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Directors Duties in Insolvency and their Implications

Company Insolvency in Scotland

Is there a genuine company rescue culture in Scotland? There is only one company driving the rescue culture in Scotland, and you have found it!Our firm KSA Group, who run this website, are responsible for a significant proportion of CVA led rescue work in Scotland.If you run an insolvent or struggling Scottish company the chance of rescue is low. Amazingly, less than 1% of insolvent companies are rescued by a company voluntary arrangement or CVA each year!  This is compared to England and Wales, where proportionally, the CVA is used 4 times as often.So always ask your advisors these questions - What about a CVA - would that work? What is the comparison between CVA and liquidation? What is the comparison between CVA and administration?

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Company Insolvency in Scotland
creditor definition in dictionary

Secured And Unsecured Creditors – What Is The Difference?

I am confused about secured and unsecured creditors.  What is the difference? As a director of a company that is doing well and making money you may have no real understanding about the important differences between certain types of creditors.  The only time it really comes up is if you apply for a loan for the business and the lender talks about security and the loan being secured etc. Secured Creditors A secured creditor is a creditor that has security over an asset or assets of the company. So, if the company can't pay then they have the right to the proceeds of the sale or proceeds of the asset.  This is enabled by a legal document called a charge or debenture.  There are two kinds of charge;  A Fixed Charge and a Floating Charge.  The difference is quite hard to explain in a few words so we have a dedicated page on the differences.  Have a read here on fixed and floating charges.  A fixed charge is essentially a charge on a very specific asset whereas a floating charge is across a range of assets or asset that can change.A charge is a bit like a mortgage on your house.  If you fail to keep up your payments then the bank can effectively force the sale of the asset and reimburse themselves.  In a company situation if the secured lender is owed money then they can "force" the company into the hands of administrators who will pay them having sold the assets.  This description is simplistic and is more akin to the old system of receivership but it illustrates the principal. Unsecured Creditors These are essentially creditors that have no security over the assets.  This can be a trade supplier, HMRC, a utility company.  Banks will often lend without security but they will charge a higher rate of interest to offset the risk they can't get their money back.Be aware though that some creditors are called secured as they have a personal guarantee from the director and they may use terminology like "secured against the directors personal assets"  In insolvency law they are not secured and so come after the secured creditors that have a "charge" over the company's assets when money is paid over in the event of a terminal insolvency event like liquidation. What about defacto secured creditors? These are creditors that do not have any security over the company's assets but they have control over the company in that they can shut it down.  An example might be the creditor that runs their proprietory software, or their means of payment (this happens when Amazon have lent the company money to develop their online shop)  such creditors are more properly referred to as "ransom creditors". Ransom creditors are more important if the company is insolvent but could be rescued and so need to continue to trade.  So they need to be kept happy!In a liquidation scenario they would be behind a secured creditor that had a charge over the stock for example.For a more detailed explanation of the priority of creditors in an insolvency situation then please look at our page on creditor priority.  There is even a handy infographic on there too. 

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Secured And Unsecured Creditors – What Is The Difference?
helpful advice for trading whilst insolvent

Trading Whilst Insolvent – Worried Directors Guide

Trading whilst insolvent is a legal term used to describe a business which continues trading when it cannot pay its debts and its liabilities are greater than its assets.  It can lead to a breach of several provisions of the Insolvency Act 1986 which can result in the directors being held personally liable

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Trading Whilst Insolvent – Worried Directors Guide

Can I claim Directors Redundancy in Liquidation?

