Winding Up Petition ~ lessons to be learnt for company directors

The recent winding up by the Insolvency Service of Jacob H Ltd (JHL) on 14th May 2014 provides a few lessons for directors; apart from the obvious one of making sure that you provide services that you are taking payment for. The company traded in London, but offered large goods vehicle (LGV) driving services across the UK and did not actually provide the services in the majority of cases. You can read about the actual Insolvency Service case by clicking here.

The Insolvency Service investigations supervisor David Hill said: “This company appeared to have no intention of providing the services it claimed it could and instead duped customers into paying for service they were never likely to receive and winding it up protects the public from losing more money in this way. “The winding up should serve as a warning that the Insolvency Service will take action to remove rogue companies from the business environment.”

The company failed to file accounts but it is known that £130,000 was taken in deposits and even where refunds were agreed they were never paid. The average customer paid £920 deposit to book their lessons so the number of customers involved and eventually defrauded were quite substantial. It is not clear if criminal charges may follow but the directors Hussain Ahmed and Mohammed Khaled will now be interviewed by the Official Receiver and a full investigation of the directors actions will now follow. The directors can receive disqualifications from 2-15 years, fines and even a jail sentence for the most serious offences. The Insolvency Service was alerted by Islington Trading Standards who had received 40 complaints of services not being provided despite being paid for.

What the Insolvency Service does

The Insolvency Service is a government body and is responsible for all compulsory liquidations (winding up) in the UK via the official receiver. One of the key tasks of the official receiver on behalf of the Insolvency Service is to identify why the company ended in an insolvent liquidation and became insolvent in the first instance. It has a lot of other wide ranging powers from paying redundancy to insolvent company employees to investigating live companies that warrant their attention. You can learn more about the Insolvency Service here http://www.bis.gov.uk/insolvency.

Failing to file annual returns

Directors should be aware that failing to file accounts with Companies House is a criminal offence so can leave a naïve director with a criminal record and there is no point in blaming the accountant even if it is their fault. Whilst there is no law stating Directors must have qualification as a director you have the responsibility for filing the accounts and you will be expected to demonstrate ‘sufficient levels of skill and knowledge’ to manage the company affairs.

Directors have a legal obligation under the Companies Act 2006 to file annual returns and failure to do so on time will result in escalating fines, dependent on the delays and end in possible personal prosecution of the director and directors' disqualification. It is also worth noting that as a director you also responsible for acting responsibly and complying with other laws too such as

• Employment Law
• Health & safety Law
• Insurance law
• Tax law
• Insolvency law

Failure to comply with these laws can have severe implications for directors and this can range from disqualification from acting as a director to going to jail so if you are in any doubt you should seek relevant professional advice.

Abandoning the company

Simply resigning as a director will not negate any liabilities or responsibilities you may have incurred whilst acting as a director. In any event leaving a company without a director is also a breach of the Companies Act and may lead to the directors being disqualified and investigated as if they had been “liquidated”. The investigation can be instigated by the director of corporate enforcement so abandoning your company should not be considered an option. By abandoning the company you are openly demonstrating disregard or ignorance of the law and either one will not be received well by the Insolvency Service.

Wrongful trading   

The directors have continued to trade and subsequently increased the debts to the company and therefore are likely to be charged with wrongful trading. Wrongful trading is better thought of as irresponsible trading and this would be accurate on the face of it in these circumstances. If proven, wrongful trading can mean the directors being made personally liable for the debts accrued in the time period when the directors knew, or should reasonably have known, the company would end in an insolvent liquidation.

There is also the point of the deposits themselves and clearly they should have been kept separate from the company funds so that customers wanting a refund could have been made easy. By ring-fencing the deposits they also protect customers money from being absorbed into the company account for paying bills and being misused. For example if the customers were told that they can have their money refunded if they were not satisfied then the ‘not isolating’ the potential customer refunds only adds more evidence of misuse of customer deposits. This situation can be made worse if those monies were then used for the director’s personal use. So the simple answer is keep personal and business funds separate, but also keep deposits separate too, possibly in a customer trust account or something similar – ask your bank for more information.

Offering services you do not provide

There may be charges against the directors from Islington Trading Standards for not providing services as advertised.

Generally a company; when advertising goods must:

• Match the description
• Be of satisfactory quality
• Be fit for purpose   

Clearly in this case none of the above applied, so there may be a prosecution to follow on this matter, also.

To find out more information about a specific insolvency solution; get business debt advice, or to simply learn a little more about insolvency, in general, please visit our website by clicking here.

Are HMRC Withdrawing Support for Time To Pay Arrangements?

