Increasing Your Clients Chances of Survival

As an accountant or lawyer, your clients rely upon your advice.  Your advice whilst always important becomes critical when your client is experiencing financial difficulties.  The risks faced by your client when his or her business becomes insolvent are personally very high.  Continuing to trade on an insolvent company exposes your client’s personal assets to claims from creditors.  Timely action by your client will minimise these risks.

For companies experiencing financial difficulties a voluntary administration may provide an opportunity for the business to continue, the directors to retain control of the company, the company’s employees to retain their jobs and you to retain a client. However, in order to maximise the prospects of the business surviving, timely action is required. The voluntary administration process enables the company and its creditors to conclude a legally binding arrangement to deal with outstanding claims by way of a deed of company arrangement. These deeds have resulted in companies clearing their liabilities to unsecured creditors for as little as 5 cents in the dollar in some instances.

We offer the following suggestions to you that we consider will help you in assisting your clients in their time of need.

Encourage your clients to be pro active not reactive. 

Timely action maximises the prospects of a successful arrangement with creditors.  If a creditor has served your client with a statutory demand and they are unable to satisfy it, the time to seek the advice of an insolvency practitioner and appointment of an administrator is before the creditor files its application to wind up the company.  Waiting until the last minute to appoint an insolvency practitioner will increase the costs associated with the voluntary administration.  The administrator will need to engage solicitors to defend the application to wind up the company.  Further, at least one creditor will be dissatisfied because your client has forced them to incur unnecessary legal costs by delaying, until the last moment, the decision to appoint an administrator.

Choose a reputable independent insolvency practitioner.

Should you require expert advice, choose a reputable independent insolvency practitioner to assist your client when the need arises.  How do you choose an insolvency practitioner? The essential qualities required of an insolvency practitioner are an understanding of business and financial affairs which allows the practitioner to make an assessment of the business of the company concerned.

• Consider whether the insolvency practitioner demonstrates the requisite understanding of business and financial affairs that will enable the practitioner to perform the assignment.
• Ensure that both you and your client know the basis on which the insolvency practitioner will be remunerated. Most insolvency practitioners are remunerated on a time basis at hourly rates applicable for the various grades of staff employed on an insolvency assignment. 
• Inquire whether the practitioner has sufficient skilled staff to perform the assignment in a cost-effective manner. The benefit of discounted hourly rates will be lost if the insolvency practitioner performs the more menial tasks and charges your client his or her hourly rate.
• Check out the reputation of the insolvency practitioner. What type of assignments does the practitioner traditionally perform? Is the practitioner regarded as debtor friendly? A practitioner with a debtor friendly reputation may put creditors offside and make it more difficult for your client’s proposal for the future of the company to obtain the requisite support to result in a successful deed of company arrangement.

Encourage your client to be open and honest.

Encourage your client to be open and honest to the company’s creditors, both secured and unsecured.  The secured creditor may even be willing to recommend an insolvency practitioner to your client with whom they would be comfortable.  The appointment of an insolvency practitioner with whom the secured creditor is comfortable may avoid the appointment of a receiver by the secured creditor and the associated duplication of costs.  However, the choice of insolvency practitioner ultimately rests with your client.

Formulate a proposal in a timely manner.

Encourage your client to formulate a proposal for a deed of company arrangement well before the administrator’s deadline for reporting to creditors.  Delaying the submission of the proposal may lead to the administrator seeking an extension of the convening period for the meeting.  This action will lead to increased costs from two sources.  To extend the convening period the administrator must engage a solicitor to apply to court on his behalf. 

Extending the convening period increases the time the administrator maintains day to day control of the business.  The cost of the administrator maintaining control of the business is always greater than the cost if the business were left in your client’s control.  This is because the administrator will impose far more stringent operating and financial controls on the business than those imposed by your client.

Prepare financial forecasts to support the proposal.

If your client’s proposal provides for creditors to be paid from future trading profits the proposal should be accompanied by financial forecasts including cash flow projections.  The assumptions underlying these projections should be clearly stated to enable the administrator to evaluate the prospects of your client’s proposal providing the return to creditors it has proposed.

How RSM Bird Cameron can assist.

RSM Bird Cameron can assist in any matters that require input from independent and experienced insolvency practitioners.  We are prepared to offer you and your clients an obligation free initial consultation at no cost to either you or your client.  Further, we would be happy to assist you with any telephone inquiry with respect to insolvency related matters.

Contact one of our Turnaround & Insolvency team members.

All formal insolvency appointments are undertaken by RSM Bird Cameron Partners.