Accountants are more and more often being called on to guide clients through the complex landscape of funding. A critical element in this responsibility is the understanding and management of a director’s personal guarantee exposure.

At its core, a personal guarantee serves as a legal pledge made by a director to make sure a business obligation is fulfilled, if the business itself fails to meet its commitments.

It could be required in respect of a loan, lease or other type of business liabilities. These guarantees bridge the trust gap for lenders and creditors, offering a form of security that transcends the business' assets alone.

The legal standing of personal guarantees

Personal guarantees are written so that lenders are almost certain to recover the borrowed funds or leased assets from the directors personally, if necessary. Even in the case of insolvency.

Should a business enter insolvency, directors will almost certainly find themselves directly accountable for outstanding business debts which have been personally guaranteed. Any formal insolvency proceedings, such as administration or liquidation, do not absolve the guarantor from the obligations of a personal guarantee.

In fact, it's at this point that creditors are most likely to invoke a personal guarantee, seeking repayment directly from the directors if the principal securities fail to cover the debt.

Navigating the risks and responsibilities

The decision to give a personal guarantee should not be made lightly. While the working capital it secures can be a vital element of a business' survival and growth, a personal guarantee given when the business is already vulnerable presents a serious financial risk.

Directors need to weigh up the necessity of the loan versus the potential risk to personal assets. Exploring alternate funding sources or reassessing the business' financial strategy might be the safer path forward.

You should also advise them to thoroughly examine the terms and conditions, and suggest they seek legal advice before proceeding.

When to terminate a personal guarantee

A personal guarantee isn’t automatically terminated with the sale of a business or with the guarantor leaving it. Should either situation occur, your client needs to take a proactive approach and directly engage with the lender to negotiate a release from the guarantee.

If this doesn’t happen, the directors will still be bound to their financial obligations and could be called on to honour the personal guarantee - even if they’re no longer involved in the business.

How can we help?

The complexity of personal guarantees and the gravity of their implications cannot be understated.

The objective for accountants is clear: ensure that when directors are pursuing viable business ventures they’re safeguarding their personal financial future in the process.

If your client is concerned about taking on a personal guarantee to keep their business afloat, or about one they already have, we can help you guide them through the risk management and financial planning that goes with it.

Talk to us about your client’s situation by calling 01455 555 444 or emailing enquiries@fasimms.com

In the complex landscape of insolvency options, pre-pack administrations have long been a feature. While they often makes headlines in the retail sector, it’s a viable form of rescue for all types and size of business.

While both pre-pack and normal administrations are formal insolvency processes, the former offers a few advantages that can make it a more appealing choice for rescuing a business as a going concern.

Overview

In essence, a pre-pack aims to rescue a business by selling a pre-determined package of the viable parts of the failing business to a new entity. It’s possible for the buyer to be the existing director(s), owner(s) or investor(s), operating under a new company.

The details of the sale and buyer are usually agreed on before the administration begins. So when an administrator is formally appointed, the sale can complete immediately.

At the heart of a pre-pack administration is its ability to preserve the intrinsic value of a business as a going concern. The rapid nature of the process means there's less time for the operational disruption of a cessation of trade which can erode customer and supplier confidence. This ensures that the business retains as much of its goodwill and asset value as possible.

These are some of the other common reasons company director(s) opt for a pre-pack administration:

Business continuity

Continuity is crucial for a business' survival and future prosperity. A pre-pack administration is designed to minimise disruption to operations, maintain ongoing trade and to preserve the goodwill that the business has built up over time.

Employment protection

A pre-pack administration has the potential to save jobs. By allowing the business, or parts of it, to continue operating under new ownership by a new company, many employees can retain their jobs and their rights and obligations transfer to purchaser under TUPE Regulations. In fact, it can be advantageous for the new owners that they do, as these employees often have skills, experience and customer relationships that would be costly to replace.

Cost effectiveness

Cost is a critical consideration for any business, especially one facing financial difficulties. The streamlined nature of pre-pack administrations can make them more efficient in terms of both the time and resources needed to complete them, when compared to a normal administration.

Attractiveness to investors

The ability to purchase a business without its legacy debts, combined with a quick transaction and minimal disruption to operations, makes for an attractive investment proposition. This can result in better outcomes for the business, its employees and its creditors.

Could a pre-pack work for your client?

The advantages of pre-pack administration, from preserving business value to ensuring continuity and saving jobs, make it an attractive and effective solution to an insolvency of a company. Whether we can use a pre-pack administration to rescue a business depends on your client’s specific circumstances.

If you’d like to explore this business rescue option for your client, get in touch with our team by calling 01455 555 444 or emailing enquiries@fasimms.com

If our clients have the potential to get back into profit, our goal is to rescue the business by maximising its chances of continuing as a going concern. This often involves a legal process that needs the supervision of a licensed insolvency practitioner. But there’s also ways in which you, as the client’s accountant, can help.

You’re likely to be the first professional that a struggling company turns to for help. Having knowledge of the business rescue process can allow you to provide better advice and increase the chances of a successful turnaround.

When can a business rescue start?

A company doesn’t need to be insolvent to start a business rescue. As an accountant, you’ll be used to seeing the fluctuations in profitability throughout a company's lifecycle. But being attuned to the signs of financial distress that might indicate a client needs an intervention gives them time to make changes that address their challenges

Falling revenue and profits

Whether you only speak to your client’s once or twice a year, or catch up monthly, make it a routine to check if their revenue and/or profits have been declining for multiple quarters or years. Examining their financial statements over time can reveal these downward trends. Ask clients about the reasons behind the declines to understand if they are temporary or more systemic.

Cash flow issues

Look out for signs like accounts being constantly overdrawn, suppliers tightening credit terms, and requests for payment plan extensions on taxes or other obligations. These signal liquidity challenges that may require external help to resolve.

Mounting debts

Many companies walk a fine line with their short-term and long-term debt levels. But if these are both rising, it might show a business can't support itself through operating revenues alone. Reviewing a client's liabilities and asking about their debt situation can uncover hidden issues.

Benefits of Business Rescue

Business rescue can provide numerous benefits for struggling companies, compared to the alternative of bankruptcy and liquidation. The primary aims are to avoid closure through insolvency, save jobs, restructure debt and regain profitability. 

Avoid insolvency

Business rescue is an alternative to bankruptcy and liquidation. The goal is to rehabilitate the company and allow it to continue operating, rather than shutting down. This avoids the major disruption, job losses and closure through liquidation.

Save jobs

Keeping the company operating through business rescue can preserve jobs that would otherwise be lost if the company went bankrupt. Likewise, if a business rescue process such as administration is involved, where the business is sold as a going concern, the employees may be retained to provide value through their skills, knowledge, and experience with the company.

Restructure debt

The business rescue practitioner will work to renegotiate the company's debt obligations. This may involve extending repayment terms, reducing interest rates or agreeing on partial debt forgiveness. We can use a Company Voluntary Arrangement (CVA) to do this officially.

Regain profitability

With the breathing room created by restructuring debt or other changes, the company can focus on recovering and returning to profit. This may involve reducing expenses, selling non-core assets, improving operations and strategy or raising new investment. The business rescue plan aims to make the company financially viable again.

Business rescue terms explained

One of the first things we’ll do is conduct a thorough review of the company's finances. This involves assessing cash flow, profit and loss, assets and liabilities, outstanding debts, contracts, and any other financial factors impacting the business.

Depending on the outcome we’ll then focus on stabilising the company. This might involve using an informal process like a recovery plan that we can implement alongside you and your client, or a legal procedure, which we’ve explained below:

Company Voluntary Arrangement (CVA)

This is a formal agreement between the company and its creditors to pay off a portion of its debts over a fixed period, while allowing the company to continue operating. We supervise this process for the lifetime of the CVA (which can be up to five years) to make sure the terms of the arrangement are adhered to.