I have heard through the grapevine that HMRC are looking closely at withdrawing support for the Time To Pay arrangements from this April and these arrangements have been so popular in the past with SMEs in clearing company debt; too popular, perhaps. Some may be surprised to hear me say, but I believe generally that HMRC do a good job in very difficult circumstances.

IT System Changes and Staffing Losses

HMRC have had to endure IT system changes which have not always been as successful as they should have been. Cut-backs in staffing numbers reduction in pension benefits as have all civil servants along with chopping and changing of what jobs are completed where. The communication systems were antiquated though they are trying to catch up and some at the higher levels finally have access to external email. There is an awful lot of confusion inside and outside regarding the new phone systems which frankly leave a lot to be desired as there is only so many times you can hear Vivaldi or Green Sleeves before you start banging your head on the desk in tune with the beat.

Attempted humour aside, any cut-back on the SMEs ability to agree a time to pay arrangement would be a severe set-back to those companies who genuinely need help when coming out of recession. We deal with company debt and HMRC negotiations as part of our work and the time to pay arrangement has been a valuable tool and saved some companies - no question.

The longest recession in recorded history

Coming out of a recession is bad enough but coming out of the longest recession in recorded history is another. I am hoping that Carney keeps the interest rates down as businesses need as much help as is possible. Okay, I know there will be some out there saying “Well I pay my taxes on time so why shouldn’t they?” I accept the point, but I do come across a large percentage of smaller businesses who have cut to the bone to survive. Once a company does this they are very vulnerable and it is easy to get into difficulty for no other reason than a larger business debtor has decided to pay later than agreed. You can argue these companies should not have placed all their eggs in one basket, but the reality is these smaller businesses represent a significant part of the British economy.

I appreciate these HMRC time to pay arrangements are time consuming and so I assume they are costly to manage and monitor, but what is the alternative to a time to pay arrangement? 

A View on UK Economic Recovery; Bank Lending & SMEs:

Some interesting statistics flying around over the weekend what with the economy doing far better than expected it looks like the Bank of England governor may need to make a decision on interest rates in a matter of a few months. I am not sure Carney will be forced into making the decision that soon. He doesn’t strike me as a man who will be forced into any situation. The economy badly needs a long spell of stability and low interest rates, not a step into the unknown that a hike in rates would bring about. We have a fledgling housing market that is seeing a well-earned recovery and with wages still suppressed there is unlikely to be a return of a much feared ‘bubble’. Carney is more likely to link wages to inflation as a ‘get out of jail free card’ to get himself off the hook.

I may be proved wrong but I am hoping we don’t see any rates rising until well into Q4 2014 or early 2015.

Barclays decision to ‘transfer’ 800,000 of its small businesses away from free banking towards a charge based structure will do no favours for the already hammered reputation. Barclays insist the move will only affect about 250,000 businesses currently banking with Barclays – so that’s all right then. Business lending has never been a priority with the banks barring a few exceptions and is rarely more than 10% of any the major banks total lending. Major banks do not like lending to small businesses and never have to be fair to them and the Basel II rules make it more difficult for lending to take place.

Okay, so I understand business lending had risen slightly over the first half of 2013, but if you are already starting from a very low starting point then it’s not really great news. In any event, I now understand the percentage of lending to small businesses has fallen back by about a third to around 7% of total bank lending that may contribute towards businesses having cash-flow problems and seeking debt advice sooner, without the support they need from the banks. The bottom line is small to medium sized businesses are just not a core demographic for any of the major banks and the sooner businesses realise that banks are no friend to business the better.

Written by: Mike Smith

Banks; Friend, or Foe to SME's?

Having read over the weekend of yet another breaking banking scandal is it not about time these disgraceful fat-cats were seriously taken to task? As a company turnaround consultant I come into contact with the shameful banking practices on a frequent basis. This latest ‘revelation’ headlining the newspapers is not news to those of us in the insolvency business as there have been suspicions for years around the insolvency practices and banks. A lot has to do with the banking culture itself which has become more and more arrogant and remote from its original purpose – to lend and provide services to its customers.

Successive governments have had far too close a relationship with the banking heads. The most notoriously bad banking and political relationship was of course between Fred Goodwin, ex RBS boss and Gordon Brown, who has arguably been deemed "the worst chancellor ever".

Gordon Brown appointed Goodwin of all people to advise on the regulatory aspects of banking and sale practices and duly gave good old Fred a knighthood in gratitude. The appointment of Goodwin advising Gordon on banking regulation was not so much the blind leading the blind, as the equivalent of King Herod being asked to advise Mothercare on the latest range of comforters. It should not, therefore, come as any surprise that on top of the rate swap mis-selling debacle we now have this latest, equally shameful list of accusations against RBS of stealing property at an undervalue.

