Customer deposits and insolvency

As a licensed insolvency practitioner I am often asked to advise directors who are in a very dark place – whose company is on the brink of liquidation. I guess you might be in such a place?

 

Insolvency law requires that when a company is insolvent, and even when its solvency is in doubt, its directors have a duty to place the interests of creditors above those of themselves and the shareholders. The law looks at it this way – you’ve been given the privilege of limited liability; a cost of that privilege is that you have to do the right thing at the right time for those innocent third parties you might hurt by your actions.  Pretty much common sense, but can be difficult to implement in the real world.

If you don’t place the interests of the creditors above yours or the company’s, you as a director expose yourself to being disqualified for 7-10 years, and could see you personally paying compensation for your ‘wrongdoing’.  You could even be forced into personal bankruptcy.  And in the most severe cases, where a lot of the public’s money is lost and you continue to take money long after a judge thinks you should have known you would not be able to supply the goods or services that have been paid for, you could even go to prison.

The penalties for getting it wrong are severe so it’s vital, if you normally take deposits or payment for goods or services up front, especially from the public, that you get advice from an insolvency expert.  Take that advice at the earliest possible opportunity.  And then follow it. Be aware that turning a blind eye or ignorance is no excuse, this is something you’d be a fool not to address.

When I get involved with companies in this position the first thing I have to do is explore with the directors whether they should allow the company to continue to trade at all or whether they shut simply shut up shop.  This may sound harsh to you, especially as it’s your business and you have sunk so much time, money and effort into it, but all the other questions that follow on depend on it.  If you have come to me for advice early and you have forecasts showing that things are likely to get better, the answer is often that you can allow the company to continue trading. Often though the forecasts show a worsening position or are not certain to be achieved – in either case you should think seriously about protecting customer deposits, ring-fencing them so the customer gets their money back if things don’t go to plan.

The safest way to do this is either to stop accepting deposits.  The next safest is pay them into a trust bank account and only release the cash into your company’s own account as and when the goods or service are delivered. Both of these options make an already tight cash position worse and could make your turnaround plans unworkable.   Either way you have to manage your cash position.   If you choose not to do either of these and continue to accept deposits, you need hard evidence supporting that decision. And you should continue to revise that information and monitor the decision. This is an area where you might need my help.

How important is it you take and follow professional advice?

It’s vital. You see taking customer deposits can expose you to a wrongful trading and/or a fraudulent trading action – the first civil, the second civil and criminal action.  Case law has determined that ignorance, a lack of knowledge, skill or experience, and a failure to take all possible steps to minimise deposit creditors’ losses once the company is past the point of no return is no excuse. And that’s why you need my help.

Let’s now look into a real life case … a few years ago but the principles remain true today…

Uno plc and its subsidiary World of Leather were large retailers of furniture to the public. Furniture was bought in from manufacturers after a customer order had been placed. Customers paid a deposit when they placed the order and paid the balance on delivery.

They got into financial difficulties. Their directors allowed the companies to continue to trade for four months while investigating options for restructuring the businesses. During this time they held discussions with venture capitalists and competitors, none of which were successful and the companies were placed into administration. By then, the deposit creditors were owed £26 million. Unsecured creditors would receive nothing.

The companies had continued to accept customer deposits during that four-month period. Those deposits were not placed in a separate trust account, even though the directors knew that the company was having problems. In fact during that four-month period, the company actively sought to take more cash deposits from customers as part of a strategy to increase the money in the companies to prevent them from going under. Unsuspecting customers were encouraged to pay in full for their furniture in order to qualify for a substantial discount or early delivery.

Were the directors liable to repay those deposits?   Were the directors unfit to be involved in the management of a company?

In their defence, the directors argued two things:

• While they were investigating options for restructuring there was a reasonable prospect that the companies could avoid insolvent liquidation and
• After they became aware that the company had no such prospects, they took every step to minimise potential losses to creditors.

In particular, they claimed that by continuing to accept customer deposits— in fact, increasing them—they improved the cash flows of the business in line with a viable rescue plan that, if successful, would have enabled the companies to avoid liquidation.

