The Corporate Restructuring & Insolvency (CR&I) team comment on the insolvency statistics for November 2021, and provide guidance for directors with concerns as to their company’s finances and who are facing a likely business liquidation.
November 2021 insolvency statistics
As we fast approach the new year, we have again been faced with mixed headlines of rising COVID-19 cases and booster statistics, Strictly speculation and results, Plan B restrictions, and questions over whether Christmas parties did or did not occur (oh no they didn’t… oh yes they did).
However, hidden behind these varying news items, the Insolvency Service’s monthly statistics for November 2021 have today been released.
The headline points are that November 2021 saw:
- a 22% increase in company voluntary liquidations (CVLs) compared to October 2021;
- the number of CVLs have doubled compared to November 2020; and
- a 43% increase in CVLs compared to November 2019 (pre-pandemic).
Whilst the increase in numbers compared to last year is hardly surprising given the various creditor restrictions previously in place alongside the availability of CBILs and Bounce Back loans for businesses, CVL numbers have increased over the last month and have risen far beyond the pre-pandemic levels.
While we are unable to draw too many conclusions from these statistics, it is clear that directors must continue to keep a close eye on their business’ finances and the credit scores of their essential suppliers and customers. The rise in CVL numbers of course may affect some aspects of supply chains, or render previously recoverable book debts to be classed as bad debt write offs, impacting business balance sheets.
Notwithstanding this, we are aware that once directors suspect financial difficulties many are unsure what to do next.
What should I do before I consult with an IP?
It goes without saying that if any director is concerned about the state of their business’ finances, cashflow issues or increased creditor levels, they should consider speaking with a specialist Licensed Insolvency Practitioner accountant (‘IP’), even if only for an initial consultation.
A director should, in the meantime, consider the following:
- Treat all creditors equally (including but not limited to HMRC, trade creditors, and any director’s loan accounts) if there are any signs of business distress. The consequences for not doing so may result in claims by subsequently appointed liquidators seeking to recover funds for the benefit of all creditors, and/or possible claims against the directors themselves. It is therefore important not to prefer one creditor over another, especially if they are ‘connected’ to the director (i.e. family member, close friend, business associate etc.).
- Avoid seeking any further credit in an attempt to pay off some business debts before discussing with an IP.
- Hold open discussions with all directors about the need for IP advice. As soon as one director suspects financial issues, they should speak with all other directors to raise their concerns, and ensure to retain contemporaneous notes and formal board minutes to form part of the company’s books and records.
- Their Director’s Duties: all directors must act within their powers, promote the success of the company, exercise independent judgment, avoid conflicts of interest and declare any personal interests in proposed transactions, and not to accept third-party benefits. Further information can be found within our recent blog.
- ‘Hold the ring’ in the meantime. As soon as directors identify any sign of business distress they should be wary of shareholders drawing any further funds from the company by way of dividends which cannot be justified by reference to distributable profits, and as stated above, should not treat creditors any differently amongst themselves. The risk here is that directors may be exposed to breach of duty claims later down the line.
What is the test for insolvency and what are my options?
In order to determine whether the company is insolvent there are two key tests: the cashflow test and the balance sheet test. If the company cannot pay its debts as they fall due, it is cashflow insolvent, whereas the company is balance sheet insolvent where the sum of debts outweighs the sum of assets. Once directors have overcome the first hurdle and consulted with an IP, they will be advised what, if anything, they should do regarding their business’ finances.
Business options include, but are not limited to, administration, company voluntary arrangement (CVA), corporate restructuring, schemes of arrangement, debt restructuring – intended to rescue the business – or voluntary liquidation to wind up the company.
A voluntary liquidation can either be solvent, by way of a members’ voluntary liquidation (MVL) or insolvent, by way of a creditors voluntary liquidation (CVL). An MVL is commenced by a solvent company to distribute its assets among shareholders in the most tax efficient manner under the supervision of a licensed insolvency practitioner. A CVL is commenced by an insolvent company, usually as a result of pressure from creditors. This is generally much more cost effective than a compulsory liquidation and more flexible in terms of the company/its liquidator selling on assets including the company’s main business. A CVL requires a licensed insolvency practitioner to be willing to take appointment as liquidator, and creditors in principle can reject company’s choice of liquidator and install their own.
What is the liquidation process?
For information as to MVLs, please see our recent blog on whether it is time to extract value from your business.
Once the decision has been made to enter into a CVL, directors will need to assist the IP in preparing a report to creditors and statement of affairs. Generally, the IP will require:
- a brief company history (including the reasons for the business’ failure);
- a complete list of company assets and approximate values;
- a complete list of creditors, addresses, and amounts owed to them;
- details of any CBILs or Bounce Back loans taken, and details of how the funds were applied;
- employee details, HR and pension records (if any);
- HMRC details (in particular VAT registration and PAYE references); and
- details of any landlords, rent arrears and leases.
To commence the liquidation process the shareholders of the businesses will need to pass a special resolution for its winding up (requiring a majority of 75% or more) and an ordinary resolution to nominate a liquidator (a qualified IP).
The nominated liquidator will then advertise the resolution in the London Gazette, and will request liquidator nominations from the body of creditors (usually via the deemed consent route by which creditors must submit proof of debt forms and votes by a ‘decision date’, though occasionally in-person creditors meetings are held upon request from creditors). Through this the creditors are able to appoint a different IP as liquidator if they choose to. Once a liquidator has been appointed by the creditors they will advertise their appointment in the London Gazette.
Following a liquidator’s appointment, they will take steps to collect and realise the company’s assets and to distribute the ‘pot’ of assets to the company’s creditors in a prescribed order, as follows:
- Fixed charge holders;
- Liquidators’ remuneration and expenses;
- Preferential creditors;
- Prescribed part (a ringfenced part of assets subject to floating charges which are reserved for unsecured creditors);
- Floating charge holders subject to the above;
- Unsecured creditors ranked equally; and
- Any surplus distributed amongst shareholders.
Will I be disqualified as a director?
There is no one blanket rule that all directors whose companies enter into liquidation will be disqualified.
Once appointed, the liquidator has a statutory duty to investigate the company’s affairs prior to liquidation. This will generally involve a comprehensive review of bank statements and past business transactions. A key element of this investigation is to submit a mandatory report to the Secretary of State on the conduct of directors (which includes shadow directors or de facto directors).
Whilst this may seem daunting, it is at all times vital that directors cooperate with the liquidator to the fullest extent.
Disqualification proceedings may be considered if one of the following is reported:
- Action or inaction relating to the insolvent company;
- Breach of duty by the director, and the frequency of such breaches; and/or
- Material breach of legislation or director’s obligations, and the frequency of such breaches.
It is however worth noting that the Secretary of State will generally only initiate director’s disqualification proceedings if there is sufficient public interest to do so. An alternative is that the Secretary of State may accept a voluntary disqualification undertaking, which sets a time period where the director agrees not to act as a director.
Under the new Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 (having only been given Royal Assent this week), disqualification orders may be made and disqualification undertakings may be given in respect of former directors whose companies have since been dissolved without first having been liquidated.
In a nutshell, every director should continue to monitor their business’ financial state and at the first indication of difficulties they should consider seeking early advice from an IP. Directors should be aware of their duties and cooperate as fully as possible with an IP if they find themselves needing their assistance.
Should you or any of your contacts require any guidance with any of the issues highlighted in this blog, please get in touch with any of our CR&I team who have a wealth of connections with a variety of IPs and financial advisors, and we would be glad to assist you with putting you in touch with the right individuals for your business needs.
We in the CR&I team wish you and your contacts a peaceful holiday period.