Following the travel restrictions, lockdowns and quarantines the travel industry has not seen a difficult time like this, since the second world war. Obviously, this is a very challenging time for all those concerned.
The situation now, for most companies, is they are being supported by the Government in multiple ways. Using government parlance, they have “thrown a protective ring” around companies and businesses.
One overriding problem the travel industry has, which is more prevalent is the issue of customer deposits. Most customers buy their holidays a long way in advance and so deposits are taken from customers. Faced with a sudden loss of income from new bookings there is immediate cash flow pressure when people want their money back for old bookings. New bookings have also dried up. Double whammy.
Most firms do not operate a trust account system and this means that deposits are not ringfenced for the customer if the event is cancelled. Rather, the payment is protected if the company fails or becomes insolvent by ABTA, ATOL, ABTOT, insurance companies and often by merchant service providers who facilitate the card payment on debit or credit cards.
This guide does not address that issue or how a refund credit note can be offered or the date for RCNs to be extended. Rather, it addresses what should struggling operators do, now that cash is drying up and an avalanche of refunds is due?
Most of the above provide cover for the customers in the even of a formal insolvency event such as company voluntary arrangement, liquidation, administration or pre-pack administration. These insolvency actions would automatically trigger a full refund of deposits of full payments made by the customer. Thus, it can be strongly argued that if the company simply doesn’t have the cash to pay the customers back then a full refund can only be provided if the company enters an insolvency process.
This would achieve the objective of maximising the interests of creditors as whole which is a UK legal requirement for directors of insolvency companies. We would strongly advise all company’s boards to consider all other options very quickly, and to speak to qualified insolvency advisors like KSA first, we can advise on these options.
Perhaps operators have tried to get refunds from airlines, hotels etc. but all are suffering similar problems of poor cashflow. Where no money can flow back to the customer due to suppliers not able to perform their end of the contract I,e hotels, flights etc then your customer can make a claim against their credit /debit card. Obviously, this could lead to clawback of funds from any designated accounts the operator holds for the merchant service provider. This can be a huge and very sudden blow to cash. An insolvency process can halt this cash outflow.
Cut Costs
During the lockdown the best thing to do is to try and reduce your costs as much as possible. So negotiate with the landlord, suppliers, cancel agreements that assume you are trading as usual or are able to use – you will be surprised at how many there are such as car insurance/tax, parking spaces, office service charges etc.
Cut employment levels. When furlough ends what will all of the returning employees be doing? You should start redundancy programmes as soon as you can
If there is insufficient cash to meet costs cutting and redundancy objectives you should consider using a company voluntary arrangement or administration which can terminate those payments, cut costs and restructure debt arrears.
Think about what your customers will want in the future
No-one can predict with much certainty what travel will look like in the future, but it is likely that staycations and small group holidays will come to the fore, at least in the short term. In fact, it has already been hinted that small holiday groups will be allowed.
If you run a travel firm and you have concerns about forward trading and/or the ability to refund clients, if requested to do so, and these are unaffordable, you should be seeking advice. There are options available to you and as a company director you are required to maximise the best interests of the creditors (your clients if they have made part or full payments in advance of travel) and understand the various mechanisms available to you.
We are currently advising various firms in the travel/leisure sector on the various scenarios facing them.
Written ByKeith Steven
Turnaround Director
Keith is the Turnaround Director of RMT KSA Insolvency Practitioners which has been established for 25 years. The company has undertaken more CVA led rescues than any other firm. Read our case studies to see how.