The directors produced evidence of their plan which was based on accurate, timely financial information. They also showed that they had taken, and acted in accordance with, appropriate professional insolvency advice throughout.   In summary, they had made informed decisions.

The court decided that the directors were not guilty of wrongful trading and should not be disqualified. The judge explained that a director is not unfit and will not disqualified merely because he knowingly allowed a company to trade and take customer deposits while insolvent.

Key to the case were the following:

1. The directors had continued access to reliable financial information as to the existing financial position and forecasts demonstrating the proposed rescue plan.
2. The directors obtained and followed full legal and professional advice in allowing the companies to continue to trade and take deposits.
3. There was a huge amount of documentation and written evidence that supported and evidenced the directors’ decisions.
4. The directors not only kept their major creditors informed of the companies’ situation, they told them of their strategy to restructure the business, and got them to buy in to the plan. The point is they were not just trusting to luck. Not every business can do this – it’s particularly difficult for a small business to do.
5. The judge said that company directors have no duty to segregate customer deposits once a company gets in financial difficulty. Continuing to pay monies into the general company account is not on its own a reason to disqualify a director, it is not irrefutable evidence of improper or dishonest conduct, a lack of probity or incompetence.
6. Based on the legal and professional advice they received, the directors formed a reasonable belief that there was a reasonable prospect of finding a satisfactory outcome for the creditors. They held this belief properly and honestly based on hard written evidence and professional advice.
7. The directors made no effort to shirk their responsibilities, no one resigned. They were just trying to work their way through a very difficult position.

The case gives some useful guidance on what you as a director need to do to avoid personal liability. The directors weren’t flying blind. No one ran away. A proper comparison was made of the effect on creditors of closing down and continuing the business. The figures justified their restructuring plan and decision to carry on accepting deposits and paying them into the companies’ normal bank accounts. The decisions were made on the basis of prudent management, accurate financial information, and legal and professional advice. A professional analysis of the situation and comprehensive reporting are vital. Evidence is key – minute all decisions, retain all the financial documents. Get independent professional advice from the right insolvency specialist.

Here are some questions for you to ask yourself:

1. Is the company insolvent or at risk of insolvency?
2. Should you continue to accept customer deposits?
3. What do you tell major creditors, if anything?
4. What steps should you take to protect your personal position?
5. Can you resign if you don’t like what is going on?
6. Do you have all the evidence you need to justify your decisions?
7. Are you taking the right professional advice?

Who pays business rates after a liquidator has disclaimed a lease?

What was thought to be the situation has recently been confirmed in the High Court, when a landlord was told to pay up £0.6m to Birmingham Council for business rates accruing after a tenant went into liquidation and disclaimed the lease – click here to read the judgement.

Thus any uncertainty there was that payment of business rates post disclaimer was the landlord’s problem has now evaporated.

This is a mixture of good and bad news…

Good for local authorities …

Bad for landlords who now know that unless they have the benefit of a strong covenant or strong Authorised Guarantee Agreement could end up with a big rates bill at a time when a property is earning no income …

Good for prospective tenants of empty properties as they could be in a better negotiating position when it comes to rent free periods or other ‘perks’…

Good for tenants of tertiary properties who could go to the wall unless they can renegotiate leases and rent payment dates with the landlord.

In fact it’s good news for everyone but landlords and people who’ve signed an authorised guarantee agreement!

If you’re a tenant who has massive problems because of their rent bill, and you’d like some help renegotiating it, call me on 01902 672323.

Just set up a new business? Read this if you want it to be a success!

As an insolvency practitioner, I have met met hundreds of new business owners…wouldn’t it be great if you could learn what I’ve learnt from all those meetings?

Well you can!  Here’s an article just for you…

So you want to set up in business, do you?

Or you’ve recently started trading but not doing as well as you hoped?

Would you like to know how to avoid going under? How to give it the best chance of being a success?