We come into contact with situations like this through our line of work and one example could be a recent case where a director was sold ‘insurance’ to cover his company against rising interest rates until, you guessed it, the interest rates fell and his cash-flow was destroyed. This was an interest rate swap product and even though he complained, he got nowhere with the bank and eventually the company went into default with his mortgage payments – the actual mortgage he had ‘insured’ and trying to protect.

The director had secured a RICS valuation for over £2m and yet, just one year later when the company, now starved of cash due to the horrendous interest rate payments he was paying to the bank, was forced into company liquidation. The bank appointed liquidators then sold the property off at a value of £800,000 knowing that my client had personal guarantees in place further protecting the bank. He not only lost his business but also his wife, having long suffered the pressures of supporting a stressed husband, she had finally had enough. He also lost his children and immediate access to those that made his life worthwhile. All this because greedy individuals looked after their own interests first and believed they had the right to do what they could with no thought that they may be doing wrong. But these ‘scams’ do not only involve bankers, they drag in the associated large insolvency practitioners who sit on the banking ‘panels’ as they may have too cosy a relationship with the banks. This may be another area for investigation by Vince Cable who appears to me to be one of the few politicians with any sense of integrity. 

Of course the newspapers rightly focus on the lost businesses and the hardship that this causes, but what it also does is knock our confidence in the established banks and the establishment itself to an extent. It is hardly surprising why banks are so despised; try getting a commercial loan, or worse a mortgage and the banks get tighten-up. Any mortgage applicant is treated like a criminal as they have the audacity to dare borrow money to improve their lot. 

Of course this would be funny if there wasn’t a more serious side to it and the serious side is the human fall-out of the pressure that these scandalous banking practices bring about. The fact that the Co Op Bank, set up to serve its members has been brought to its knees with £1.5billion gap means pensions will be underfunded and genuine investors will lose money. 

The banks have a lot to answer for and there does not seem to be any end to these banking scandals that have hit every man woman and child in this country and arguably the western world. The bigger question is what do we do to put this right? 

Written by: Mike Smith

Where to Turn for Business Advice?

Most people in business will have suffered a sleepless night or two when cash-flow problems loom, but where do business people turn to when they need someone to help? Loved ones are usually out of the question as they will inevitably have been contaminated by the emotion of the situation anyway. The old days are gone when you could sit down and talk to your local branch manager who knew you well and had the authority to make the decision for you. Nowadays, you are more likely to be sold something completely worthless by a ‘relationship’ manager who is probably too young to even have had one – a relationship that is. The Citizens Advice Bureau are not in a position to advise if you mention the word business and debts in the same sentence and besides, they are becoming few and far between as government cuts dig deeper.

A religious belief of some kind can provide someone who simply listens, but you are unlikely to see a burning bush, or have a revelation that indicates a way forward.

It seems that the internet has been the saviour of some who are able enough to switch on the laptop and search for help. Certainly we get our share of truly dreadful and often heart breaking accounts of how someone has found themselves in difficulty.

Despite what most believe, business people in trouble are not all directors shirking their responsibilities, though it is easy to see why it may appear so when you are a creditor and a company that owes you money enters company liquidation. From experience usually around 20% are forced to close through an outside unforeseeable incident such as stroke, heart attack, sudden death, or the impact of a family death, or long term illness. A further 30% are often guilty of no more than putting too much faith in a particular project, or company, and OK it may be mismanagement, or simple inexperience, but we all have to learn.  Making mistakes whilst learning can be a very expensive way to learn, so this should be avoided at all costs – consult a professional.

For most small businesses they may turn to their accountant, but this is hardly fair on them as in most cases they will see a client once or twice a year if they are lucky. The medium sized companies may have an in-house bookkeeper/accountant, but they will be too close to the problem and unfortunately in my experience usually, unfairly, carry some or all of the blame for the company predicament. If you are a sole trader or a partner in business it is likely that the first person you speak to is either your life partner, and or business partner. Either is a mistake and often leads to the ‘blame game’ which in turn applies negative pressure on the relationship. It is a sad fact of life that around 60% of those contacting us will be separated, divorced or splitting up. We sometimes forget the impact on families business stress can have.  