A Guide To Debt Finance and Refinancing
Are you running out of cash waiting for the business to make a profit or can't collect money in fast enough? Almost all businesses need to go through periodic refinancing exercises, whether replacing bank facilities, renewing overdrafts, obtaining bank term loans, EFG loan guarantees scheme loans, factoring/ invoice discounting or capital expenditure requirements. This is normal business practice.Raising working capital is an important plank in any growth plan. Since the 2008 banking crisis and new rules being imposed raising finance has become more difficult and more hassle.Where a company has encountered a significant downturn event or is under pressure, then the directors must consider whether raising further finance against assets is the solution to their problems. As the current market for business changes and evolves almost daily, we cannot provide an exhaustive list of the financial products available but we give a simple guide to the options available to you below.We assume that the business is not a prime candidate for lending and that it needs working capital. Refinancing Remember, this section is not designed for ordinary business financing solutions, rather it is for companies under pressure, who need to find adequate working capital.Consider the products, weigh them up against the circumstances you find yourself in and decide. If you want help to decide and find the most appropriate suppliers of finance, please contact us. We know and have access to dozens of providers of these products and can point out the pros and cons of each.Bank Overdraft Enterprise Finance Guarantee Loans Factoring and Invoice Discounting Asset Refinance Credit Card Merchant Advance Stock Finance Venture Capital Business Angel Investment Directors Loans (Simply what it says!) Crowdfunding Peer-To-Peer Finance (P2P) Company Voluntary ArrangementAfter all that are you confused? Want help to decide what is appropriate? Contact us - call us FREE on 08009700539 or fill out the contact us form. Bank Overdraft It may be possible to obtain temporary increases in facilities from the bank although due to regulations (BASEL III) banks are keener to convert overdrafts into loans. If the problem can be demonstrated to be short lived the bank will often want to try and help. If the problem looks more deep-seated the bank may want more investment from third parties (you). Prepare good information, your team's arguments and talk to the bank - early enough. Don't wait until you cannot pay PAYE and VAT as this is a sign that the company is probably insolvent. Rarely will banks allow extension of facilities for this purpose.If, however, your business looks like turning the corner you could offer to provide additional personal security such as personal guarantees (PG) secured against your home. If you are not prepared to back your hunch with a PG, then ask yourself why should the bank provide money at increased risk to the bank?Advantages Decision making process is usually short - if you have good information to give the bank. The existing relationship is very valuable - banks don't like losing customers. It may ask for more detailed work to be done on the figures, (despite the cost) this can a be valuable exercise. It may help pave the way to other financial products from the bank in future.Disadvantages If the bank cannot see how its money can be repaid (serviceability) or cannot see how it can get the money back in the event of liquidation (security) they will not lend. Ill-prepared requests for funds will be looked upon less favourably. The bank may want a third view and ask for investigating accountants to examine the business. It may be more costly than existing finance.The bank will probably want more security from the company and the directors - personal guarantees may be demanded or increased if already in place. Factoring & Invoice Discounting You essentially sell the debtor book (customers that owe your company money) to a factoring company who then provide the company with working capital advances (effectively a loan) against that asset. They will provide from 50-95% advance against the debtor book and charge around 0.33% to 2% depending on the number of invoices, the quality of the debtor book and how much work is required.Usually all your future invoices pass through the system and this sharply improves cashflow. Not any more seen as "lending of last resort" factoring is a very powerful tool and there are some excellent factoring companies providing multiple working capital products to tens of thousands of UK businesses nowadays.Some companies can now even offer finance based on one invoice! Call Keith Steven if that product would be helpful to you. This can be used, for example, if you are selling some products to one new customer. The provider just looks at the history of the debtor. Talk to KSA if you need a new factor, specific spot factoring or just some guidance.Factoring means that the customers know you are borrowing money against their invoices from you. Confidential invoice discounting (CID) usually means this lending is discrete and the customer doesn't know.Advantages If your debtor control is poor this can help. It is an extremely flexible form of finance - the facility