Administration

Administration’s aim is to rescue a company as a going concern, or at least achieve a better result for creditors than liquidation would. During administration, the company is placed under our control. Our aim is to restructure the company's debt and business operations to make it viable again or to sell the business as a going concern.

Pre-pack administration

In this form of administration, the sale of the company's assets is arranged in advance of the company entering administration. This process is often used to save parts of the business that are viable, protect jobs and maximise the return to creditors. If it’s feasible, we’re able to sell this ‘pre-packed’ business to the former management under a new company.

Start Afresh Liquidation

You might know this under the term ‘phoenixing’. We use a Creditors' Voluntary Liquidation (CVL) to close the company, with assets sold off to repay creditors as much as possible. But while the outcome is still the dissolution of the company, in a Start Afresh Liquidation we’re able to restart the business under a new company.

If your client’s facing financial challenges and you want to know if business rescue could be put them back on track, please get in touch with us to talk through their situation by calling 01455 555 444 or emailing enquiries@fasimms.com

If you’re client’s dealing with unmanageable business debt and facing the threat of insolvency, they might naturally consider shutting down operations as a way out.

However, entering into company administration could be an alternative solution to prevent their company from closing completely.

Company administration is a formal insolvency process that offers a lifeline to struggling businesses by providing temporary protection from creditors while a restructuring is implemented.

In this article, we'll look into the details of what company administration entails and if it could be a viable option for rescuing their business.

Is your client’s company right for an administration?

We would use a company administration when a company’s insolvent but has a viable business model or valuable assets. Your client’s business might qualify for this insolvency process if:

the company has a potential for recovery, reorganisation or the sale of parts of the business as a going concern.

Or

a company administration is the best way of maximising the asset value for creditors' benefit, as an alternative to liquidation.

The advantages of company administration

Your client is protected: The moratorium on legal action by creditors that’s triggered by company administration gives your client much-needed breathing space. It allows us to work together on a recovery plan, without the threat of lawsuits or asset seizures.

We could rescue the business: We’ll act as the administrator and work closely with you and the directors to devise a recovery plan. This plan will outline our strategies for repaying debts, cutting costs and restructuring operations to make the business viable again.

Creditors are often supportive: Creditors are more likely to recover more of the money they’re owed from a company that’s in administration rather than being liquidated. If creditors are happy with our recovery plan, they’re more likely to work productively with us.

A better outcome for employees: The period of company administration can be a time of uncertainty and stress. However, if parts of the business are successfully rescued or sold as a going concern, some jobs may be preserved. We’ll keep your client’s employees informed about our plans, potential timescales and their rights and entitlements during this process.

An overview of the process

Engaging our services is the first step. We’ve worked with the AIA and its members for over a decade, helping clients of varying sizes in a wide range of sectors to recover their businesses. This is a quick look at the steps involved in the company administration process:

Work on a recovery plan

The recovery plan is created in partnership with you and your client. It will take into account the desired outcomes of the company directors. But we’re also legally obliged to find a solution that gets best results for the company’s creditors.

The recovery plan will explain how debts are to be treated, as well as the changes which can be made to make the business viable going forward.

Get the creditors' agreement

By law, a decision process must be called within 10 weeks of a company going into administration. During the decision process we’ll explain the plan to the creditors. Ahead of this, the administrator’s proposals will be circulated, offering an in-depth insight into strategy and expected outcome.

Act together

Our aim is to enable your client to move their business forward into profitability and a brighter future. We’ll work with you, the company directors and the creditors ’committee to make sure the process of discharging the company’s debts, and streamlining and restructuring is as smooth and stress-free as possible.

Could company administration save your client’s business?

Company administration can be a powerful tool that provides a lifeline to businesses facing financial difficulties. By offering temporary protection from creditors, facilitating debt restructuring and enabling operational reorganisation, company administration presents a viable path to business rescue.

While the process can be daunting for your client, seeking the guidance of a licensed insolvency practitioner can significantly increase the chances of a successful outcome. If you believe that your client is struggling with mounting debts and insolvency looks like a realistic outcome, exploring the option of administration could be the first step towards a brighter future.

Call 01455 555 444 or email enquiries@fasimms.co.uk for free guidance on whether company administration might be an option for your client.

Members' Voluntary Liquidation (MVL) is a formal process that allows the directors of a solvent company to voluntarily wind up the business, pay any debts and distribute assets to its shareholders.

The directors of the company appoint a liquidator, or licensed insolvency practitioner, to oversee the process and make sure a company’s affairs are closed fairly and legally.

How is a Members ’Voluntary Liquidation different from other types of liquidation?

An MVL differs from other types of liquidation in a few important ways. In an MVL:

• the liquidation is initiated voluntarily by the directors while the company is still solvent, rather than being forced due to financial difficulties

• assets are sold off to pay creditors in full, rather than giving creditors a pence in the pound offer (often less than is owed due to the debtor’s insolvency)

• the focus is on the fair distribution of capital to shareholders rather than creditors unlike during a Creditors Voluntary Liquidation (CVL)

When can a Members ’Voluntary Liquidation be used to close a company?

If your client’s company is legitimately able to take each of the following steps, an MVL could be the right choice:

1. The company can pay its debts in full (including current and contingent debt) within 12 months of the start of the MVL process.

2. The company directors can make a sworn statement confirming the company's solvency. This statutory declaration of solvency must be made within five weeks of the winding-up resolution. If made fraudulently, the directors may be liable to fines or prosecution.

3. The declaration can truthfully state that the company directors have made a full inquiry into the company's affairs and they believe the company will be able to pay its debts within 12 months of the start of the MVL.

The benefits of using a Members' Voluntary Liquidation

Tax advantages: With an MVL, funds can be distributed to shareholders as capital rather than income. This means shareholders can pay the lower Capital Gains Tax rather than the higher Income Tax.

Most directors can also claim Business Asset Disposal Relief which means they pay just 10% tax on qualifying assets.

Low stress: The MVL is handled by a licensed insolvency practitioner with in-depth experience in managing the process from beginning to end. While the company directors are still involved, it’s a much faster and simpler option than trying to manage everything in-house.

Legal safety: Licensed insolvency practitioners are fully qualified and experienced in company closure.

We have specific steps we take to make sure the process is carried out fairly and legally.

Nothing is overlooked and at the end of the process, your clients can enjoy the full benefits of their efforts as directors and shareholders.

Is Members' Voluntary Liquidation right for your client’s company?

If your client is considering closing their company and you want to know if liquidation is right for them, talk to our licensed insolvency practitioners and liquidation experts. Call 01455 555 444 or email enquiries@fasimms.co.uk.

There’s still frequent news about company directors being disqualified for the misuse of their BBL, or having their company strike off stopped to be investigated. So it’s natural for you to be cautious around giving advice to clients on insolvency and unpaid Bounce Back Loans (BBLs).

The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 gave The Insolvency Service new powers to tackle directors who dissolve their companies to avoid paying debts. It also allows for the Secretary of State to apply for a disqualification order up to three years after a company has been dissolved.

This makes it much harder to close a company that still has an outstanding BBL without taking the proper advice concerning what the most appropriate route should be. Therefore, we advise seeking the help of an insolvency practitioner (even if the company is solvent) before your client takes any action.

In short, if the loan has been used responsibly it’s feasible that we can use an insolvency process to bring an end to their debt. However, if it was used illegitimately, there’s a possibility they could face serious consequences.

We explain the two scenarios in more detail below.

Was the loan used correctly?

When we’re acting as the liquidator for an insolvent business, we’re legally bound to review its activities in the lead up to its insolvency. This includes looking at whether a BBL was used for its intended purpose.

As the government website, gov.uk, states: “The Bounce Back Loans were made on the condition that they were not to be used for personal purposes, but could be used, for example, to purchase a company asset such as a vehicle, if it would provide an economic benefit to the business.”

It takes knowledge and experience to view each situation in the context of the pandemic and subsequent years, and determine which directors have - and have not - acted honestly in the face of an unceasingly hostile climate.

What are the potential consequences for misusing a BBL?

