullen

It's a shame that this is ending up badly. Still it might come right. Have you got your CV out there yet? Best of luck

farmergiles

Good luck, Robert, I hope everything turns up roses for the New Year for you.
Have a merry Xmas and try not to think about it(easier said than done, I know)

Regards
Peter

blobbyh

Well the visit was extremely painful for me but the net result was that although there are issues in the way I account for certain things, they didn't feel I was too rubbish at what I do and responsibility for the overall poor state of the company lies solely with the directors.

However, just as a contingency plan, I'm considering applying for an Insolvency Examiners job advertised in the local rag - only three years training which would see off me ever finishing my Technician but could open up a whole new area for me!

Have a good Christmas all!!!

blobbyh

Just been made redundant with immediate effect! I should be unhappy but this now releases me from several personal obligations which have been dragging me down for months so onwards and upwards from here! :

Bluewednesday

Sorry to hear that Robert, good luck in whatever you decide to do

peugeot

At least you're looking at it in the right spirits. From what you have said on your posts, the directors of that company are only prolonging their agony - at least you're out of that environment.

Good luck for the future.

Steve

sarahwilson

I was in exactly the same boat Robert albeit at a much lower level. Its not great being made redundnt but the stress of working somewhere thats dying and really needs putting out of its misery is unbelievable and I'm much happier now I'm not there.

I hope everything works out for you Robert.

Cullen

Onwards and upwards. What are your plans? Are you going to try to get right back in the thick of it or will you take a break for a while?
Best of luck for your future and I hope your next gig will be for a better company.

claudialowe

Robert

I do hope that it turns out to be a blessing in disguise for you.

Don't forget that we are here for you, if you need us.

Claudia

blobbyh

Thank you

Thanks all for your kind messages. I'm feeling quite down today - I guess it's delayed shock that it finally happened and reality starting to sink in, however I do already have one application to fill out. Ironically, it's for the trainee Insolvency Examiner position I mentioned a few weeks ago so even this horrendous experience could prove useful in the end.

shaxxa

Good luck Robert, I'm sure you will have no problems finding another position.
If I was a boss looking for an accounts manager/financial controller then you would certainly be on my short list :thumbup:

Keep your chin up!!

Sharon