By Alan Tomlinson
Licensed insolvency practitioner in England & Wales
In this grim economic climate, large company insolvencies and the role that licensed insolvency practitioners play have been very much in the news.
So what are licensed insolvency practitioners and exactly what do we do?
More importantly, do we have anything to offer the smaller business, or are we merely high-flying professionals only interested in the big assignments like Woolies, Zavvi and Land of Leather?
First things first, we do not walk around in black capes with glistening scythes, which is the impression many people have.
Believe it or not, we are human and understand that many of the people we deal with are going through a tough time.
A licensed insolvency practitioner (or 'IP' for short) is a professionally qualified person who is authorised to advise and act as a liquidator, administrator or trustee in cases such as bankruptcy.
In simple terms, this means we have the necessary expertise and experience to deal with and help businesses in financial difficulty.
Given the nature of our work, IPs are closely regulated by one of a number of regulatory bodies in the UK, for example, the Institute of Chartered Accountants.
Some IPs tend to deal almost exclusively with larger assignments, including the high street names that we all hear about when they 'go bust'.
However many firms, such as my own, tend to focus on smaller businesses and have particular expertise in that field of work.
Generally speaking, if you are running your own smaller business, you will be trading either as a sole trader, a partnership or a limited company.
Each of these has their own particular issues and the problems associated with financial difficulty will be dealt with in different ways.
But the warning signs common to all types of business structure would include:
- Inability to pay the monthly PAYE or quarterly VAT (or both)
- Having cheques returned by the bank
- Encountering cash flow difficulties
- Recognising there are problems but saying to yourself: "I can trade out of it"
- Finding yourself under pressure from your creditors in the form of solicitors' letters, judgements, bailiffs or winding-up petitions
- Spending more time dealing with creditors and "fire-fighting" than actually working on developing and managing the business
- Not having up-to-date and accurate financial information
- Considering remortgaging your house or borrowing from relatives, friends or other business acquaintances to keep the business going
- Having sleepless nights or drinking excessively to forget about things.
It is worth pointing out that one of the key preventative measures directors can take is to ensure they have proper financial information.
What this consists of will depend on the size and complexity of their business, but the costs associated with it should be considered an investment in the business, not an expense.
So what happens when a smaller business starts experiencing difficulty? Well, this will depend on the way your business is set up.
If you are set up as a sole trader, all the business' liabilities are your own and you cannot avoid them.
Don't ignore your financial problems, Mr Tomlinson said.
Because of this, trading as a sole trader is not recommended where there is an element of risk associated with the business.
If you are a sole trader and your business gets into difficulty, the worst-case scenario can be your personal bankruptcy, which in turn may lead to the loss of your home and any other assets you have.
If the business is viable or if you have an asset (such as a house), an income or a third party willing to help you out, it may be possible for you to put forward an Individual Voluntary Arrangement (IVA) to your creditors.
This is done through an IP and involves reaching an agreement with your creditors as to how much you are going to pay them and over what period of time.
This may often result in the creditors accepting a settlement that is less than the amount owed, and in many cases will enable you to continue running your business.
If you are trading as a partnership, again the debts of the business are yours personally.
Debts arising in a partnership are known as 'joint and several', which means that the creditors can pursue their claims against any of the partners for the full amount due.
For partnerships in financial difficulty, a Partnership Voluntary Arrangement (PVA) may be feasible.
This is similar to an IVA except that this can be limited to the assets and liabilities of the partnership business, and there may be no requirement for the individual partners to contribute their own personal assets.
Like an IVA, the partnership may well be able to continue trading while the PVA is in place.
Finally, you may be trading as a director of a limited company.
In this case, the liabilities are those of the company, not you personally, unless you have signed any personal guarantees with your bank or any of your suppliers.
If the company gets into difficulty, this may result in it going into liquidation and closing down.
There are a number of different options available such as 'administration', where a new business may emerge from the old, or a Company Voluntary Arrangement, which is similar to the IVA and PVA mentioned above.
However your business is structured, an IP will be able to assess you own particular situation and advise you as to the most appropriate way forward.
Most IPs offer an initial consultation free of charge, so if you see the warning signs, do not delay.
When financial problems rear their head, the only thing that comes to those who wait is regret.
The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.