Dealing with Financial Difficulties I Flashcards
Where might one find danger signs that indicate a customer is experiencing problems?
- From internal bank records
- From interview/visits to customers
- From financial info
How might internal bank record show that a customer is experiencing problems?
- The customer attempts to take an authorised excess borrowing
- The customer unexpectedly requests extra borrowing
- The level of turnover (lodgements) through the account is falling
- Evidence of hard core borrowing is emerging
- The customers cheques are having to be returned unpaid
- Cheques which are lodged by the customer are subsequently returned unpaid
- Cheques for round amounts are being issued by the customer
- The customer regularly issues cheques against uncleared effects
- Cheques issued by the customer are being specially presented
- Numerous status enquiries (opinon requests) are received concerning the customer
- The customer hands to the bank a standing order on favour of a finance company
- Cheques originally lodged by the customer are returned ‘payments stopped’
- The customer makes regular significant withdrawels in cash
- Rumours regarding the financial standing/stabilty of the customer
How might interview/visits show that a customer is experiencing problems?
- Staff industry levels/attitudes
- State of repair/age of buildings and machineary
- Machineary not being used to capacity or evidence that is being sold off
- Obsolete stock or overstocking etc.
How might financial info show that a customer is experiencing problems?
- Other borrowings may be revealed
- The figures in the audited accounts may be markedly different from those in the managemnt accounts
- Operating losses may be evident
- Production of financial info and accounts is late
- A change of auditor or unusual audit fee
- The auditors statement accompanying the accounts is qualified
- Management accounts are sketchy or non-existent
- The business may be losing valued customers
How might the bank respond to a customer in trouble?
Pass them onto their dedicated credit restructuring units.
This intensive care approach enables an ongoing closer scrutiny of the business along with the involvement of individuals with specialist knowledge and skills in handling situations of this nature.
How might a customer take action to remediate their problems?
- Stock - reducing prices in order to sell off dead or obsolete stock, cutting down on reordering; concentrating on fewer items which are known to saleable; considering alternative suppliers
- Debtors - are debtors being collected strictly in accordance with agreed terms?
- Creditors - in rare instances you may find cash flow difficulties are attributable to creditors being paid prematurely
- Other assets - the customer should consider whether any assets are surplus to requirements and could be sold
- Additional Lending
- Other areas for review - staff costs, cut back through say a reduction in working hours or a recruitment embargo; capital expendature - can planned expendature be postponed or altered?
What is administration?
What are the purposes of administration?
The legal process by which an official is appointed by the court to administer the affairs of the company. The administrator’s duties are to all creditors, rather than just the secured with the focus on saving the company.
- Primary objective - resuce the company as a going concern; but the administrator can pursue the secondary objective. This is done if the primary objective is not reasonably practicable or if the secondary objective would acheive the better result for the company’s creditors as a whole
- The secondary objective - a staged running down of the business. The third objective applies only if neither of the first 2 objectives is possible.
- The third objective - realise property/assets in order to make a distribution to one or more secured or preferential creditors, but without unnecessarily harming the interests of the unsecured creditors
What are the routes into administration?
- Court route
- Out of court route
What may the administrators do?
- Run the company in place of the directors
- Raise money by borrowing
- Grant security
- Establish subsidaries
- Rank and claim in the bankruptcy or whatever of any persons or companies indebted to the company
On what grounds can a floating charge be challenged?
- (SCOTS) A gratuitous alienation - Alienation in the legal sens of transfer of property from one person to another, Gratuitous meaning granting it without getting anything in return
- (SCOTS) An unfair preference - based on equity and sets out the premise that if a debtor is insolvent all the creditors should have equal treatment and none should be favoured to the exclusion of others
- A floating charge created within a relevant time is invalid, except to the extent of the following, which may be added together:
- What consists of money paid, or goods or services supplied to the company at the time or after the creation of the charge (this is called nova debita - new debt)
- The value of other debts that were repaid from funds made available because of the creation of the charge
- The interest which accrued on the account because of the above
- A charge is consdered as having been created within the relevant time in respect of the following:
- When the charge was created in favour of a person who is connected with the company; the charge was created within a period of 2 years prior to winding up beginning; or on presentation of the petition for an adminstartion order
- Where the charge is issued in favour of any other party, like the bank
- It had been created within the period of 12 months prior to the commencement of a winding up or the presentation of a petition for an administration order
What is Liquidation?
The process by which a limited company is terminated
How may a company have its existence terminated?
- Wound up - where the liquidator is a licensed insolvency practioner
- Struck off the Register of Companies as being defunct
- Dissolved by an order of the court, without being wound up to enable reconstruction or amalganation
What is Compulsory winding-up?
One of the most common grounds for winding up is that the company is unable to pay its debts
- A creditor for a sum exceeding £750 has served on the company a written demand for payment
- The court is satisfied that the company is unable to pay its debts as they fall due
- The court is satisfied that the value of the company’s assets is less than the amount of its liabilities
What is Voluntary winding-up?
- Members’ voluntary winding-up
- Creditors’ voluntary winding-up
The difference between the 2 is that in a members’ voluntary winding up the directors must be able to make a declaration of solvency.
What powers does the liquidator have in winding up?
- To sell any of the company’s property
- To do all acts executed on behalf of the company
- To prove, rank and claim in the bankruptcy, insolvency or sequestration of any contributory
- To draw, accept, make and endorse any bills of exchange, etc. in name of and on behalf of the company
- To raise on the security of the assets of the company any money required
- To take such action in his official name as will be necessary for obtaining payment of any money due from a contributory or his estate which cannot be conveniantly be done in the name of the company
- To appoint an agent to carry on the business
- To do all such things as will be necessary for the winding up of the company’s affairs and the distribution of its assets