You see, there’s a big problem with small businesses.  And that is when most people go into business, they only look at the positives such as what they’ll do when things really take off.  Things like what new car they’ll buy, how they’ll spend their increased free time, how they’ll manage all that profitable work? ….
… They build the business on two things:

(i) what they think they know; and

(ii) what they hope.

They don’t go out of their way to find out what they don’t know or to plan for things not going quite to plan.

Yet it’s often what they don’t know or haven’t thought about that will eventually kill the business.  And with it, destroy their hopes and dreams, and often their own and their family’s finances.

The bad news is that’s how it turns out for the 4 out of 10 new start-ups – yes, 40% of new businesses fail within the first 2 years!

That’s almost as many businesses fail as are still alive within just 2 years.  But it doesn’t end there – of the survivors, most then go on to fail within the next 3 years.  Only one in ten are still around by year 5.

The point is you will fail if you follow the course most new business owners do. Yet with so many not making it, there’s an abundance of experiences out there that you can learn from. And it’s free to do so!  Here they are…

The business was started for the wrong reason

Some businesses are set up and then run more like a hobby than a business.  I call these ‘lifestyle businesses’ – they tend to merely exist, either doing poorly or at least not doing spectacularly, until something happens later to cause the wheels to come off…

It scares me that right now many small businesses being set up out of necessity – because there are no jobs around – rather than by someone who has identified a profitable opportunity.

Why have you set up?

I can do it all myself!

In his book, the E-myth, Michael Gerber spoke of the 3 skill-sets needed by business owners today – entrepreneurial, managerial and technical.  No one I know has all three, in the right degrees.  Businesses that don’t have and won’t buy in all three skill-sets lack the cutting edge to succeed in today’s harsh business environment.  Seeking help from outside the business to plug skills gaps is a show of real strength, not of weakness…

Read the book, plug the gaps!

Not enough money

It always costs more to set up a business than you expected and then survive the inevitable troughs later on.  At this time when the banks are selective as to whom they lend to and seem to fail to support customers when they most need them, it’s not a good idea to rely on credit lines over which you don’t have full control.

Have you taken a good amount of time to assess how much money you will need, where you can get it from and how you’d cope with what might happen when business dips?
Poor financial skills

It is vital that you understand how the business works financially.  If you don’t, it won’t be long before you won’t have a business because you don’t properly understand the machine that brings in the cash it needs works.  Also, if you’ve got weak financial skills, you probably don’t have a strong profit motive.  Sure, you love what you do, but you’ll return to stereotype ‘manager’ or technician’ – see above – roles when things get tough, and when you do, you’ll dig the business into an even bigger hole rather than solve its problems.

Do you understand exactly how how the business ticks financially?  Do you understand the figures?  Think about going to college to learn management and accounting if you don’t.  Don’t try to abdicate responsibility for your business’s finances to an accountant – sure it’s ok to hand the processing to him, but not responsibility.
The location, the product or service is all wrong

Quite simply, the business opportunity was not fully explored, optimism blinded reality… there are many businesses in our High Streets which have got the location, product or service wrong.  I stand there and think ‘just what is the owner thinking?  It just doesn’t stand a chance!’

Have you allowed your heart to overrule your head?
No planning

Have you heard the saying ‘to fail to plan is to plan to fail’.   Have you planned for what is going to happen?  And what might happen? – you see the unexpected does happen, increasingly so today!

A lot of the things that cause businesses to fail can be anticipated, plans can be formulated to avoid failure.

Have you spent enough time thinking about what is going to happen and how you’d deal with what might happen?

Poor trading levels

Where a business suffers poor trading levels, often their owners cut costs to manage their cash flows – they do this because it’s often the easiest decision and produces short term cash benefits.  However, if this is all you do, you’re merely storing up much more serious problems into the medium term.  It’s simply not possible to cut yourself to greatness!…

If things don’t work out in terms of sales levels, what’s your plan? How certain are your planned sales figures?
Poor marketing

Many businesses wait for sales to find them, because ‘that’s what you’ve always done’.  If you have worked for someone and have now gone to work for yourself, this could be a big problem for you.  I often can’t ‘find’ any presence anywhere of such businesses – there is no website, no sales force – and if I can’t find you, how can you expect would-be customers to find you?