If the BBL wasn’t obtained and used legitimately and your client’s now looking to close - whether through an insolvency process or strike off - the directors of that company could be held personally liable for BBL repayment, along with more serious consequences.

• Director’s disqualification

Your client could be banned from acting as a director of a company, or participating in the formation, marketing or management of a company, for between 2 to 15 years.

Breaching these restrictions can lead to severe penalties, including fines and imprisonment. Disqualified directors could also be held personally liable for the company’s debts if they continued to act as directors while disqualified.

• A criminal investigation

If the company director(s) concerned have committed criminal offences or other regulatory breaches, The Insolvency Service may refer them to their internal criminal investigation team, the police or a regulator (if they’re in a regulated sector). They may then be subject to a criminal investigation and the loss of reputation, business and potential legal consequences that comes with it.

• Jail time

In June 2022, Abdulzarzag Zagroba became the first person to be prosecuted by The Insolvency Service and receive jail time for misuse of a BBL. If you read the details of the case you’ll see that there were clear signs of fraud and misuse, which could not be explained away.

Most recently, the two directors of a Liverpool property business received suspended sentences for transferring their BBL straight to their personal accounts and trying to close the business.

• An extension of a Bankruptcy Order

For sole traders who have been through an insolvency process, they could have their Bankruptcy Order extended. This means that they will continue to be restricted in their borrowing, business activities and impacted by their credit rating for potentially years longer than necessary.

What about clients who used their loans legitimately?

If your client used their BBL for business purposes, including to pay themselves or employees a reasonable salary, we can look at options to make way for a legal process to deal with any remaining debts (including the BBL) properly and within the parameters of the relevant legislation.

Depending on their company’s individual circumstances, one of these common insolvency solutions could be the answer.

Company Voluntary Arrangement (CVA): A CVA will allow your client’s company to repay its debts in part over a specified period, subject to approval by creditors and with any balance agreed to be written off by creditors. They’ll still be able to trade and the arrangement is legally binding, which prevents any legal action from creditors. A CVA essentially gives them breathing space to work with you and us to implement vital business improvements to bring them back into profit.

Administration: Administration aims to keep a business open by shedding the parts that are no longer viable. This is very much a rescue tool, with various options available dependent on circumstances.

Creditors' Voluntary Liquidation (CVL): Yes a CVL is a liquidation. But it doesn’t have to mean the end of a company. We can often reopen your client’s business under a new company but without the legacy of debt. This enables them to continue to work with you on how to plan for a more profitable future.

If you think your client could benefit from independent Bounce Back Loan advice, call 01455 555444 or email us at enquiries@fasimms.com.

Seeking tax assurance from HMRC as part of a Members ’Voluntary Liquidation has acted as a safeguard for licensed insolvency practitioners and accountants alike against potential future HMRC enquiries.

It’s been our way of confirming all taxes have been paid before distributing assets, as well as provided us with assurance that HMRC’s satisfied with the company's tax affairs upon liquidation.

But, as rightly stated in HMRC’s announcement on 6th December 2023, there’s actually no statutory or best practice framework for HMRC to provide tax clearance. And so they’ve made the decision to cease providing it for MVLs, with immediate effect.

While the tax clearance process was an unofficial one, this signals a major change that will impact the solvent liquidation process. We think for the better.

Benefits of the change

Of course, removing the step of tax clearance means we’re no longer waiting around for HMRC, which has always added an uncertain amount of padding to the MVL timeline. The new process should allow your client to be able to complete their company’s liquidation more quickly, once all the correct documentation is done.

It’s likely that you’ll want to put in place additional checks of your client’s tax compliance before handing the paperwork over to us completely. This is a process we’ll be able to work on with you. It’s also something that you can offer as an enhanced service to your clients.

You’ll know better than anyone that the preparation of final accounts and returns is a vital step in the MVL process, to guard your client (and yourself) against any future repercussions from HMRC over discrepancies. The additional hours spent on double and triple checking will not only give you peace of mind: they could be built into your charges too.

Working with your liquidator

These changes place increased responsibility on everyone involved - you, your clients and the liquidator - to thoroughly review all the documents to be submitted, so that any outstanding taxes aren’t accidentally missed.

For us, this is our standard way of working.

The onus that insolvency legislation puts on company directors to confirm that liabilities, plus costs and interest, can be met in full in the next 12 months means that it’s customary for us to work closely with you and your client throughout the MVL, to get the numbers correct.

The clear overview that this relationship gives us means we’re in a good position to work with HMRC if there are any questions or checks to be carried out before and during liquidation. It also enables us to make sure all post-liquidation responsibilities are fulfilled.

With the proper diligence, the end of tax clearance represents progress in an evolving insolvency and liquidation environment. And as the new process embeds over time, further efficiencies and benefits may emerge. In the meantime, this is our opportunity to help clients through solvent liquidations more quickly and smoothly, enhancing their journey.

Many clients will seek your advice at pivotal moments in their business' life cycle. Especially when it comes to planning for the future. When a business owner is looking at closing their solvent business, due to retirement or to undertake a different venture, Members’ Voluntary Liquidation (MVL) is a common consideration.

As an MVL is largely a tax-driven choice, you have a very important role to play and it’s crucial to provide informed and practical advice on its benefits and potential pitfalls.

What is an MVL?

A Members’ Voluntary Liquidation (‘MVL’) is a quick and straightforward way of ‘winding-up’ a solvent business. It will allow your client to extract cash and distribute it in a tax efficient way. There can be significant tax benefits for the client.

If you have a client that falls into one of the following categories, then an MVL is likely to be the most financially rewarding route to closing a solvent business.

· A contractor who wants to release the assets in a company, especially due to IR35 legislation.

· Your client owns a company but doesn’t want to run it any more or they want to retire.

· They have one (or more) dormant companies that have outlived their usefulness.

In brief, the MVL process involves a company being liquidated after:

· Final invoices have been paid.

· Accounts up to liquidation date completed.

· Company tax affairs bought up to date.

· Creditors cleared pre-liquidation.

The distribution of company reserves to shareholders can take place at various points in the liquidation process dependent on the realisation of assets in the company.

Your role in an MVL

Your guidance is critical in helping clients decide whether an MVL is suitable. By examining their financial position, business goals and future personal plans, you can provide comprehensive and tailored advice.

You’ll need to prepare the accounts and ensure all tax affairs are in order. Communicating the tax consequences of the MVL and exploring potential tax-saving strategies will be a crucial part of your role. We’re here to give you any information you need to help them with this decision.

If your client goes ahead with an MVL we’ll work closely with you too.

A point to bear in mind is that your client will not be able to go back into the same sector as a business for the next two years if they have taken advantage of Business Asset Debt Relief via the MVL process.

When insolvency strikes: The CVL option

For insolvent companies, an MVL is not a viable option. But a Creditors' Voluntary Liquidation (CVL) could be. This would help to minimise your client’s liability, potentially allow creditors to recoup some losses and still close the company in an structured way.

Like an MVL, we’d work side-by-side with you to support your client through the process of holding the necessary meetings, liquidating the company assets, paying the creditors and carrying out all the formalities needed to close the company.

Final thoughts

Being knowledgeable about the benefits and suitability of an MVL is crucial to providing effective guidance to your clients. However, it's also important that you’re prepared to help them with alternative options when they face insolvency.

You’re best placed to start advising your clients on these procedures, helping them to find the best solution for their unique situations. We’re here to give you the support you need to do that, and to work with you and them to clarify the decision and proceed with whichever solution they decide on.

You’ll know better than anyone how the financial health of a client’s business plays a crucial role in its growth and survival. But not many businesses have experienced smooth sailing over the past few years.

When you’re advising companies in financial distress, one option that might be open to your client is a Company Voluntary Arrangement (CVA). Is a CVA the right solution for them? Let's explore.

What is a CVA?

A CVA is a formal agreement between a company and its creditors, which allows a portion of its debts to be paid back over time. This agreement is legally-binding and is often used as a strategy to address insolvency. This process must be carried out by a licensed insolvency practitioner.