can rise and fall as your needs dictate. If the company is under pressure and your sales are growing it is a vital tool. Finding the right factor can lead to much more efficient use of your assets and the ability to plan production or activity - thereby creating improved efficiency.If your business is growing this can grow with you, if sales are shrinking it can be a flexible facility but see below.Disadvantages Concentration in one or two customers can cause difficulties. It is perceived as expensive - but it is providing the commodity you need - money. Most banks have a factoring division - they may not be suitable for your business - shop around. BUT in the current climate big bank factoring facilities are less flexible than the small more nimble factoring companies. Any bank overdraft is normally repaid from the advance from the factor (the bank's main security is sold to the factor). If you have very low margins or your debtors pay very slowly (more than 80 days) it is not generally suitable.Talk to Keith Steven on 07833 240747 if you need to find new flexible factoring or CID facilities Asset Refinance or Asset Based Lending (ABL) Most companies depreciate their assets faster than the value of those assets fall. Therefore, there are often "unencumbered" assets to lend against. The assets of the business form collateral for the lender to secure themselves against.Assets can include, property, machinery, stock (see stock finance). Used in conjunction with, say, factoring, this method can provide a package of new finance to overcome distress.Advantages It is usually a very quick method, access can be through commercial finance brokers or other contacts. Contact us by email for help if required. Where a short term crisis (say a large bad debt) has occurred this method can help the company round the problem very quickly by efficiently using its assets to raise cash. Better quality assets such as land and buildings can attract good rates of interest. In 2020-21 there are many new players offering refinance and asset based lending at good rates.Disadvantages Raising finance this way is not cheap. Where the company has unencumbered assets it is tempting to raise cash against them but remember NB: If the crisis is longer term can your company service the debt repayments?Call us for a CVA now! Costs vary but rates of interest on refinancing assets (i.e. where previous debts are repaid and fresh advances made) can be as high as 30%. The value of assets is established by the lender - it is never as much as you expect. Stock Finance (very limited availability) A form of asset finance. Where the business carries stocks that are easily value-able and resold (such as retail or wholesale or where manufacturers hold stock for clients) then stock finance can be raised. The value of stock is usually much less than that on the balance sheet and lenders lend according to their own valuations.Advantages As part of a package of measures stock finance can be useful. It can often be flexible and longer term advances can help cope with trade cycle ups and downs. It can be relatively quick to organise.Disadvantages It can be costly and the stock will never be worth as much as you think. The security may be difficult to assign. If the bank has a debenture in place any finance raised may be taken by them to mitigate the exposure anyway. Business Angel Investment The classic UK equity gap problem is getting worse. Too small for venture capital and too big a risk for the bank - where to turn? Angels can provide a mixture of loans and equity to distressed or struggling businesses. Most come from a business background and have lots of experience. They usually take a longer term view and can greatly assist the directors grow the company.Advantages With bags of experience an angel can be just what the growing or struggling company needs. Chose carefully and the relationship can be very fruitful. The funds can be flexible and inexpensive. Further rounds of funding can be available. The fact that an investor is putting money in can also help persuade the bank to increase funds available.Disadvantages Chemistry can be difficult - they are going to be involved long term therefore will take time choosing their investments. Equity: they will want to hold shares in the company and the depth of the distress or pressure will determine how big a slice they require. Paucity: there are thousands of angels but finding an appropriate angel, convincing them to get involved and getting finance can take many months. Control: many angels will want control at board level. BUT isn't it better to own say 75% of a company with value than 100% of nothing?Speak to Keith Steven on 07833 240747 if you think this is a product that you need.Angel investors often want to see debts restructured either through a CVA or a pre pack. Be warned they never want to risk their money to plug a gap for tax payments for your company, if the company fails they may pick the assets up is a common view.So ask yourself should the company be restructured with a CVA and hive out BEFORE any new funding comes in? (click links to read more on these powerful tools). Venture Capital Most small businesses in trouble are NOT suitable for Venture Capital. VCs invest in around 1 in 1,000 