What’s your marketing plan?  Have you written it down? Do you follow it up?
Failing to set and follow a clear strategy for success

Without a formal plan, businesses develop haphazardly.  And one day you’ll scratch your head and wonder just how the business got to where it is now – it will then be slowly strangled, by ‘unfair’ relationships with a major customer, by your banking constraints, or something other you could have anticipated, …

What’s your strategy?  have you written it down?  Do you act on it?
Business model with high fixed costs

An inflexible business model with high fixed costs may work in boom times, but it will cause significant problems in the inevitable times of bust.

Tell me all about your fixed costs…
Finally, knowledge without action is pointless, it won’t change the outcome, so now go and do something about it!
Paul Brindley FCA, Licensed insolvency practitioner
Midlands Business Recovery

A message for all you business consultants out there who are struggling for an answer to a client’s problems…

No one knows all the answers, that’s why my Business Resuscitation work is so very vital…


Let me ask you a question –
Do you have any clients who could benefit from some innovative support from a licensed insolvency practitioner?  

Please bear with me, I am not talking about business closure here, this is about achieving for your clients some really great results that you will not be able to achieve on your own…  
  

You see a long time ago I formed the view that insolvency practitioners should be doing far more than just closing businesses down, and because whatever the mind can conceive and believe, it can achieve, I invested heavily in what I call my Business Resuscitation Programme™.  And believe me, this service is unique, I’ve left them all my competitors in my wake.

My Business Resuscitation work puts businesses in touch with the people and organisations that provide exactly what they need but cannot easily get elsewhere, whether it be cash, skills, a business to buy or merge with, a buyer of their business, a joint venture partner … the list goes on, it’s that flexible.

Built initially to save struggling businesses, it’s now being used by businesses at all stages of the cycle.
You see it provides solutions your clients never thought possible.  So if you ever find yourself scratching your head unable to find the optimum solution for a client, just give me a call – I’d be glad to explain how it works.  Just remember one thing, now with my Business Resuscitation Programme neither you nor your clients will ever have to settle for second best.  And if you don’t need me just yet, please retain this mailer because at some time you will.

Paul Brindley FCA
paul@midlandsbusinessrecovery.co.uk      Tel: 01902 67232301902 672323

Call

Send SMS

Add to Skype

You’ll need Skype CreditFree via Skype

A message for all you business consultants out there who are struggling for an answer to a client's problems…

No one knows all the answers, that’s why my Business Resuscitation work is so very vital…


Let me ask you a question –
Do you have any clients who could benefit from some innovative support from a licensed insolvency practitioner?  

Please bear with me, I am not talking about business closure here, this is about achieving for your clients some really great results that you will not be able to achieve on your own…  
  

You see a long time ago I formed the view that insolvency practitioners should be doing far more than just closing businesses down, and because whatever the mind can conceive and believe, it can achieve, I invested heavily in what I call my Business Resuscitation Programme™.  And believe me, this service is unique, I’ve left them all my competitors in my wake.

My Business Resuscitation work puts businesses in touch with the people and organisations that provide exactly what they need but cannot easily get elsewhere, whether it be cash, skills, a business to buy or merge with, a buyer of their business, a joint venture partner … the list goes on, it’s that flexible.

Built initially to save struggling businesses, it’s now being used by businesses at all stages of the cycle.
You see it provides solutions your clients never thought possible.  So if you ever find yourself scratching your head unable to find the optimum solution for a client, just give me a call – I’d be glad to explain how it works.  Just remember one thing, now with my Business Resuscitation Programme neither you nor your clients will ever have to settle for second best.  And if you don’t need me just yet, please retain this mailer because at some time you will.

Paul Brindley FCA
paul@midlandsbusinessrecovery.co.uk      Tel: 01902 67232301902 672323

Call

Send SMS

Add to Skype

You’ll need Skype CreditFree via Skype