When a company goes into administration or liquidation the directors of the business are in effect made redundant.  Their powers and duties as directors cease.  So, it isn't surprising to know that directors are in fact entitled to redundancy payments if they were employed by the company.  Given the company is insolvent then it cannot afford to make the payments, so instead the bill is picked up by the Redundancy Payments Office (RPO).  This fact can help alleviate some directors concerns about liquidation.  In any liquidation the employees are able to claim for arrears of Wages, accrued Holiday Pay and Pay in Lieu of Notice, and if they have been working for the same employer for two consecutive years are also entitled to receive a statutory Redundancy Payment.  The same applies to directors.  There are a number of companies out there claiming they can get large payments for directors but there are a number of caveats. What are the eligibility criteria? You must have been employed by the company and received a wage commensurate with your work. This is not often the case as directors usually pay themselves with dividends and take a minimum wage for tax reasons.  This was actually one of the reasons why many didn't benefit from furlough payments during the pandemic as they were not actually employees.You must have proof you were employed. Again just being paid via PAYE may not be enough.  You will need to show that you had a contract and that terms were set (these can be implied and not necessarily detailed in an employment contract) example terms might be holidays taken, sick leave, paternity.maternity payments, car allowances, pension provision etc.  ie all the usual things that an employee has.An employee may not work less than minimum wage. This is important as if you are putting in long hours and not being paid much then it actually means you are not an employee!  As such any claim will not be accepted. Small monthly payments will just be seen as extracting money from the company as an office holder not an employee. How do I apply? Once the company has gone into liquidation or administration then there is an application form that the directors can fill in.  It doesn't take long and there really isn't any need to employ a third party to do the claim for you.  Some companies are making some misleading claims about average payouts etc. How much am I likely to get paid? You will receive redundancy and loss of pay if you are entitled to it.  However, in most cases that we have dealt with the directors owe the company money and this negates any payout that is likely to be owed.  In addition, the Redundancy Payments Office (RPO) is getting very strict about claims, so a director that has taken out substantial dividends is unlikely to be regarded as an employee.

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Can I claim Directors Redundancy in Liquidation?

Business Insolvency

Definition of Insolvency. A business is defined as insolvent if it can’t pay its debts when they fall due. There are two main types of business insolvency:Cash flow insolvency – the business cannot pay bills when they fall due. If trade creditors sell to the company on say 30 days terms and the company regularly pays on 90+ days, then this could mean the company is insolvent. Balance sheet insolvency – This is when a company’s total liabilities outweigh its total assets.  But it may still be able to pay its liabilities when they are due.  So a company may have a big tax bill coming up, which is not due yet, but if it was then it couldn’t pay it.  A company might also be deemed balance sheet insolvent if contingent liabilities exceed its assets.  A contingent liability is one that has not as yet crystallised or been determined exactly.If your business fits into either scenario, you must act fast to ensure you minimise risk for your creditors.  There is also a legal action test of insolvency which is really a follow on from the cashflow test of insolvency. When might your business face insolvency? All company directors should be aware of the risks of business insolvency, and its possible consequences.It can affect the future of your business and personal life, so it’s worth investigating the options open to you even if your company is not in financial distress.Here, we’ll explore exactly what business insolvency is and explain as much as we can about the proceedings that follow it. That way, you can be prepared for insolvency proceedings, just in case. Warning Signs Of Insolvency There are also several warning signs to look for, including:Creditors increasing pressure to pay, often with threats of legal action Company overdraft at its limit, suggesting the company is not viable Applications for borrowing refused Directors taking a pay freeze Late payments to HMRCAs a director, it’s important that you are aware of all these signs. They may help you prevent business insolvency, or mitigate the consequences for you personally and for your company.  Read our page on the implications for directors. What Are My Options If I Face Insolvency? Being insolvent puts your company in danger of closing down. However, there are several options you can take once your company becomes insolvent, including some that allow the company to continue trading.Remember, as soon as you realise your business is insolvent, you must do all you can to maximise the creditors' interests. If you don’t, you might be made personally liable for your company's debts.Business insolvency can be a complex and confusing process, so it’s best to seek expert advice straight away. There are plenty of people and organisations you can turn to, including:Citizens Advice Bureau Solicitors Qualified accountant Licensed insolvency practitioner Reputable financial adviser Debt-advice centreHowever, it should be borne in mind that only a licensed insolvency practitioner can take the necessary steps to protect the business or its creditors.  They are an officer of the court and they are the only people that can allow debt write off in a business to be formally binding.  Many insolvency practitioners will outline your options for no charge.  Call us on 0800 9700539 if you want to talk to us direct.Your options are; Create an informal arrangement with creditors It is vital that you contact your creditors as soon as you become aware of your company’s financial distress.If your company is experiencing temporary financial difficulties, try contacting your creditors to arrange a payment plan. However, this usually only works if there is no immediate threat of formal action by creditors.These arrangements are not legally-binding. A creditor can withdraw from the agreement at any point, but this is a good temporary solution that allows you to continue trading.Before you make alternative arrangements, make sure you’re aware of any costs for changing your repayment terms, including how it will affect your interest payments. Enter into a company voluntary arrangement (CVA) Similar to the previous option, a CVA is an arrangement made with creditors to deliver money owed over a new time period.This is a binding arrangement for all, or part of, the company’s unsecured debts and allows you to continue trading during and after the arrangement. Go into administration Administration is a bold move for companies experiencing business insolvency. However, it has many benefits; it offers respite from all creditor actions and enables the company to continue, or be sold.The process is quite simple. You hand over your company to an insolvency practitioner (the administrator), and while they’re in charge your creditors cannot take legal action to recover their debts without the court’s permission.  Although any charge holder has to be notified and may appoint their own administrator if they wish.The administrator will draw up proposals to try any of the following.Restore company viability Restructure the business Sell the business as a going concern, or realise more from the assets than in a liquidation Realise assets to pay preferential or secured creditorsThe administrator will also decide if you can continue trading during proceedings. Use administrative receivership Known more commonly as ‘receivership’, the holder of a 'floating charge' - usually a bank - initiates this option.They appoint a receiver (a private insolvency practitioner) to recover the money owed. The court is not usually part of these proceedings. The receiver will recover enough money to pay:Their costs Preferential creditors The floating charge holder’s debtThis option does nothing for unsecured creditors and it cannot be used if the floating charge occurred after September 2003. As such, there are hardly any of these nowadays. Liquidate or ‘wind up’ your company Liquidation or ‘winding up’ a company, essentially means closing it down. The assets are sold, and funds are given to creditors. Often, this will not cover the money owed to all creditors.Both solvent and insolvent businesses can do this. If your company is solvent, the term given to this is a member’s voluntary liquidation, if it is insolvent it’s known as a creditors voluntary liquidation (CVL) or a compulsory liquidation.All liquidations are followed by investigations into the company director's conduct. If the investigation finds anything inappropriate, there can be severe consequences. What can happen to me as a director? It's not just the company that has to face consequences of business insolvency, as a director you might too.If your actions have been unfit or unreasonable, or you have traded wrongfully or fraudulently, you may face these consequences:A fine Director disqualification for up to 15 years Being held personally liable for money owed, from the time you should have acted A prison sentenceIt is extremely important, for both your professional and personal life, that you act quickly if you think your business is insolvent. Seek professional advice and find out about your options, so you can create a plan for dealing with business insolvency.If you are concerned about business insolvency, speak to our experts today. They’ll be able to give you high-quality, actionable advice tailored to your situation.