applications for finance and unless there is a huge growth potential and an almost unique nature to the business it will not get venture capital. If however the company is unusual in the above regard, then contact us by email keiths@ksagroup.co.uk with a synopsis and we will look at the options with you.Advantages Most directors are aware that equity is "cheaper" than debt. Having a quality non executive director to help guide the board (a pre-requisite of most VCs) is also a big plus. The company's reputation and PR are enhanced. Where growth is achieved and prospects remain good, the ability to raise further finance is enhanced.Disadvantages Classically, shareholder directors see the dilution of their equity as a no-go area. Would you rather have 40% of a company worth £10m or 100% of a company worth £1m? VCs only part with money after thorough due diligence, it is hard work and costly. In the end you may not get the money. Only the best management teams with the best ideas win through. It is very time consuming - in a distress situation do you have 3-9 months to wait?No! Use a CVA or pre-pack to restructure the costs, overheads and debts. Then a business angel or VC investor may be interested. Call Keith Steven 07974 086779 for more details. Directors' Loans It may be possible for the directors or senior people to raise funds privately. This can then be loaned to the firm. Tax efficient repayment may mitigate the PAYE due on directors pay. But if the company is insolvent, repaying your loans in advance of the creditors may contravene the law.In the event of a liquidation, the monies may have to be repaid to the company! This is a possible minefield.Security may be taken for the directors loans - but this is a complex area and needs proper advice.Beware you could create a potential preference (s239 Insolvency Act 1986) if you put money into an insolvent company and then pay yourself back!! Call Keith Steven for smart, expert advice 08009700539 or 07974 086779.Advantages It is cheap, you remain in control of the financial process. It is usually a quick method to raise finance. But be warned, taking out second mortgages will require showing the lender the company's accounts. You can repay the loan as convenient to cashflow. It can carry zero interest (you can however charge interest). Personal loans are now more freely available.In 2019 mortgage providers lent less than 30% of the amounts in 2007. A distressed set of accounts will make borrowing harder. You can of course use credit cards and personal loans (unsecured) but the lending criteria for these product have also hardened. Remember if you lend the money to the company and then take it back out BEFORE liquidation, this is a breach of s.239 Insolvency Act 1986.Disadvantages If you had lots of money it would probably already be invested in the business? Can you afford the repayments personally? If the company fails you still have to repay the loans. The bank may take some of their existing advance back after the funds are introduced. Finally, is the money you can raise really ENOUGH money to solve the company's problems? New Finance products Crowdfunding There are several web based crowd funding sites. Essentially you pitch to the investors and if they like your model they will provide equity or debt to the business. You will need a GREAT pitch, good accounting information, forecasts and a business plan. This particular type of funding has seen explosive growth in the last year with hundreds of companies now offering shares. Peer to peer finance Investors or companies can lend finance directly to businesses in exchange for interest. Those in need of finance can create a pitch which is then passed from the peer-to-peer platform (e.g. Funding Circle) to investors.Call Keith Steven now for a guide to this innovative route to financing your business. Recovery Loan Scheme See this page Short term loan providers Advantages. Quick and easyDisadvantages - only up to £50,000, set criteria and a personal guarantee will be needed. Credit card finance merchant loans This is like factoring above. Effectively you obtain a loan against the future credit card receipts in the business. So if you had sales of £100,000 on credit or debit cards last year; you can borrow £10,000-£12,000 against this. Great for a short term tax problem say, and relatively easy to obtain with no security; but a Personal Guarantee (PG) will be required.If you have a funding requirement have you thought about postponing ALL unsecured debts, collecting in debtors and work in progress and cutting costs? This huge increase in working capital is the impact a company voluntary arrangement can make.If you're concerned about your business, request our free 40-page expert guide for directors, answering everything from personal guarantees to rescue options.
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Personal Liability Notice or PLN Explained
A personal liability notice (PLN) is issued by HMRC and governed by Section 121C of the Social Security Administration Act 1992. It gives HMRC the power to issue a notice to an individual officer of the company to be personally liable for National Insurance Contributions or NIC.
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What is a Prescribed Part?
