Seeking business advice when things go wrong

Setting up a company can be very rewarding, but there are risks and when things turn sour salon owners and directors should urgently seek out good business advice, says leading accountant Peter Windatt. A changing view The direction of the pendulum, following the Enterprise Act 2002, may now be starting to swing the other way. The system now wants to make sure that directors can’t just quit and start again at the creditors’ expense. Accountability has become increasingly important. This is typified by the views of many commentators regarding administrations that allow companies to be “phoenixed” – a move they think is akin to legalised theft. And so regulations to ensure a pre-pack sale of a company’s assets back to the former directors, without affording other prospective interested parties a proper opportunity to consider acquisition, are tightening. The first signs of trouble When problems appear, the earlier the business speaks to an insolvency or recovery expert the greater the number of options that are likely to be open to it. It surprises many that not all options require the formal involvement of an insolvency practitioner (IP) and many creditors, approached in the correct way, would rather a solution is found that avoided the costs involved with a formal insolvency solution. Provided there isn’t a trail of broken promises, deals can often be done. Naturally directors fear being made bankrupt, divorce, losing their home and/or being disqualified from running a business again. And so the first job for an IP is to properly understand where the director is, where he is heading and, if things are going from bad to worse, stopping him. But nine times out of ten the worst is not as bad as a director initially fears. Protecting positions Ordinarily when a business is performing well, the first duty of a director is towards the company shareholders. When things are going wrong the duty moves over towards protecting the creditors and the defence to an accusation of wrongful trading (which can enable company liabilities to be passed on to the directors personally) is that the directors took “every step possible to minimise losses to creditors”. Not all directors realise that the protection of a limited liability company can be lifted. But this can happen when a director allows a company to continue to trade after the time when they knew, or ought to have known, that there was no reasonable prospect of avoiding insolvent liquidation. This is why directors should maintain a good documentation trail. What they are doing, and why, may seem obvious at the time, however, things may look very different when reflected on. A liquidator will have the benefit of hindsight and, without a contemporaneous note about their actions directors may find themselves at the wrong end of a disqualification hearing or worse. No creditors’ position should be allowed to get materially worse by virtue of the business carrying on. This also means avoiding pitfalls such as entering into transactions at undervalue or preferring one creditor to another. By the same token directors in trouble cannot just abandon ship – they should take stock, establish their position and determine which they think is the best, or sometimes the least bad, way forward. What next? Whatever the form of insolvency - administration, receivership, liquidation (solvent members voluntary liquidation, insolvent creditors voluntary liquidation and compulsory liquidations) and company voluntary arrangements (CVA) – there are processes to follow. But having discovered the problem, gone through a creditors meeting, directors will finish that process and find themselves wondering “what next?” If the meeting was to consider an administrators proposal they may still have work to do, and if it’s a CVA then they will have to make the proposal work and see it through. For our purposes let us assume that a director has just concluded creditors voluntary liquidation meetings and the IP is now the company’s liquidator. The IP isn’t working for the company now - they are acting for the creditors. For the majority of run-of-the-mill meetings no creditors attend or are represented, and the votes are cast by proxy vote with the creditor instructing the chairman by post in whose favour their vote should be cast. Possible disqualification A director is likely to receive a letter from the liquidator containing a Company Directors Disqualification Act 1986 (CDDA) questionnaire. In addition they may get a copy of a circular to creditors which asks for “any evidence of wrongdoing by the directors in their conduct of the company which matters ought properly to be brought to the attention of the Secretary of State (SoS) for the purposes of the CDDA.” This is standard and does not mean that anyone thinks a director has done anything wrong. Every IP has to ask questions about how directors managed the business while inviting observations from those who have suffered as a result of the failure. Within six months of appointment the IP should report, confidentially, to the SoS their findings and it is for the SoS to determine whether or not proceedings should be taken against a director to prevent or restrict them from being “involved or concerned in the promotion, formation or management of a limited company” – disqualifications can be for between two and 15 years. Directors may also receive demands under any personal guarantees they may have given. If they guaranteed to a bank they may already have made their demand immediately upon receiving notice of the meeting of creditors. However, and this might be seen as good news, none of the people having guarantees are likely to want to see anyone declare themselves bankrupt. Those going bankrupt may lose a lot but their debts too will be written off by virtue of the bankruptcy. It’s a fact of life that sometimes even the good businesses fail. But when things start going wrong the earlier advice is sought, preferably from a qualified person with a regulatory professional body, the greater the options that will be available and the better the outcome. The result doesn’t have to be as bad as many might think.  Peter Windatt is an accountant and licensed insolvency practitioner with BRI Business Recovery and Insolvency.