Business Recovery & Insolvency Newsletter – November 2016

November 4, 2016

Accountant in Bankruptcy’s Annual Report.

The Accountant in Bankruptcy issued his 2015-16 Annual Report in September 2016 which indicates a continuing downward trend in personal insolvency in Scotland.

He reported:

  • The total number of bankruptcies awarded in Scotland declined for the seventh year in a row. There were 3,765 Awards, being a reduction of 44% on the previous year.
  • The Accountant in Bankruptcy was appointed Trustee in 80% of awards made during the year.
  • Sequestration creditors were repaid a total of £15.2 million, representing an average dividend of 29.3p in £1.
  • 2,041 approved arrangements under the Debt Arrangement Scheme was a reduction of almost 51% on the previous years
  • There was a slight increase of 6.1% in the number of Protected Trust Deeds the total registered being 4,709.
  • Over £80 million in total had been repaid to creditors during the year.
  • The number of Receiverships in Scotland reduced to 4 from 6 the previous year.
  • Compulsory Liquidations fell by 3.1% to 595 but there was a 31.9% increase in Creditors Voluntary Liquidations being 302 reported.

According to statistics obtained by Money Advice Scotland, 48% of Scottish adults surveyed had less than £100 savings, therefore the continuing low interest rates are alleviating the burden of borrowing, resulting in a reduced requirement for debt relief.

The full report is available on the Accountant in Bankruptcy’s website.


Bankruptcy (Scotland) Act 2016

Current personal bankruptcy legislation, until now, has been quite fragmented.  The Bankruptcy (Scotland) Act 2016 now addresses this with one consolidated piece of primary legislation which does not alter how the processes will work merely the underlying legislative framework.

In practical terms, new forms and references will apply to all cases commencing 30 November 2016 and after.  To add complication, the previous legislation, in all its various forms, will still apply to existing cases so we will be working in multi-tiered systems for several years to come.


What Cost Incorporation?

The question often faced by people in business is – should I incorporate my business? Undoubtedly it will involve more paperwork and expense but the greatest argument used is that it will protect the individual directors/shareholders from personal liability.  It creates a “corporate veil” – the company being a separate legal entity from the individuals running and owning it.  Any creditors of the business can only seek payment from the company and if the company becomes insolvent, can only seek redress from the assets of the company.  Or can they?

Funding

In the current economic climate, most businesses will require some type of external funding, be it Banks or other Finance providers.  Assets are often leased or taken on Hire Purchase. Debts may be Factored.  In order to advance any form of credit, the lender will take into account many different factors but in the event that they cannot gain sufficient collateral or reassurance from the assets or trading background of the business, they will commonly insist on some form of personal guarantee from the Directors/Shareholders.   This may take the form of a standard security over the individual’s property or other personal assets such as Life Policies, or simply an all-encompassing  written guarantee from the individual that they will meet any shortfall should the company be unable to meet its debts.  This then lays the personal assets of the individual on the line and removes any limited liability protection.

Contracts

If the sole trader or partnership decides to incorporate because of tax or other advantages, they must ensure that all the relevant paperwork in relation to their previous trading entity is amended as appropriate, at the time.  It should not be assumed that this is something which can be done at a later date.   It is often only when a corporate business gets into financial difficulty that paperwork is reviewed and Directors discover that contracts for leased equipment, rental of premises etc are still in the individual’s name and thus the creditor looks to them for payment of the remaining liabilities.  Suppliers whose terms of business have never been amended may believe that they have been trading with an individual and not a limited company, thus rendering those terms open to challenge.

Loans

It is a fairly common occurrence for Directors of limited companies to take short term loans from the business for a specific purpose then pay it back some time later.  Whilst there are potentially tax costs to the company, these can be reclaimed on repayment of the loan subject to conditions laid down by HMRC.  Some Directors who previously ran an unincorporated business continue to treat the company funds as their own and any drawings or personal expenses through the company require to be treated as a loan.  It has long been a common occurrence for Directors to take their remuneration by way of a loan which is then cancelled at a financial year end by the issue of dividends from the company from distributable reserves.  This is perfectly acceptable until the point where the company gets into financial difficulties, has no distributable reserves or goes into liquidation.  If there are insufficient funds in the company to pay the tax liability to HMRC or there are no distributable reserves, then there can be no payment of a dividend to wipe any Directors’ Loan account and the Director may then be looking at paying this back to the company.  If the company goes into liquidation, any unsupported dividends which have been paid in the period leading up to the liquidation or indeed any amounts shown in the books as Director’s Loans are then assets of the company and the Liquidator will seek to recover the sums due for the benefit of all the creditors.  If the Director has, in effect, spent this money and cannot pay this back from cash funds available to him, then his personal assets will be at risk.

Fraudulent Trading/Trading Whilst Insolvent

Lastly, should the company run into financial difficulty, and Directors fail to take the appropriate steps to safeguard the creditors interests, they could be held personally liable for company debts. It should be noted therefore, that the “corporate veil” can be torn down in certain circumstances and Directors/Shareholders may not have the limited liability protection they thought they had.  None of this however, need rule out the advantages of incorporating a business but individuals need to be aware of the potential pitfalls.


To discuss any of the issues highlighted within this newsletter, or any other matter you require our help with, please contact any member of our team.

 

Graeme Smith – Head of Business Recovery & Insolvency

Email: gcs@hlca.co.uk or tel: 01382 200 055

Christine McTavish – Director

Email: cmt@hlca.co.uk or tel: 01382 200 055

Angela Paterson – Senior Manager

Email: akp@hlca.co.uk or tel: 01382 200 055

Margaret Linn – Manager

Email: mal@hlca.co.uk or tel: 01382 200 055