If the business is not viable and you are a sole trader then there is no difference between personal and business debts. It is not better, as was suggested by a recent client that; ‘if you are a partnership then your debts are halved aren’t they?’ The answer is it is not as simple as that and it can be worse in some cases where, as is usual, one partner has no assets and the other has lots. Unless you have a limited liability partnership and or a legally binding partnership agreement then the debts will be joint and several. So if your partner is about to sign a contract for a new BMW on the partnership business account you may want to hold back the signature as you could end up paying for it if things go badly.

You would think directors would do better when the company has limited liability? Not so, as banks and suppliers obtain more personal guarantees and security for provision of supplies or lending. Unfortunately if the company does end up in liquidation the insolvency practitioner is not allowed to help the director by regulation. If you think about it this makes sense as the insolvency practitioner acts in the best interests of the creditors not directors. Whilst an insolvency practitioner must have due care for a director with a personal guarantee they cannot give direct advice on the personal guarantee when acting for the bank as this is a clear conflict of interests. Of course the biggest taboo subject for an insolvency practitioner and guaranteed to make him/her to go pale prior to being engaged is the subject of an overdrawn directors' loan account. In liquidation, this can have very serious personal implications for any director and the insolvency practitioner will be duty bound to pursue these on behalf of the creditors, even to the point of bankruptcy. Remember who the ‘practitioner’ is acting for? This situation should be discussed in detail if an insolvent liquidation is being considered as a potential solution. There are unscrupulous ‘practitioners’ who are well known in the business who will actively seek out naïve directors seeking a ‘liquidation bargain’ and thinking that they are being adept by obtaining the cheapest liquidation on the internet, the truth is this could not be further from the truth. If a liquidation fee seems too good to be true then it probably is and there will only be one loser.

If a liquidation is being recommended to you as a solution ask direct questions and get straight answers and if need be get confirmation in writing as to what the process will be, before, during and after liquidation. If in doubt, ask to speak to past clients and check for testimonials on the ‘practitioners’ website. If a director entering into liquidation does not perform these very simple checks then they do so at their peril.  Just as the internet can be a saviour it can also be a dangerous place too.

Your accountant may know someone who will not simply and automatically think of liquidation as the first port of call and if you have seen previous blogs you will know this is unlikely to be a modern insolvency practitioner. You knew I was going to say "seek out a business turnaround consultant", but I genuinely think this is the best option in today's business climate. They are used to working in high pressure and insolvent environments and if they are any good they will provide initial free advice and even solutions for you.

Whether you are a director, sole trader, or a partner, if you are having severe cash-flow problems and you are worried about your personal situation you should be speaking to someone who looks after your interests whilst having due care for the creditors? Someone who is well used to negotiating with creditors and someone who has earned their stripes through having managed many businesses, gaining hard business experience. Doesn’t that make more sense? Do yourself a favour and seek out a business turnaround consultant, you can learn more here at the Turnaround Management Association http://www.tma-uk.org/.

Do insolvency practitioners do turnaround?

I read a very interesting article recently highlighting this question and it may seem an odd question to ask, but do insolvency practitioners actually rescue companies, or simply put them into liquidation? Put plainly, do insolvency practitioners rescue companies? The question was posed by a well-respected rescue CEO and consultant with over twenty years in rescuing businesses. My experience is, I have to say, not good when answering this question. I have been advising large medium and small companies for over thirty four years now and rescuing a failing business is not for the faint hearted, that’s for sure. So why is the question even being asked? Well I suspect this well respected gentleman has had similar experiences to me over the last five years or so, through the heat of a recession.

Unfortunately, I do believe insolvency practitioners generally have lost the appetite and more importantly lost valuable experience in rescuing companies and have put more focus on more expedient liquidations. In the last year alone we have been contacted by around 2-3,000 company directors seeking business debt advice. The majority of directors that we have advised who had also spoken previously to competing insolvency practitioners were genuinely surprised and greatly relieved when we discussed how we may be able to rescue the company and not simply put it into company liquidation. Now, it is not possible to rescue all companies and I accept there are a lot of so called zombie companies out there, but shouldn’t we at least work from the premise of ‘how do we save this company’ rather than how quickly can we close it?   

Certainly the majority of insolvency practitioners appear driven more by regulatory and compliance matters than saving the company. I guess this is understandable when they are subject to spot checks and can lose their licence if not completing procedures thoroughly enough, but is this the real reason or a symptom of something else?

    

Over the last five years or so, since the recession, we have seen and heard of serious investment in compliance policies and procedures which has turned into an entrenched dogma creating a completely different type of insolvency practitioner to that which existed 7-10 years ago I suspect. There is something else though when you look at the increased numbers of staff. The new kids on the block don’t know anything else other than compliance, regulations and following the necessary processes and many have no first-hand experience of rescuing a company, or negotiating with creditors over business debts.