A prescribed part is the part of the proceeds from realising the assets covered by a floating charge, that is set aside and kept available, so it can satisfy any unsecured debts.
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Options for an Insolvent Pub
See below some advice given on our online chat regarding an insolvent pub I hope I was able to give you some options today.We discussed the fact that the company has two pubs in [town], one we will call “large pub” the other “small pub”. Both are tenanted pubs with Company 2.The large pub tenancy ends in May, you need to provide 6 months notice and have yet to do so. The small pub is reasonably profitable and you wish to retain this if possible. The company is insolvent and has tax liabilities it cannot meet. You are not taking salary and are struggling to survive financially as a result.We discussed Option A; close the large pub, make employees redundant and hand the keys back to Company 2, this will cause Company 2 to look at the issues and it may decided to end the lease/tenancy of the small pub as a result. Or it may not. This action would straight away cut costs.Option B is to place the company into creditors voluntary liquidation. This would end both leases/tenancy agreements when the liquidator is appointed by creditors. But it also writes off the debts.Then you would seek to retain the small pub under a new agreement as a sole trader. Do NOT trade as a partnership in case this fails in future, this could lead to BOTH of you being made bankrupt as partners. So liquidation would bring all the debts and the business to an end.The employees would get paid redundancy by the RPO – redundancy payments office which is a government safety net.
ReadMutual Assistance Recovery Directive
KSA has experienced a situation where the German Tax Authority was pursuing a UK registered company for taxes allegedly accrued via remote trade into Germany. Allegedly, because under the EU Directive which governs issues of this nature, the €100,000 threshold set by the German state had not actually been reached. The EU directive concerned is the Mutual Assistance Recovery Directive 2010 – 24 – EU, usually abbreviated to ‘MARD’. The threshold is usually either €35,000 or €100,000 depending on the member state. Details of threshold for an individual member state should be sort when trading is commenced in that sate.This directive concerns trade into any EU member state where the company providing the goods is not registered to that country. The directive applies to distance selling and mail-order; for the avoidance of doubt this applies to items purchased via catalogue, telephone and internet. If the company concerned has yet to reach the VAT threshold for a particular member state the ‘Origin’ principle is applied I.e. the vendor company applies the VAT rate of the country from where it trades. If that company has exceeded the threshold it must apply the ‘Destination’ principle i.e. it registers for VAT (or the equivalent) within the destination state and applies the relevant level of tax for that state.The first step that a member state must make in recovering any revenue it believes is owed and overdue, is to take all steps available to it to recover those monies. In the case referred to above this included threats of pursuing the director of the company personally: under UK law a director of a limited company is protected from such action unless he/she has provided the creditor with a personal guarantee or wrongful trading has been proved, in which case the veil of incorporation may be lifted. These threats were nearly enough to cause the director to pay from personal funds however he consulted KSA first.Next the member state must apply to the tax authority of the ‘home’ country of the company/business concerned; obviously in the UK this is HMRC, who will continue pursuit of the debt including all recovery action available to them under UK law. In the UK this action may include, levying distraint over assets and the issuing of a Winding Up Petition the company will then be contacted by HMRC any reference number from HMRC will be prefixed by ‘MARD’ which will indicate this is an EU debt.If the debt is disputed or refuted the company director or business owner may lodge a dispute directly with the issuing tax authority, which should be copied to the relevant HMRC office. During this time action should be suspended whilst the dispute is considered.Under UK Insolvency criteria a debt of this nature ranks the same as any HMRC debt and may be bound into a CVA as an unsecured creditor.There are limitations to action of this nature, in that HMRC are not obliged to grant recovery assistance to the EU member state if: 1. It would cause serious economic or social difficulties in the UK 2. The debt is more than 5 years old 3. the debt is less than €15,000.Sources: https://www.gov.uk/government/publications/vat-notice-725-the-single-market?_nfpb=true&_pageLabel=pageVAT_ShowContent&id=HMCE_CL_000152&propertyType=document
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