Why consider a CVA?

CVAs have numerous benefits. They provide an opportunity for viable businesses that are burdened with debt to continue operating while paying back creditors in a manageable way, over an agreed period. They safeguard against legal actions by creditors. And they ensure the existing company directors retain control.

Is a CVA right for your client's company?

CVAs are certainly not a one-size-fits-all solution. Careful consideration and assessment are required to determine whether a CVA is the right choice. While it's an effective way to regain financial control, it's only suitable if the business is fundamentally viable but is facing short-term financial issues.

Assessing the viability

The viability of your client's company is paramount in deciding whether a CVA will work. You’ll know better than anyone whether the root of its financial difficulties lie in the business model itself or not. If the company's financial troubles stem from deep-seated issues, a CVA might simply delay the inevitable.

You’re best placed to undertake a thorough review of the company and provide objective insight into its long-term feasibility. If the financial issues are temporary and the business model is sound, a CVA could be an excellent option.

Creditor relationships

For the CVA to be successful, the creditors must have confidence in the company's ability to meet the proposed repayments. Strained relationships between the company and its creditors may prove a stumbling block when it comes to establishing a CVA. Managing creditor relationships effectively is vital. This is an important part of the insolvency practitioner’s role. We often act as the mediator between a company and its creditors, to reach the best outcome with the least friction.

The alternatives

Before proceeding with a CVA, it's important that all alternatives are discussed with your client. An informal negotiation with creditors, refinancing, administration or even liquidation used as a business rescue process might also be suitable for your client’s situation. As licensed insolvency practitioners, we’re able to work with you and your client to decide on the option that best suits them.

Conclusion

A CVA can provide a lifeline for a debt-laden company that’s viable in the long term and looking for a route to return to profitability. Your role as an advisor will be invaluable to your client throughout the process.

It’s important that your client sees the CVA as simply the next step in their business journey. By analysing the business’ situation carefully and involving us to help guide your client, you can have a fundamental role in rejuvenating and safeguarding your client’s future.

Richard Simms is a licensed insolvency practitioner, chartered accountant and MD of FA Simms. If you think your client could benefit from insolvency or business rescue advice, call 01455 555444 or email us at enquiries@fasimms.com for more information about how FA Simms can help.

We’re getting an increasing number of calls from worried business owners who want to liquidate their company but are concerned that their company does not have the assets to fund an end of road liquidation. They feel like they have no option but to wait for a winding-up petition to arrive.

I imagine you’re having similar conversations, which is why I wanted to look at the pros and cons of all the options, including how we could help your clients to a better, more profitable future.

We always explain all the options to a director, one of which is to fund the liquidation themselves in order to have an effective closure of the business and to remove any pressure from creditors. In the situation when a director is also an employee of the company, they will be able to make a claim alongside other employees for statutory employment related payments due to them from the Government.

Be aware that the Government is unlikely to make these payments to a director if the director owes money to the company. This debt is most commonly an overdrawn director’s loan account.

Dissolution

Dissolving the company and having it struck off the Companies House register might seem like the best alternative to avoid paying a company’s debts, as long as the client meets the requirements set out by Companies House. However, as you’ll know, its creditors are within their rights to apply for the court's intervention to recover their debts.

There’s been many news stories about company directors who’ve been prevented from dissolving their company due to outstanding Bounce Back Loans or CBILS loans. Such strike offs are being blocked to protect the majority who used the Covid loan schemes for their intended purpose. This is done by ensuring an investigation into how the funds were used is carried out by a regulated professional, generally a licensed insolvency practitioner.

This investigation could potentially result in a director’s disqualification for those found to have acted inappropriately.

Compulsory liquidation

You’re best placed to show your client that ignoring a financial crisis can lead to severe consequences. Namely, a winding-up petition. Should your client’s creditors petition the court for a winding-up order and force the business into compulsory liquidation, the court will appoint an official receiver to liquidate the company.

Your client will lose control of all company assets and the official receiver will investigate the actions of the directors. If they’re found to have acted irresponsibly, improperly or negligently, they could face disqualification and the penalties that come with it.

Many petitioning creditors are willing to allow the company to go into voluntary liquidation if their petitioning costs are met.

Getting back into profit

Of course, the ideal scenario for both you and your client is to work through their financial crisis so that their business can stay open. As licensed insolvency practitioners, this is a process we specialise in. We work with many AIA accountants to advise and guide their clients through insolvency and out the other side.

The first step we take is to determine if the company has a legitimate future, if the immediate pressure of the debts was removed. If so, a Company Voluntary Arrangement (CVA) could allow it to continue trading. This is done by working with creditors to agree a repayment plan. A CVA does require certain stipulations to be met and for a strong business plan to be produced.

Due to the conditions attached to this option, your client must use a licensed insolvency practitioner to carry out a CVA. We’ll work with you and them to create a practical, achievable plan - one that has a good chance of being accepted by their creditors.

Administration is another option. In this case, an licensed insolvency practitioner acting as an administrator will take over control of the business. Our aim here is to rescue the business by selling some or all of its assets to pay back its creditors. During this process, the business may be able to continue trading, depending on the circumstances.

A pre-pack administration is slightly different in that the business and its assets are sold to a new company, which can be owned by the existing directors.

In some cases, we can also use a Creditors’ Voluntary Liquidation (CVL) to save a business. Acting as the liquidator, we sell the company’s assets so maximise the value for creditors. But it doesn’t have to mean an end to the business.

Subject to valuation, the directors could purchase the assets. This is called a Start Afresh Liquidation. There are a number of restrictions surrounding this process so it must be done carefully.

The options available to your client will of course depend on the company’s individual situation. But for businesses that are struggling now but have a viable future, the end of the road for the business could be avoided. With careful planning, these businesses can be guided through and onto a better future.

Richard Simms is a licensed insolvency practitioner, chartered accountant and MD of FA Simms. If you think your client could benefit from insolvency or business rescue advice, call 01455 555444 or email us at enquiries@fasimms.com for more information about how FA Simms can help.

We’re seeing a significant increase in the number of businesses facing financial difficulties. According to the latest data from The Insolvency Service, in May 2023 alone there were 2,181 Creditors' Voluntary Liquidations (a 34% increase on May 2022) and 189 Compulsory Liquidations (a 38% increase in May 2022).

These figures highlight the challenging economic environment that many businesses are operating in, with increasing competition, rising costs and the ongoing impact of the pandemic.

In such circumstances, we work with AIA members to inform their clients of the options available to them to help save their business from closure. One such option is a Creditors' Voluntary Liquidation (CVL), which can sometimes be used as a business rescue process.

This article will discuss how a CVL could save your client’s business - and what happens after the CVL process to set them back on track to profit.

Creditors' Voluntary Liquidation as a business rescue process

While the term "liquidation" may initially seem negative, a CVL can often provide the directors with an opportunity to learn from the mistakes that led to the insolvency and build a stronger, more sustainable business going forward.

There are several other key benefits to using a CVL:

1. Protection of the business' value: A CVL can help protect the remaining value of the business by allowing it to be sold as a going concern. This can help to maximise the return to creditors.
   
   
2. It’s a voluntary process: By initiating a CVL, the directors of the company are voluntarily entering a liquidation process, rather than having it forced upon them by creditors through a compulsory liquidation. This can provide the directors with the time and space needed to explore all available options for rescuing the business. We’ll always explain all the available options but the decision on which route to use is in the hands of the directors. They stay in control.
   
   
3. Protects the directors: Directors of insolvent companies can face legal consequences for wrongful trading if they continue to trade while knowing that the company is unable to pay its debts. By entering into a CVL, the directors can demonstrate that they have taken appropriate steps to address the financial situation, which can help to protect them from personal liability.

Once the CVL process has been completed, the company will be dissolved, and its name will be removed from the register at Companies House. However, this does not necessarily mean the end of the business.

