Avoid letting risk build into insolvency

A recent report claimed a total of 304 property companies now face critical financial problems with many of them at severe risk of insolvency. The figure is a considerable escalation from 185 companies with critical problems in the third quarter of 2008 and 221 in the fourth quarter.

The latest troubled companies are not major groups, but mainly small and medium firms with total asset values in their last published accounts of £1.1bn, an average of £3.6m per distressed company.

There’s been a build up of problems in the commercial property sector for a number of years, as tenants have started to struggle to pay rent, leading to escalating defaults.

Warning signs
I’m seeing property companies approach us at all stages of insolvency that have been squeezed by the recession. The number of enquiries from property companies has risen dramatically in recent months as lenders are forced to take control of commercial property right across the UK.

Many businesses are going through insolvency proceedings because despite the warning signs they hoped they would ride out the worst of it. The reality is the market isn’t getting any better and the next six months also look like they’re going to be tough.

However, there are several signs that a company is facing difficulty that owners and directors should react to including cash flow problems, increasing creditor pressure, withdrawal of credit insurance, erosion of resources and negative market rumours which can affect employee or customer morale.

If any of these warning signs are spotted businesses must be proactive and take professional advice, whether this is legal or financial to identify the best way to move forward.

Director disqualification
When a company is heading towards difficulty the directors must switch their focus from the shareholders to the creditors and the potential claims against directors. When an insolvency practitioner takes an appointment they have to compile a report on the conduct of all directors who were in office in the last three years of the company’s trading. The report forms the basis of the Insolvency Service’s decision whether to pursue a claim for disqualification against a director.

A director can be disqualified as a result of a number of reasons including failure to keep proper accounting records; failure to prepare and file accounts; failure to submit tax returns; or failure to co-operate with the insolvency practitioner.

A person who has been a director of a company in the 12 months leading up to its liquidation could become personally liable for debts incurred by a new company with the same or similar name, if that person continues as director of the new company and does not give proper notice to creditors.

Directors must act with extra vigilance and ultimately be the ones to make the decision as to whether the company is fit enough to continue trading.

Pre-packs
There has been a recent trend of companies being saved through pre pack administrations. It can be an effective tool but a controversial one with many companies said to be abusing the system. Pre-pack administration is where a deal is struck to sell an insolvent company’s assets before it enters insolvency.

Creditors and shareholders have criticised pre-packs believing that assets may have been sold at an undervalued price or that goodwill has not been fully valued because of the speed of the sale. Critics often forget there are statutory and practical implications under which the administrator has to act. From my experience pre-packs can have significant advantages for suitable companies, providing companies seek legal guidance to facilitate the sale.

The influx of enquiries we’ve received recently from companies concerned about their position indicates an increase in awareness of potential problems. This is likely to be as a result of the media attention failing big-name companies have attracted. The rise in awareness can only be viewed as positive – the earlier the warning signs are spotted, the more likely insolvency can be averted.

For further information please contact:
Gemma Wieczorek, RMS PR Ltd, Tel: 0161 927 3131,
email: gemma@rmspr.co.uk or visit lhs-solicitors.com