19/08/10

By Suzanne Jones, Solicitor, Howard Kennedy

In January it was announced that the UK economy had come out of recession, after figures showed it had grown by 0.1% in the last three months of 2009. However, the future of the UK economy is very uncertain.

Recently the insolvency statistics were released which showed a decline in compulsory and creditors’ voluntary liquidations, receiverships and administrations and an increase in company voluntary arrangements. Personal insolvencies have fallen for the first time since 2007, but have increased by 5% on the same period a year ago. In the second quarter: gross domestic product, total services output, total production output, manufacturing, construction, agriculture, forestry and fishing output all increased compared with the previous quarter. The number of unemployed and the number of repossessions also fell. However, Vince Cable, business secretary has spoken of concerns about the UK entering back into recession. Mervin King, governor of the Bank of England warned that the UK economy faces a ‘choppy’ economic recovery over the next 2 years. The Bank of England recently lowered its economic growth forecast and said inflation would stay higher for longer than previously forecast. Many companies have entered into time to pay arrangements with HMRC and £5.13bn of tax payment is delayed under the scheme which will soon need to be repaid. Tough austerity measures have been announced, there is still an ongoing lack of credit and VAT will be increased to 20% at the start of next year. All of which suggest difficult times ahead.

These improved figures may give some company directors false hope, but UK companies should continue to tread cautiously. Company directors should focus on the operational side of the business to better place the company, should there be a downturn.

Experienced and competent directors, often neglect their duties and disregard the basic principles of running a company when the company suffers a downturn. The company’s accounting records should be kept up to date and the directors should be aware of the exact financial position of the company at all times and if the directors are confident that the company can trade out of its insolvency they should consider:

• Asking the landlord for a rent free period, or a reduction in the rent. If it is possible to terminate the current lease, consider new premises.

Reducing staff overheads this could include, reduce working hours, ask staff to take voluntary unpaid leave, redundancies and avoid using employment agents.

• Negotiate longer periods of credit with creditors and if necessary request a time to pay arrangement.

Good credit control. Limit the credit offered and ensure customers are financially sound.

• Ensuring the taxation affairs of the company are dealt with in the most efficient manner.

• Factoring the book debts.

Changing suppliers, look for better prices and trading terms.

Restructuring the company, which can involve downsizing or eliminating parts of the business or refinancing. Before restructuring, professional advice needs to be sought to undertake an in-depth review of the business operations and its financial position, to take into account commercial and legal constraints on any restructuring plan.

If the company is failing to pay its debts as and when due and/or it is balance sheet insolvent, professional insolvency advice should be obtained immediately. A director should be aware of their duties to avoid director disqualification and be alert to the consequences of trading an insolvent limited liability company, as personal liabilities can arise.

The failure of a company can also lead to the personal insolvency of the company director and if the director intends to carry on as a company director of a new company, it is important that the director does all that is possible to avoid bankruptcy as a bankrupt is prohibited from holding a directorship. A company director can reduce the risks of personal insolvency by:

• Using up to date cash flow forecasts and plan financial needs. The earlier financial difficulties are recognised and dealt with the more options available

• Personal guarantees and charges on personal property should only be given as a last resort. If personal guarantees are given limit the scope.

• If borrowing is obtained from family and friends, ensure each person receives independent advice if security is granted and ensure it is properly documented; do not borrow from them more than they can afford to lose.

• Communicate with creditors and if necessary negotiate time to pay arrangements.

• It may be possible to negotiate with a lender to carry any debt across into a new venture, and will not need to discharge the personal guarantee immediately.

Once the company or the individual becomes insolvent it is imperative that the insolvency laws are abided by. Any misconduct of a director or an individual could result in further restrictions imposed and create a more difficult situation.

Until the UK economy becomes more stable company directors should remain cautious and focus on survival and lowering the company’s overheads to reduce the risk of insolvency should there be a downturn.