If carefully managed by an experienced licensed insolvency practitioner, the directors of the company may be able to set up a new company to continue trading, provided that they comply with certain legal requirements.

We call this process a Start Afresh Liquidation. It can be particularly beneficial for businesses with a strong underlying trading position that has been hampered by unsustainable levels of debt. By using a CVL as part of a Start Afresh Liquidation, it’s possible to create a platform for future growth.

Richard Simms, MD of FA Simms and AMLCC, is a licensed insolvency practitioner, chartered accountant and a leading authority on anti-money laundering. He is a sought-after guest at Accountancy and AML conferences worldwide due to his position at the pulse of changes in guidance and legislation that impact DNFBPs.

Traditionally many company owners and directors have turned to their accountant, in the main, for all things financial. To make sure they meet their statutory obligations, make payments to HMRC, filing with Companies House…you know the drill. And to draw on their knowledge of changes to tax and other legislation. Many have always also been trusted business advisors to their clients

As a result of the economic turbulence of the last few years, you may have found that clients need extra support. Indeed, we’ve spoken to many more accountants who have become trusted business advisors, using their expertise and experience to secure business survival for company owners and directors.

Business survival is what we’re here for too. As this article will show you, it’s actually one of the biggest aspects of a licensed insolvency practitioner’s (IP’s) role. If we work together to support your client at a time of financial difficulty, that time can often become just a ‘bump’ in the road of your long relationship with the client. Contacting an insolvency practitioner doesn’t need to mean the end of a business.

Giving professional advice before insolvency

One of the primary responsibilities of a licensed insolvency practitioner is to provide professional advice to individuals and businesses experiencing financial difficulties. This advice can help clients understand the options available to them and the best course of action to take to address their financial situation.

IPs can help with various challenges, such as:

• Assessing the financial position of the business or individual

• Identifying the causes of financial distress

• Recommending appropriate insolvency procedures or alternative solutions

• Advising on the legal and financial implications of insolvency

• Assisting with the preparation of financial forecasts and budgets

• Providing guidance on debt management and restructuring

The goal of this advice is to help clients make informed decisions about their financial situation and, if possible, avoid formal insolvency proceedings.

Negotiating with creditors for informal agreements

When a business or individual is facing financial distress, it’s often in the best interest of both them and their creditors to reach an informal agreement to resolve the outstanding debts. Licensed insolvency practitioners can help to negotiate these agreements and act as an intermediary between the debtor and the creditor.

We can use our expertise and knowledge of insolvency law to negotiate the best possible outcome for your client. These informal agreements can provide a lifeline for struggling businesses and individuals, helping them avoid the perceived stigma and financial consequences of formal insolvency proceedings.

Working with accountants

We often work closely with accountants to ensure that their clients receive the best possible advice and support, to address all aspects of their financial situation. By pooling our expertise and resources with you, we can achieve the right outcome for the client and hopefully help your client’s business move forward to a positive future.

FA Simms has worked closely with the AIA as a partner for the last 20 years. During that time we have supported many of your clients during challenging times for their businesses. We’ve clearly explained all the options available to them and allowed these clients to make informed decisions on the best way forward for their particular circumstances. No two situations are ever the same and FA Simms will never offer a ‘one size fits all’ solution to any business.

Closing solvent businesses

In some instances, we may be called upon to close a solvent business, for say a contractor or someone wanting to retire, using a Members' Voluntary Liquidation (MVL). Some business owners choose to use an MVL because it’s a tax efficient way of extracting cash from the business and, if they’ve owned at least 5% of the shares for at least one year beforehand, they could qualify for Business Asset Disposal Relief.

The MVL process involves:

• Preparing a Declaration of Solvency, which confirms that the company can pay its debts in full within a specified period (usually 12 months)

• Holding a general meeting of the company's shareholders to pass a resolution for voluntary winding-up

• Selling the company's assets and distributing the proceeds to creditors

• Distributing any remaining funds to the company's shareholders

The IP is responsible for ensuring that the MVL is conducted in accordance with the relevant laws and regulations.

Guiding clients through an insolvency processes

Of course, we do handle a lot of formal insolvency processes too. We act as an administrator for companies going through an administration process. We also supervise and manage Company Voluntary Arrangements (CVAs) to ensure that the agreed terms are followed.

When it comes to liquidation, we oversee the Creditors’ Voluntary Liquidation (CVL) process so that assets are distributed fairly among creditors and that the company is dissolved according to the law. Even if a formal insolvency process is necessary, your client will potentially be able to take the ‘good ’parts of the business and move forward in a new company. We call this ‘start afresh ’liquidation.

The key to future success is for you or your client to get in touch with us as early as possible so we can use everything in our armoury to ensure the survival of the business.

We’re also AML regulated

As with any regulated profession, we have a legal obligation to comply with anti-money laundering regulations in exactly the same way as you do. This means we have to take steps to prevent our services from being used to facilitate money laundering, terrorist financing or proliferation financing.

In conclusion

Yes, licensed insolvency practitioners are an essential part of the liquidation and administration processes. But we can play a much bigger role in a business. Especially when a business wants to avoid insolvency and stay open. Or has a potentially positive future once debt levels have been addressed.

In fact, a large part of our role is to help businesses and individuals navigate the complex world of financial distress and come out the other side in a stronger position. It’s always preferable if we support a client alongside their existing accountant. The earlier you can spot signs that a client needs help and contact us for advice, the better the likely outcome for your client will be.

We offer a free support line for AIA members who have questions about a client’s situation or want to find out more about our services. We don’t have a call centre, so every person you speak to has the experience to give you professional advice. You can call us on 01455 555 444

Richard Simms, MD of FASimms and AMLCC, is a licensed insolvency practitioner, chartered accountant and a leading authority on anti-money laundering. He’s a sought-after guest at accountancy and AML conferences worldwide due to his position at the pulse of changes in guidance and legislation that impact regulated businesses.

One of the most challenging aspects of running a business is navigating the financial landscape, especially when faced with the possibility of insolvency. In these situations, it’s crucial for business owners to seek the guidance of a licensed insolvency practitioner to help them find the best course of action.

However, there’s sometimes a concern that consulting a licensed insolvency practitioner might lead to director disqualification. This may stem from a misunderstanding of what a director must have done to be disqualified and a licensed insolvency practitioner’s role in the process.

A recap of the role of a licensed insolvency practitioner

A licensed insolvency practitioner is a professional who specialises in assisting businesses in financial distress. We’re qualified to provide advice on and guide business owners through various insolvency procedures, such as administration, liquidation and company voluntary arrangements.

Our primary goal is to help businesses find the most appropriate solution to their financial difficulties, which may include restructuring and refinancing to keep the business open. We’ll carefully explain all the options and the directors will make the decision they feel is most appropriate for their company and personal circumstances.

Consulting us doesn’t mean a business owner has failed

Some business owners may believe that consulting a licensed insolvency practitioner is an admission of failure. However, this is not the case. We’re here to help businesses find the best possible solution to their financial problems. Engaging our services early on can actually save their business from insolvency.

Again, we lay out all the options for a business in financial difficulties and the directors make the decision on the way forward. We’ll always discuss with directors whether any actions they have concerns over could possibly lead to action being taken against them or disqualification.

It’s crucial for business owners to understand that insolvency itself is not a sign of misconduct. Working with a licensed insolvency practitioner can help them navigate the complex financial landscape and find the best possible outcome for their business.

Director disqualification: What is it and when does it happen?

It’s important to note that director disqualification is not an automatic consequence of insolvency. Director disqualification is a legal procedure that prevents an individual from acting as a director of a company for a specified period, typically between two and fifteen years. It can occur if a director is found to be unfit to manage a company due to serious misconduct or failure to fulfil their legal duties. However, the actions a director will need to take to be disqualified are more extreme than you may think.

For example, a director was disqualified to hold the role of Company Director for 10 years on 20^th March 2023 for applying for multiple Bounce Back Loans for a number of companies by illegally declaring false turnover levels (exaggerated by 5 plus times) on the application forms. All the companies received BBLs they were not entitled to and subsequently went into liquidation to try to not repay the debts.