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Business Insolvency

Insolvency Advice For Small Businesses

We have over 20 years of turnaround and insolvency experience.  We are licensed Insolvency Practitioners, so we guarantee to help you find the best solution for your business. We offer tailored services, as we know each company has its own specific problems. Give us a call to find out how we can help you – we offer friendly and honest advice, free of charge in the first instance. When to Seek Insolvency Advice For Your Business Luckily there is now plenty of free advice available online on websites like ours.  However, first of all you need to recognise that your small business may be insolvent. Warning Signs of Small Business Insolvency Creditor Pressure If your creditors are chasing you for money and it is starting to distract you from the everyday running of the business then that is a sure sign that your company may be insolvent. Delaying the odd payment to ease cashflow is fine but if it is happening all the time then that is a problem.  If a creditor resorts to legal actions then your business is insolvent on the "legal action test" Not Paying Yourself Many directors do this to say they are investing in the business.  This is fine up to a point.  If you haven't taken a wage in months or years then you have to ask yourself if the business is viable. A company's primary purpose is to deliver an income for the shareholders!  No point throwing good money away.  You will have learnt a great deal from running a company, so the experience is worthwhile but don't let it hold you back from your true potential that might be around the corner as an employee or starting a NEW business. Borrowing Money For Cashflow Purposes Borrowing should really be for investment in products/people or services.  If you are finding yourself borrowing to plug gaps in cashflow then the company is likely to be insolvent.  Unfortunately loans used for these purposes are usually very expensive and eventually put added pressure on cashflow.If you find you or your business is struggling then you should seek advice.Some 23 years ago we recognised that there is very little support available, when things start to go against you in business. There are few resources about business rescue - hence in 2000 we developed this online service for distressed business people. It has grown by over 2,000 pages of free content since then. We still provide this service free of charge.Most accountants, bank managers, Business Link advisors, lawyers and management consultants have insufficient working knowledge of the UK turnaround sector, or insolvency techniques, to be able to guide distressed companies properly and give correct practical advice.Even today, most insolvency practitioners (IPs) remain tied to closure techniques like liquidation or those methods where fees are greatest like administration. Whilst many IP's are moving into the rescue and restructure field they do not communicate with distressed companies easily and can seem arrogant and distant.Call us or email us, fill out the form on this page or the contact us page, whichever way you contact us we are proud of our ability and willingness to help with a kind and helpful voice. You will speak to trained advisors who will quickly help you.We will give you practical advice on a completely confidential basis, we will need to ask lots of questions and once you tell us what is happening in your business; this will slowly start to lift the pressure on you. Quickly we'll start to set out options for you to look at. We may send you Expert guides in easy to use portable document files (PDF) and or links to some of the relevant pages on this site, all these have been carefully designed to help build understanding of YOUR options.What is in it for KSA?Obviously there is a commercial motive - we should all be in business to make profits - but we hope that the lack of overt selling messages on the site, means that you do not feel hustled to buy anything.For your clarity our commercial gain will come from providing hands on agreed turnaround work through our expert company turnaround advisors, insolvency advisors and insolvency practitioners, should we work together. Until then...THERE IS NO CHARGE FOR INITIAL ADVICE OR INITIAL MEETINGS.All fees are agreed and set out in advance so there are no misunderstandings. All of the team at KSA Group looks forward to helping you solve your business problems. Why not call us today?

