What is insolvency and does it apply to me or my business?

Insolvency is a very simple situation that can need a very difficult and sometimes complex resolution. If you find yourself in a situation where you are potentially insolvent you will need to take a long, clear look at things and decide what is the best option. In this video, Kym Carvell looks at what insolvency means for a business or individual. With over 30 years of experience of insolvency, Kym is a respected member of our team who is able to explain financial situations with clarity, honesty and a sympathetic ear. If you think the situations described in this video may apply to you, or your accountant is flagging a potential issue, your best option is to contact us as soon as possible so we can begin working towards a resolution.

 

What is Bankruptcy?

Personal insolvency, including bankruptcy is something that nobody wants to face. In this video Gavin Bates, one of our directors , explains a little more about what insolvency means, other options to potentially avoid bankruptcy and what could happen if you do need to take the bankruptcy option. Many people come to PBC with questions such as ‘will I lose my house if I take bankruptcy’ and ‘what about my car and other basic needs’ these are difficult questions and the answer will vary depending on your circumstances but we will work with you to make life improve as fast as possible. For many people, the relief of seeing a solution to their issues is the first sign that they are re-stabilising their life and turning the corner towards becoming solvent again. While the road may still be difficult (and we may not always say what you want to hear) talking and taking some advice could be the first step on your journey.

So what went wrong?

The most common reasons why businesses fail

“If you fail to plan then plan to fail”. A well-known phrase that everyone in business should have hanging in a prominent place as a reminder that operating a business carries risk as well as reward.

Nobody takes that brave leap into being self-employed thinking their business will fail within the first two years. However, many start-ups find themselves in difficulties within this time frame, generally as a direct result of a failure to plan.  I appreciate I will not win many friends by saying this but the business acumen in this country is poor and the general knowledge required absent.  If I had a pound for every time a director referred to the assets of a limited company as his assets when they are actually company property………

Putting it another way, if you build a house on poor foundations then you can expect that house to fall down eventually. Similarly, if you do not start a business on sound footing from the outset you are promoting failure.

This article could dominate several pages if I were to go into any real detail but, generally speaking common areas leading to difficulties in the near future of a start-up include:

  • No business plan (including cash flow forecasts) from the outset. If you have a business idea then putting that down in writing should inform you if that idea is viable and what is likely to be the requirements. It also supports any application for third party funding, such as from banks.
  • Choosing the wrong trading vehicle (e.g. limited company, partnership etc.).
  • Over-borrowing from the outset, leaving start-up costs creating a financial commitment that eventually becomes a burden too great.
  • Not registering for VAT or PAYE. In one case I handled the company had been over the VAT threshold requirements for three years yet was not VAT registered. It was one of the grounds for him receiving a custodial sentence!
  • Not accounting for receipts and payments properly.
  • Entering into contractual obligations without fully understanding the implications.
  • No trading terms and conditions upon which to fall upon when things go wrong.
  • Not monitoring cash flow. Most business failures have reached a stage where cash is exhausted so they cannot pay the bills.

 

The advice to any would-be new business owner is to take advice. Speak to an accountant who can help you determine what the appropriate trading vehicle for your business is, assist with VAT registration and guide you through how to ensure your day-to-day accounting is correct.  Equally, a commercial solicitor can draw up your terms of trade that maximise protecting your business interests and can steer you with regards to any agreements you are asked to sign.  Finally, do not overlook the role of commercial banks as they can assist in the most appropriate form of funding the business, both at start up and going forward.

I use a phrase, “You do not have a dog and yet bark yourself.” Unfortunately, all too often business people come to me and it is clear they have not grasped that concept.

If you require any advice or assistance on mediation matters, or any other insolvency-related issue, then please contact PBC Business Recovery & Insolvency to discuss your situation. Call Gary Pettit or Gavin Bates on 01604 212150 completely confidentially.

What is the difference between Corporate and Personal Insolvency?

When you realise you are potentially in a position where you or your company is insolvent you will need to take action as soon as possible. It is sadly not uncommon for corporate and personal insolvency to be bedfellows, but they are different so you will need to make sure you are approaching it from the right perspective. One of the very early discussions we often need to have with our clients is the difference between their personal and corporate financial responsibilities. Kym Carvell explains how to answer the question ‘what is personal insolvency’ and the difference between that and corporate insolvency in this video. She also discusses some of the confusion surrounding the liability status of sole traders and the common reasons why some companies can become insolvent.

What is a Voluntary Arrangement?

Voluntary Arrangements (VAs) are not a universal panacea for financial difficulties but they can be a way of resolving your financial issues to the satisfaction of everyone concerned. In this video licensed insolvency practitioner and director here at PBC, Gary Pettit, will explain what a voluntary arrangement is and what it can do.  Many people are aware of the basics of a VA but are unsure of a range of specifics such as can a company have a voluntary arrangement and do all creditors have to abide by the terms of a voluntary arrangement?  Gary will answer some of the more common questions we are asked about VAs and how they are used.

Ever Decreasing Circles

‘Living beyond means’ – a leading cause of bankruptcy

When you think of Ali Campbell you think of UB40, Shane Filan, Westlife and Martine McCutcheon may bring back memories of “Eastenders”. What they all have in common is being made bankrupt, which goes to prove cash is king.

There is an old joke about the husband who did not report his wife’s card stolen because the thief was spending less than she did. Excluding mortgages, household borrowing in the UK rose to £198 billion and with car financing increasing by 15% and credit card debt by 10% this represents the fastest growth in debt levels since 2005.  Statisticians suggest the average household could last just 32 days without any income and that more than 22% have savings below £500.

This depressing picture is indicative of how austerity has impacted on the general public. However, it does not reflect the true picture because the reports on personal debt do not include “Hidden” liabilities such as personal guarantees for third party borrowing or directors over-drawing on their loan accounts.  The worst case I have seen so far was a former partner of a failed legal practice whose Christmas present in 2014 were demands amounting to £11 million.  Try explaining that to your spouse!

At PBC we see people with personal debts ranging from less than £10,000 up to the poor sole mentioned above. Regardless of the quantum of debt they all endure the same; demand letters, High Court Enforcement Officers, threats of bankruptcy etc.  Admittedly, there are some who consult PBC where bankruptcy is the best option for that individual due to the overall circumstances.  Others, like our client with the unwanted Christmas present, entering into an individual voluntary arrangement (“IVA”) provided certainty and protected his career.

As implied, an IVA is not right for everyone. It is a deal with your creditors; a balanced compromise where there are benefits for both the client and their creditors and demonstrates being more beneficial than bankruptcy.  The key component from the client perspective is you must have something to offer, whether that is an income contribution or tangible offers, or a combination of both.

The principle message has (and will always be) take advice early. The longer you leave debt-related problems the more antagonised your creditors will become, the more cumbersome the debt and the less creditors will be persuaded to support any form of compromise you may wish to put forward.