The licensed insolvency practitioner involved in an insolvency procedure has a legal duty to investigate the causes of insolvency and report any misconduct to The Insolvency Service. However, the vast majority of directors in insolvent companies have done nothing wrong and no action is taken against them.

In fact, seeking the advice of a licensed insolvency practitioner can demonstrate that a director has taken responsible steps to address the company's financial difficulties. This proactive approach can be seen as evidence of good conduct.

If you have concerns about a client in financial distress and think you or they could benefit from our advice, please get in touch with our expert team at FA Simms on 01455 555 444 or email enquiries@fasimms.com.

One in four SMEs in the UK struggled to survive in 2022 amidst daunting challenges. Many are facing immense pressure to repay the loans they took out during the pandemic. With the government's Bounce Back Loan Scheme and Covid Business Interruption Loan Scheme (CBILS), 100,000s of businesses were able to stay afloat during the economic turmoil caused by Covid-19.

However, the time has come for these loans to be repaid. And businesses are struggling to do so. With the ongoing uncertainty caused by Brexit, geopolitical tensions and the challenges of economic recovery from the pandemic, many businesses are finding it difficult to generate the revenue needed to repay these loans while meeting their other costs.

The pressure on companies to pay their debts is likely to lead to an increase in the number of creditors resorting to legal action to recover their debts, resulting in a surge of winding-up petitions being filed with the courts.

This situation highlights the need for businesses to take proactive measures to manage their finances and cash flow, and to seek professional advice if they’re struggling to meet their financial obligations.

When is solvent liquidation an option?

You might have clients who, after years of uncertainty, want to throw in the towel and start a new venture, or retire altogether. Taking full-time employment to avoid getting caught up in IR35 complications is another common reason we’re seeing for winding up a solvent company.

Solvent liquidation, also known as Members' Voluntary Liquidation (MVL), is an option for businesses if they’re able to pay off their debts in full. This process allows the business to distribute its assets to its shareholders, pay off any remaining debts and ultimately close down with no loose ends.

An MVL is a quick and straightforward way of winding up a solvent business. It will allow your client to extract cash and distribute it in a tax efficient way. The owner might also qualify for Business Asset Disposal Relief, if they own at least 5% of the shares for at least one year before the MVL.

A word of caution: your client won’t be able to go back into the same sector as a business for the next two years if they’ve taken advantage of Business Asset Debt Relief via the MVL process.

When can you liquidate an insolvent company?

If your client is unable to pay its debts as they become due, or its liabilities exceed its assets, then they’re in an insolvent position. Liquidation is one solution open to them. The decision to liquidate an insolvent company should be made by the directors of the company, and the reasons for the decision must be documented. These might include:

• The company won’t be able to pay employees’ wages.
• The landlord is threatening repossession of the company’s premises.
• The business of the company is no longer viable.
• A winding-up petition is being threatened or has been presented against the company.
• The outcome of a court case is expected to go against the company and it can’t pay the likely award.
• Enforcement action is being taken by those owed money by the company.
• The business has had to cease suddenly due to unforeseen circumstances.

What is an insolvent liquidation?

A Creditors' Voluntary Liquidation (CVL) is the most commonly used corporate insolvency process. In some cases, we can even use it to stop a Compulsory Liquidation. If your client’s been threatened with a winding-up petition or received a letter from the court regarding one, it’s vital they contact us as soon as possible to give them the best chance of success.

While a CVL is initiated by the company's board of directors, it requires the approval of at least 75% of the shareholders to proceed. The aim of a CVL is to provide a fair process for the company's creditors to receive as much of the money owed to them as possible, while also allowing the company to wind up its affairs legally.

In a CVL, the directors of the company will propose to the shareholders that the company be wound up and a liquidator be appointed to sell the company's assets and distribute the proceeds to its creditors. The liquidator will also investigate the conduct of the directors to determine whether any wrongful or fraudulent trading has taken place.

It’s our job as licensed insolvency practitioners, acting as the liquidator in a CVL, to guide the client through the process and make it as stress-free as possible.

Can a client start again after a CVL?

In certain circumstances, the directors of the liquidated insolvent company can restart under a new company in a process we call Start Afresh Liquidation. This allows the directors to buy out the good bits of a business and carry on, leaving the unprofitable parts behind.

This is a process that’s governed by strict rules and so must be overseen by an experienced licensed insolvency practitioner. We’ll arrange for the valuation of the assets and goodwill of the insolvent business, as with a Creditors’ Voluntary Liquidation. The new company (owned by the insolvent company’s directors) can then make an offer to purchase them. This amount can be paid by way of deferred consideration.

The personal challenges of corporate insolvency

Many company directors find the process of managing a distressed company overwhelming. It can be emotionally and physically draining, impacting their lives beyond the business environment. This is especially true if the company director has made personal guarantees or put their own money in to fund the company. They might also worry about consequences of a liquidator’s investigations.

Have they inadvertently continued to trade while the company was insolvent and as a consequence be accused of wrongful trading? What will happen about their overdrawn director’s loan account? Will their personal credit score be affected?

All insolvency practitioners have a legal duty to investigate the causes of a company’s failure. But it can be reassuring to know that the majority of business directors are found to have played no part in the insolvency. The best way to allay these worries is to contact us for advice, which we offer free of charge for all AIA members and their clients. When you or your client call, they’ll speak to an expert - not a call centre - who can give relevant advice there and then.

Bounce Back Loans (BBLs) and other large bills can be a huge burden for business owners struggling to stay afloat.

For clients who are worried about not being able to pay their creditors and heading towards insolvency, or who already find themselves in an insolvent position, liquidation might be a solution that’s been mentioned.

When faced with seemingly impossible circumstances, people often feel that they have no choice but to liquidate. But this is not always the case.

How we can work with your clients

We’ve helped thousands of SMEs to adapt their business plans in ways that will have a positive impact on their futures, by identifying which parts work best in their business and which no longer offer a benefit.

We then work with the client to identify their goals, examine possible scenarios and ultimately support them to make a decision that's right for their personal and business aspirations.

It's essential for business owners to know that options are available and understand those options. The ability to deal with a situation in a clear-headed, unemotional way is key when addressing these issues.

Our role as a licensed insolvency practitioner is show your client these options and make sure they have the knowledge they need to make essential decisions. We'll also walk them through any business rescue or formal insolvency procedure, from beginning to end.

You don’t need me to tell you that managing your money laundering, terrorist financing and proliferation financing (ML/TF/PF) risk is a legal requirement for accountancy service providers. But a surprising number of people I speak to in the industry are still failing to give AML the attention it requires. 

Regulations have changed and continue to change. Controls are getting tighter and there is increasing scrutiny on the sector. According to recent research by Credas Technologies, accountancy service providers saw fines increase by 1,083% between September 2021 and September 2022.

In this article I look at what you need to do to avoid these fines and stay compliant. And why it’s so important to do so.

What must you have in place?

The Anti-Money Laundering and Counter-Terrorist Guidance for the Accountancy Sector (AMLGAS), issued in July 2022, puts huge emphasis on implementing a risk-based approach. Your firm is required to develop policies and procedures that enable every relevant employee to assess and mitigate risk, in every area of operation.

But what does this look like in practice?