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Insolvency Advice For Small Businesses

Can My Accountant Liquidate My Company?

In short, not normally unless they are a licensed insolvency practitioner.  Accountants often train to be Insolvency Practitioners but they tend to do one or the other as a full time profession.  The important thing to remember is unless they are insolvency practitioners then they shouldn't really advise on what is the correct course of action if the company experiences financial distress to such a degree that it is in effect insolvent.  However, they do sometimes say that you should just dump the debt by doing a liquidation restart or a pre pack administration.  Accountants do not know much about other rescue mechanisms such as the Company Voluntary Arrangement (CVA).   Some accountants will recommend an insolvency practitioner that they know but always seek a second opinion.  Once your company is insolvent then you have a legal duty to act in the best interest of the creditors. Are Accountants Responsible For Mistakes? We often hear that a company has got into financial trouble because the accountant has failed to do their job properly or given poor advice. The accountant is an ‘agent’ of the business In law, and in the eyes of HMRC, an accountant that is filing financial documents for a company is doing it as an "agent" on their behalf.  As such, any mistakes or advice followed is the responsibility of the company. Consequently, any fines and penalties will need to be paid by the company. Can I sue my accountant? You can try! They will have professional indemnity cover that will pay out if they are shown to be negligent. That said the best way to avoid problems is to hire a reputable accountant and make sure that you don't mentally "check out" of any responsibility for the overall finances of the company.Many entrepreneurs are great at running businesses and selling products but useless with numbers. If you have no interest in the "boring" numbers make sure there is someone in the business who does! So, don't just leave it to your accountant who may just report once a year. What about if the company becomes insolvent as a result of my accountants mistakes? Accountants do not know everything about insolvency! Following the increasing numbers of insolvencies of limited companies, accountants are being warned to be vigilant, as many insolvent companies are blaming their accountants for poor advice.In many instances illegal dividends and loans are being made to company directors as a way of reducing tax payments. A dividend becomes illegal if the company does not have enough profit to cover it.  This can easily happen if the company was making good profits in the past and the directors have continued to withdraw dividends, despite the financial picture changing dramatically.  This can result in directors owing the company money that will have personal implications if the company goes into liquidation.  The liquidator will seek to recover monies on behalf of the creditors.It should be remembered that a company director has a legal duty to act responsibly. If a company becomes insolvent ( ie meets any one of the insolvency tests ) then the legal duty of the director changes and they must act in the best interests of the creditors (all of them being treated in the same way). If the directors do not act in the creditors' interests and they act "wrongfully", then they can be made personally liable for the company’s debts from the time they knew the company was insolvent!So saying my accountant told me to do it may not impress a creditor, liquidator or judge in a civil law action.

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Can My Accountant Liquidate My Company?