With the economy improving and the Insolvency Service cutting down in size, it may be that a downturn in insolvent liquidation cases may well be followed by a number of insolvency practitioners starting to struggle and being taken over. It may seem improbable, but there is already evidence in the market place that insolvency practitioners are trying to change their approach as they begin to struggle. The insolvency practitioners that cannot adapt to the changes will struggle to survive in a market where desperate practitioners are already pushing liquidation fees down in an attempt to reel in more business whilst their profit margins get squeezed. A note of caution here; far too many directors do not think to check the website of insolvency practitioners for genuine testimonials, or ask to speak with the insolvency practitioners' past clients. This should always be the first action that any company director should take who is thinking of engaging, or referring an insolvency practitioner.

The 'big boys' appear to have swallowed up a significant portion of the ‘company rescue’ talent, but not every SME can afford their fees and in any event, these bigger firms of insolvency practitioners will continue to ‘cherry pick’ their clients based on certain prerequisites. The average SME traditionally turns to his/her accountant for help and that is as it should be as the first port of call. Perhaps the SME accountants should check who they refer their clients through to in future more than they previously have when they want a company to be rescued?   

Back to the question: Do I think insolvency practitioners do turnaround? Well, the larger clients will probably be able to afford the big names, but the smaller companies are left to a roll of the dice as to whether someone will genuinely try and turn the business around, or simply put it into company liquidation.

 

There is a simple solution though – check the websites and how about asking to speak to past clients? 

Coming Out of Recession – Good News for business?

We are coming out of the longest recession in recorded history so this has to be good news doesn't it? The UK economy, we are told, has the strongest forecast in Western Europe. So, if the signs of consumers finally opening up their wallets are there then struggling companies across the UK should be pleased, and they can pat themselves on the back as having ‘made it through the storm’, right? Well not really. I don’t want to be a dampener on a struggling director’s hopes as there are indicators we can be cautiously optimistic about. The problem is based on past experience having been through three recessions that the most dangerous time for a cash-strapped company is when coming out of recession. The reasoning behind this is simple. If the ‘struggling’ company has cut back to the bone and cannot raise personal finance; ploughed in personal/family cash; reduced staff; sold off assets/stock; maxed out the company credit card and the banks being as helpful as ever and refusing to lend – the ‘straw that breaks the camel’s back’ is usually an influx of new orders.

You may think this is nonsense and that any bank with an ounce of commercial common sense would see a full order book as an indicator of something positive. Not so. We have had many cases where the order books have been full to the brim and the banks have refused to even provide an overdraft. They (The bank) did by the way allow an unauthorised overdraft of as much as the company wanted but at 27.9% APR. Factoring may help but my experience is this usually creates more problems than it solves for smaller companies.

So when orders start to increase and the bank account is empty what can directors do? There are few points to remember. Take a common sense approach and remember that when a patient has been very ill and is still very weak then start with a little of the right food often rather than gorge on too much of anything all at once.

My meaning here is that is important to gear up slowly if the company is cash-strapped and do not over trade and take too much on board. It is easy for a director to convince themselves that the more work you do the better things will get. Not necessarily – it could make matters worse. The fastest way to lose a good name is to let customers down. So, it’s important not to take work on that cannot be fulfilled competently and effectively and getting paid.

A director should set reasonable achievable goals and make sure the accounts/finance department talks to sales and is able to fund the growth. Ensure regular and frequent meetings are taking place and this is the time the director must have his/her finger on the pulse and work even harder and smarter.

If directors are a ‘one man band’ then they should be talking to someone other than a life partner/spouse that will provide an objective, informed unemotional view of the situation. This is an ideal time for the accountants to step in and provide support I would suggest. Whoever the director talks to they must keep the dialogue on-going until the company is back on its feet to make sure there is no disconnect between the service you have provided and what is paid in – not owed in. A business can grow on promises of payment – they need cash.

The nature of the business the directors are involved in will also matter. For example if they are in a building related trade then it may easier to get clients to fund at least part of the project with up-front cash. This can make a big difference to the chances of survival and not. This course of action may be more difficult with other businesses and directors will need to work smarter when providing the services to the client. For example is it worth having a word with your key supplier and showing them the full order book and offer to make them the sole supplier so they can see the benefit of increased sales.

Whatever the director does they must take care and whilst it is good to be cautiously optimistic it is foolhardy to believe simply obtaining lots and lots of extra work in itself will solve the problem – it may just make matters worse. Take care out there. 

Written by: Mike Smith