“Just when it looks like things can’t get any worse… they take a turn for the worse.”
On the basis that many companies are SMEs
and most of us work in this sector, I have
based this article on a typical smaller company.
As with all great movies, the likeness, actual
or perceived, between the ‘facts’ which follow
and any partnership, company or person(s)
living or dead, solvent or insolvent, are
entirely unintentional. However, I hope all
readers recognise something in what follows
and can learn some lessons from it.
the background
John’s company, in which he is a 50%
shareholder, is run with his business partner
and finance director, Paul. Until three years
earlier it had been trading quite successfully
for a number of years as a partnership.
Their accountant had for some time been
recommending that they incorporate and,
in 2002, the newly formed company
continued the former partnership’s business.
In its short life the company has taken some
knocks. Their bad debts were on the increase
and their market was being eroded by people
making available ‘off the shelf’ widgets which
had always been their bread and butter products.
All that was now being required of them were
the technically complex widgets which brought
production problems with them. The company’s
ability to quote accurately was undoubtedly a
major issue. Also they didn’t value their own
worth – their pricing of changes to a quoted
specification once work had begun was
woeful. Such changes were rarely charged
and even more rarely paid for.
Just over six months before I met John,
essentially the company’s one and only
technical guru, Paul had moved to Spain with
his new wife. Paul had convinced John that
all would be as it ever had been. Computer
links were created which would enable Paul
to work from his Spanish villa just as
effectively as he did whilst resident in the UK.
Documents would be scanned and e-mailed
to Paul at least daily and he would come
over to the UK as and when required, but
at least once a month.
Following Paul’s departure, John found
he quickly became more involved in the day
to day management issues previously dealt
with by Paul. Whilst John was willing he found
himself unable to cope. He had no financial
or management skills and he would try to
take on everything to keep all customers and
suppliers happy. John was working 24/7
and it was too much.
As soon as I met John it was obvious that
he was a man on the edge. The first hour of
our ‘initial free hour’ was spent trying to talk
him in off the ledge – he was more than ready
to jump. A list of assets and liabilities
including an aged debtors and creditors
schedule was produced in response to our
questions. Customers were taking longer to
pay. Suppliers were putting the company on
stop as the creditor days went through the
roof. No one was talking to anyone and the financial controls were non-existent. No one
had seen Paul for some time though the company
credit card statements still showed that the
work on his villa was continuing at a pace.
Looking further into the change from
partnership to limited company, some three
years earlier, it became clear that the partnership,
just prior to incorporation, had ordered a
significant quantity of quality stationery.
This stock was only now being exhausted.
Some of the company’s customers and
suppliers were unaware that a limited
liability company even existed. As far as they
were concerned they were dealing, and had
always dealt, with the former partnership.
So what? The directors had omitted to
detail the company name, registered office
and other essential information. What was
the problem with that? This was not destined
to be a straightforward case.
Investigations into how and when the
employees and directors were paid showed
that there were modest arrears to employees.
They all remained very loyal to John but had
no good words about Paul. Both directors
had been paid by way of dividend and lumpsum
drawings throughout – notwithstanding
the absence of any profits from which to make
dividend payments and no accounting for
PAYE/NIC in respect of the lump sum
withdrawals. Added to this there were massively
overdrawn directors loan accounts about
which John knew nothing and understood
less – Paul had always said “not to worry,
it would all come out in the wash when the
accounts were finalised”.
A couple of days later, whilst further and
better particulars were being compiled, the
director called to ask what was meant by a
winding-up petition. One had been received
while he was out on site the previous week
and he had only just been made aware of it.
The landlord had also called regarding the
arrears of rent and was threatening distraint
if payment or, at the very least, contact were
not made immediately (from a brief telephone
conversation with the landlord’s agent the
company had been good tenants for many
years occupying a small office block and
larger production premises. The landlords
were reluctant to be the ones who might pull
the plug – again a lot of sympathy for John,
none for the absent Paul!)
While it looked like there was a business
to be salvaged, and trading and cash-flow
forecasts were being produced, the matter was
taken out of our hands when, over a bank
holiday weekend, the landlord’s agents took
over the production premises and cleared them.
creditors voluntary liquidation
John admitted defeat; he was a man at the
end of his tether and, whilst continuation
looked impossible, it looked like there would
be just about enough assets available to cover
the costs of the petitioning creditor and then
the costs of convening a Creditors Voluntary
Liquidation and provide something for the
liquidator to work with.
Given that Paul was a 50% stake-holder
the directors’ meeting was agreed by exchange
of faxes and the members’ resolution (an
EGM is required to be held with 75% of
members’ resolving to wind up the company
voluntarily) agreed to hold the members
meeting immediately prior to the creditors’
meeting in two weeks time.
Upon conclusion of the directors’ meeting
held at my office (Paul present by telephone
and fax), I then attended the company office
premises with John and addressed the
employees. They knew what was coming but
were saddened that John, despite his best
efforts, had been left in the lurch by his
former partner, worked himself to a frazzle
and, it now appeared, left himself open to
a whole load of problems by virtue of not
properly tying up the conversion from
partnership to limited company. I gave the
employees their forms for claiming what
could be paid to them under the Employment
Rights Act scheme operated by the DTI.