1. You need to appoint an MLRO (Money Laundering Reporting Officer). All employees must know who the MLRO and any deputy is. If you’re the MLRO in your firm, make sure your door is always open.
2. Publish clear anti-money laundering compliance policies and procedures. Just having the documents saved in a file or on a computer somewhere is not enough. You need to educate your employees in AML/CTF/CPF - and be able to prove you’ve done so. 
3. Risk-assess your firm and every client whenever there’s a change or annually (whichever happens first). 
4. Undertake due diligence and ongoing monitoring for all clients. You also need to identify who the company’s ‘beneficial owner(s)’ is. More on that below.
5. Carry out training for relevant employees, agents and senior managers. As we’ve said above, your employees need to be trained in your firm’s AML/CTF/CPF policies and procedures. They also need to be familiar with updates to the AML legislation, or other legislation relating to financial crime and terrorism. You’ll need to prove this training to your Supervisor. 
6. Show your employees what a Suspicious Activity Report (SAR) is, how to make one and, most importantly, what they should report. To protect your firm from being complicit in ML/TF/PF they must be empowered to recognise and report suspicious activity to your MLRO.
7. Make sure your employees understand what tipping off is and how to avoid doing it: it carries a two-year prison sentence or an unlimited fine.

Knowing your client isn’t enough

Having a client for many years, knowing them personally or simply collecting a copy of their passport and trusting they are who they say they are, is not enough to satisfy your Supervisor on their next inspection. 

Electronic verification can give you access to vast amounts of data on people on various databases, such as lists of known terrorists/terrorist organisations or politically exposed persons (PEPs). There’s also the option of biometric identification, which checks your client’s image against their government ID. But beyond this, you need to know who it is you should be running the checks on - the ultimate beneficial owner.

You must be able to identify and name beneficial owners of your client’s business, and supply the requisite details about them to Companies House. If your client is based overseas, information supplied to the Register of Overseas Entities will be verified and the entity will need to update its information annually, in accordance with the Economic Crime Act 2022. 

Penalties for non-compliance

In February 2022, a Midlands-based tax firm was fined £16,891 by HMRC for not having risk assessments for new clients or an up-to-date set of AML policies. There were also many clients that the firm didn’t hold any verified ID for. 

AMLGAS clearly sets out “the systems and controls that businesses must possess, as well as the related offences that can be committed by businesses and individuals within them by failing to comply with relevant requirements.” (1.1.8 AMLGAS 2022)

The biggest threat to your firm is not being able to prove that you have these systems and controls in place - and that you’re using them - when your supervisory visit comes around. This alone can result in large fines.  If they also discover that your failure to implement suitable processes and procedures has caused your firm to unwittingly become involved in ML/TF/PT the penalties can be disastrous. 

They start at censure and fines…and could end in imprisonment. To say nothing of the reputational damage you and your company could suffer. But there are other potential ramifications. If you do get caught up in an investigation into money laundering then the courts have the power to freeze your business bank account. With no access to your bank account, carrying on your business is likely to be impossible. 

Getting your AML in shape

As you weigh up your AML risk management, it’s worth taking the time to remember exactly why you’re doing it. According to a 2021 UK Government report, “the most common offences to appear alongside a modern slavery prosecution in the last three years were: supply and possession with intent to supply a Class A drug, money laundering and exploitation of prostitution.”

This criminal activity cannot happen without regulated businesses and professions willingly or unknowingly facilitating it. As the NCA puts it: “Virtually all high-end money laundering schemes, and several cash-based ones, are facilitated by the abuse of legitimate processes and services. Accounting and legal professionals, and estate agents, can be criminally exploited – this is sometimes complicit, sometimes negligent, and sometimes unwitting – and this small minority of people can pose a very significant threat.

Every business in the UK uses the services of an accountant or bookkeeper, yet the NCA’s UK Financial Intelligence Unit’s ‘Suspicious Activity Reports annual report 2020’, covering the period April 2019 to March 2020, showed that accountants and tax advisers made just 5,347 Suspicious Activity Reports - less than 1% of the total made. By comparison, money services businesses, or MSBs, made 17,701 in the same period.

There’s no question that the accountancy and tax sectors could be doing more. If they don’t, the Treasury has the power to make them. With potentially devastating consequences for the firms that aren’t prepared. 

Richard Simms, MD of FASimms and AMLCC, is a licensed insolvency practitioner, chartered accountant and a leading authority on anti-money laundering. He is a sought-after guest at Accountancy and AML conferences worldwide due to his position at the pulse of changes in guidance and legislation that impact DNFBPs. 

The post-covid landscape has not been kind to UK businesses. Economists from Goldman Sachs have predicted that UK inflation could top 20% as recession looms and fuel prices spiral. In recent research by business insurance company Simply Business, 54% of small business owners cite rising fuel and energy costs as the biggest challenge for them right now.

If your client’s business is struggling with rising bills and heading towards insolvency - or is already in an insolvent position - it’s likely that liquidation is a word that’s been batted around. It might not be what they want to do. But when faced with what seems like an impossible situation, they may feel like they have little or no choice in the matter.

That’s not always true. In this article, I’ll look at the potential solutions available to a business in distress that are an alternative to liquidation.

Informal arrangement

For most businesses in trouble, an informal arrangement will be the first option to consider. If the money owing is to one or two creditors, and your client has a good relationship with them, then this type of arrangement is worth pursuing. The key here is for the client to be able to maintain a strong relationship with those owed money and therefore to prevent enforcement action against the business happening without advance warning.

For the creditor, an informal arrangement will sometimes be preferable to a formal one. If the creditor company is a supplier, they might have an eye on doing future business with the indebted firm.

The advantage for your client is that they have the flexibility to create bespoke arrangements with each creditor. It’s important that the creditor agrees that the new payment terms replace the existing terms. Although please be aware that your client cannot show preferential treatment to one creditor over the other. If they do end up in a formal liquidation process, any informal arrangement will be looked at by the licensed insolvency practitioner (IP) and any preferential situation will be reviewed.

The first step in an informal arrangement is to contact the creditor directly to explain the situation your client’s company is in and to request a discussion on setting a plan in motion. 

Once they agree to this, it will be your job as the distressed firm’s accountant to help them put forward a credible case to the creditors, based on a detailed cash flow forecast. This means having to prove that any plan to repay the debt is realistic and achievable. With your expertise you’re ideally placed to help your client devise this plan, which will prove the longer-term viability of their business.

In cases such as these we’re often called upon to provide a sanity check of any proposal.

It’s generally worth consulting an IP before you go to your client’s creditors with any type of offer. They are best placed make sure that it’s fair and legal, so that you can avoid any negative repercussions for your client.

One problem with informal agreements is that by their nature they are informal. The lack of a legally binding terms means that at any time the creditor may back out of the agreement and pursue legal action against your client’s company, leaving them completely unprotected. It’s vital that all steps and decisions are properly recorded so that the business owners and the advisors are not exposed to litigation if the informal arrangement doesn’t go to plan. A paper trail of agreements with each creditor will be very important.

Creditors’ Voluntary Arrangement (CVA)

We regularly use a CVA to provide a sustainable business with the breathing space it needs to stabilise. It will mean compromise from creditors in return for payment from future profits. But that is better for them than the alternative of a possible no return in a liquidation.

Although similar to the informal arrangement discussed above, a CVA is legally binding. All (unsecured) creditors must also get the same pence in the pound.

Working with an IP, your client will need to create a plan for repayment of their debts, which will then be sent to their creditors. The creditors will then respond to the action plan by voting, at a creditors’ meeting, on whether to accept it.

If it’s accepted, your client will then need to work with the IP to implement the action plan and set up a schedule of monthly repayments. This schedule will determine how much each creditor is paid each month and how long the CVA will last (usually three or five years).

Remember that the terms of a CVA can be flexible. For example, we’ve seen occasions where creditors have accepted a CVA where a liquidation may have looked like the only option. The significantly lower cost and speed of distribution to creditors can mean a quickly and higher payment to creditors.

Administration

If your client’s company is insolvent but has a core business that works, company administration is a way of protecting it from legal action by creditors and from potential liquidation. It essentially puts the company’s financial situation on pause while the company director(s) work with an IP to see how – and if – the business can be saved.

Your client’s company needs to have a predictable cash flow and significant assets or value to make a company administration viable. If an administration is decided on and entered into, the company’s chosen IP becomes the administrator during the process.

It’s the IP’s role to look at cash flow and assets, to see what’s working…and what’s not. They will then send a proposal to the company’s creditors, detailing the situation and confirming whether they believe the company can be rescued. If rescue looks possible, they will also set out how the company will repay its debts.