As with most cases, I suggested that
employees take any personal possessions
with them (as agents would be in later to
start preparing the assets for sale and sort
out third party/reservation of title items) and
make sure that the company had their most
recent addresses recorded correctly. In
addition I advised them to sign on as soon
as possible in order to mitigate their claims
to pay in lieu of notice – the Government will
assume that they have signed on if they have
not gained other paid employment, and
reduce their claim accordingly, regardless
of whether they did claim.
John gave everyone his home address in
case they wanted references in the future and
wished them an emotional ‘all the best for
the future’ whilst thanking them profusely for
their help over the years. Those employees
with company cars were required to leave
them with my agent, who had by then arrived;
some, living further afield and having a number
of personal items to take home, were allowed
to use the cars to transport themselves and
others home, having first spoken at length
with my agent regarding arrangements for
their collection. A check as to the car tax
and insurance position was first carried out.
At the creditors’ meeting John was, as
predicted, the only director to attend. Only
one creditor turned up, though my colleagues
had spoken with many others in the meantime.
The rest of those who were represented at the
meeting were only there by virtue of a ‘proxy’ vote. The creditor who attended clearly had
every sympathy for John and was really only
there to ask Paul questions. He had a long
list of questions for Paul and was clearly ‘gunning’ for him.
Following the meeting and the signing
of all the requisite forms, we had retained the
appointment (it is the creditors’ choice of
liquidator that prevails over the members’
choice). In this case the creditors were largely
apathetic and left their vote to ‘the chairman’
for him to decide how to vote. After the
meeting John asked if he could talk about his
own, somewhat straitened, circumstances.
John’s liability
John had discovered that some of the suppliers
the company had been dealing with for some
years were, as I had feared, wholly unaware
of the existence of a limited company. They
believed, and the paper trail supported their
belief, that they were still dealing with a
partnership. As far as they were concerned
John and Paul remained personally liable
for the ‘company’ debts and they would make
demand shortly if payment were not received.
John had also used his personal credit
card to fund certain purchases required whilst
out on site doing various jobs – in the absence
of the ABC Company Limited paying him any
wages/dividends he had nothing to offer from
income. He was also aware that the company’s
bank, whom he had personally guaranteed
(and who, not uncommonly, had no debenture
giving them a first claim over the company
assets), would shortly be added to claims in
respect of the directors’ overdrawn loan
account and HM Revenue and Customs for
his PAYE (under regulations 42/49). His
wife was far from happy with the situation –
they had only recently paid off their mortgage
and had been looking towards an early,
peaceful, retirement.
At John’s age, and with so many years
working effectively for himself, long term
payments from income appeared unlikely.
With an un-mortgaged house it would be
necessary to look at what equity might be
forthcoming from that and then to compare
the outcome for himself and for his creditors
in putting forward an Individual Voluntary
Arrangement (IVA) instead of bankruptcy.
Paul, needless to say, was not returning
to the UK anytime soon and, as liquidator, I
had insufficient funds to mount any action
against him. The sums involved, whilst large
enough if you don’t have them, were not of
sufficient size to interest my litigation insurers
who could have funded pursuing Paul on a
contingency fee basis. Creditors, having
already lost money, were disinclined to
fund us taking any action against him.
In the end, John’s creditors, only seven in all,
mostly arising from the company but including
two credit card companies, accepted an informal
arrangement rather than a full blown IVA, in
full and final satisfaction of their claims against
him whilst reserving their positions against
Paul, who they went on to make bankrupt in
the UK notwithstanding his Spanish residency.
His return from Spain seems more remote
than ever now, especially as his discharge
from bankruptcy has been suspended
pending his surrendering to the proceedings.
A year on, John is now working for one
of his former suppliers and servicing his new
mortgage quite comfortably. He is going to be
working a few more years than planned,
though he now starts at a sensible time in the
morning and leaves most nights at 5pm. He
has not heard from Paul for some time, and
has no plans to holiday in Spain.
form a relationship
Lest I didn’t convince you with my earlier
article, I would again urge all accountants
who have not yet done so to form a relationship
with an IP – get to know and trust someone
before you need them. What you are seeking
is the survival of your own client base – not
another job for the insolvency professionals.
For an unbiased, comprehensive, technically
written, summary of the principal forms of
insolvency I recommend you look at the
Association of Business Recovery Professionals’
website at www.R3.org.uk (R3 stands for the
3 Rs – Rescue, Recovery and Renewal).
Peter Windatt is a licensed insolvency practitioner
and director of BRI Business Recovery and Insolvency.
Peter is a former ACCA Council member and now
serves ACCA as President of the Bedford, Luton
and Northampton Members’ Network and as a
director of the Joint Insolvency Examination Board
and by sitting on various allied committees. |