A pre-pack administration might also be an option. In this case, all or some parts of your client’s business and its assets will be sold to a different company, which in some cases may be owned by the existing company director(s). The proceeds from the sale repay the creditors as much as possible and the old company can be liquidated. Your client’s business, under the new company, can then carry on trading without the debt. Have in mind any business sale must be for market value.

Of course, the viability of these options will very much depend on the company’s individual situation. For some, liquidation might be the only way forward. If so, remember that - in some cases - they can still start again. Sometimes after buying the goodwill and assets of the old company. This is a complex process that must be handled by an IP so that the correct steps are followed. The same principle applies: as it is administration any sale of assets or goodwill must be for market value.

For businesses that are in a bad position now but have good long-term prospects, liquidation can be avoided. With careful planning, these businesses can be guided through and onto a better future.

Richard Simms is a licensed insolvency practitioner, chartered accountant and MD of FASimms. If you think your client could benefit from insolvency or business rescue advice, call 01455 555444 or email us at enquiries@fasimms.com for more information about how FASimms can help.

UK businesses are under assault from every side. Global supply shortages, inflation, staff shortages, hugely increased energy costs, Brexit, governmental uncertainty and the crisis in Ukraine have created a perfect storm - and many are being blown off course. 

PayPal’s latest annual ‘Business of Change’ report found that 78% of small firms cite the cost-of-living crisis is the biggest threat to their survival in the coming year. Two-thirds of Britain’s small business owners told PayPal that the past two years have been the most challenging since they started their venture – and 47% fear the next 12 months could prove even more difficult.

One of our biggest roles in a time of crisis is to guide clients through challenging financial circumstances.

For those with a chance of survival, it’s about taking stock of their current position and identifying the possible futures. These are the steps that we take a business through when we hope to rescue it. As the closest person to your clients’ financial position, you might already be doing some - or all - of this with them.

1. What does your client want for the future?

The last two+ years have taken their toll on 1000s of business owners. Some might have viable businesses but not the impetus to continue. So the first thing to determine is what their aspirations are for the future.

Do they want to evolve their current business?

Do they want to look at changing their business?

Do they want to extract any profits and walk away?

Or even, are they in an insolvent position and need a formal process to save their business?

2. Which parts of the business are essential? And which are not?

If your client is solvent and has made the decision to stay in business, it’s important to define where they want to end up. Or put another way, if where they are now is Point A, what’s their ideal Point B? To get to B, they might have to make small adjustments, or big changes.

This is the time to take stock of their business and look at every aspect - from brand to employee costs and premises. Try to sort these into categories of essential obligations, contractual obligations and optional obligations.

3. What if…?

Once you know how vital each aspect of your client’s business is to its running, it’s important to look at whether, in Point B, this will be the same or different. Or whether it even has a place at all. Premises is a good example of this. It might be essential now but do they need it for the future?

It’s important that you help your client to see things objectively. Think about the cost, whether a contract can be broken, and the value of the part of the business you’re examining. It might be best for the business that any owned premises, to continue the example, are used in another way to create income. Or that your client downsizes or employs a work-from-home model.

4. The cash-flow forecast

Your client will need to understand that their ideal Point B might have to change, depending on how the cash-flow forecast looks in different scenarios. It might be that their dream Point B is not possible now but Point C, D or E is the best option. Again, you will most likely need to help them be objective about this and remove sentimentality from the decision of which direction is best.

5. Taking action

By this stage, your client should have a clear view of what needs to be done to make the changes in their business. These changes might be able to happen quickly. They might take some time and careful guidance from you.

I’m sure this is a role you’ve been used to playing since the beginning of the covid crisis. For them to have the best chance of success, continue to be by their side to give sound advice…and probably some gentle encouragement to overcome any challenges.

Richard Simms is a licensed insolvency practitioner, chartered accountant and MD of FASimms. If you think your client could benefit from insolvency or business rescue advice, call 01455 555444 or email us at enquiries@fasimms.com for more information about how FASimms can help.

There is much doom and gloom about the UK economy right now with the coronavirus pandemic set to cause the deepest recession in Britain for 300 years. Many companies, large and small, face the prospect of administration. But rather than fear it, could it be a blessing in disguise?

The Azzurri Group has recently been sold out of administration, saving around 5,000 jobs.

Steve Holmes, chief executive of Azzurri Group, said: “Despite being a successful operator, the immediate loss of revenue during lockdown meant that we have had to make some incredibly difficult decisions to protect the business for the long term. 

“Additional investment has enabled us to preserve the majority of our restaurants, stores and jobs and I am confident that, under TowerBrook’s ownership, Azzurri will navigate the period ahead successfully.”

How could administration benefit the company?

The ‘breathing space’ administration affords is one of the main benefits, but it is far from the only one.

• Move forward debt free

Negotiating deals to pay off creditors means you can move your business forward debt-free. This increases your scope for investment in technology, staff, product development and marketing/PR. It could also give you a competitive advantage over rival businesses carrying a debt burden.

• Create a more agile business

Too often companies operate a business model ‘because we’ve always done it that way’. Streamlining is an inevitable part of the administration process, giving you the opportunity to work better with customers, suppliers and staff.

For example, the coronavirus pandemic has shown many firms that they can operate without having to rent office space (or they can vastly reduce their office-space requirements).

Mike Hampson, chief executive of Bishopsgate Financial, told the ‘thisismoney’ website the company is “ditching [its] swanky offices in London”. The business employs 18 people but following the lockdown he has realised that the staff only needs to meet a couple of times a month to operate, and all will be working remotely.

• Save jobs – and the wider economy

Unlike insolvency, where all jobs are lost, administration means there’s a good chance some jobs will be saved.

And by continuing to trade, your company is helping others by doing business with them – and so the wider economy. The government benefits too, from an increased tax take and spending less on social security programmes.

• Enhance your business reputation

Taking a company into administration and bringing it out the other side leaner and more fit-for-purpose shows you have solid business acumen and are not afraid to make tough decisions when they need to be made.

Types of Administration

Administrations generally resolve in four ways: with a CVA, with a pre-packaged insolvency sale, with a healthy, stable business, or with liquidation/dissolution.

For the purposes of this article we will focus on the first two.

• Company Voluntary Arrangements (CVA)

CVAs are a common way of dealing with potential insolvency. Working with a licensed insolvency practitioner (IP), you must work out a schedule for repaying your debt – also outlining what percentage of the debt you will be paying back.

A CVA is a formal arrangement that must be overseen at all stages by the IP, who ensures creditors are paid the right amount and on time.

Creditors vote to accept the proposal, and in many cases approve because they accept that having some of their debt repaid is better that none at all (which could be the case with liquidation).

The process has also been used by clothing store All Saints, Hotter Shoes and high street giant Debenhams. 

• Pre-pack

Insolvency trade body R3 describes a pre-pack as: "Where the sale of a company’s business and/or assets is arranged before the start of an insolvency procedure then completed immediately or shortly after the procedure begins. Proceeds from the sale are used to repay the company’s creditors.”

Pre-packs take place when an IP agrees a pre-pack is the means of achieving the best possible returns for the company’s creditors (all pre-packs are overseen by an IP).

Bed retailer Dreams and Blacks Leisure are examples of where a pre-pack has been used successfully. 

The Corporate Insolvency and Governance Bill

The focus of the Corporate Insolvency and Governance Act 2020, which came into force on 26th June 2020, introduces a formal ‘moratorium’ - an initial period of 20 business days - during which no legal action from the majority of creditors can be taken against a company without court permission.

It will allow SMBs extremely valuable time to seek help from an IP - only a licensed insolvency practitioner can supervise a company entering a moratorium - and formulate a rescue plan.

Going into administration can be daunting. But with the right help it need not be the end of the line for your business. You could emerge debt-free (or with much less debt), leaner, with a clearer plan for the future.