In all insolvent liquidations the directors, most often with the assistance of an insolvency practitioner, prepare a statement of affairs which is provided to all creditors prior to the date of liquidation.
What is a statement of affairs?
The statement of affairs is similar to a company balance sheet and provides creditors with a picture of the level of the company’s indebtedness and the anticipated value of its assets. These two pieces of information combine to summarise the likely return to creditors during the insolvency process.
Unfortunately, it is often the case that the level of return available to unsecured non-preferential creditors (often this will include all consumer and trade creditors) is very low, if not zero, especially now that majority of HMRC claim ranks just above the unsecured creditors.
A company facing insolvency when it loses its main customer
A business local to one of the BRI offices was in financial difficultly. This was a company which, for over 15 years, had primarily provided a business-to-business services involving the re-manufacture, repair and servicing of original electrical manufactured automotive equipment i.e. stereo systems and other in-car electrical equipment.
The loss of a contract with its main customer had devastating consequences for the business and brought the future viability of it into question. In addition, a dispute regarding the runoff period for the contract being brought to an end and disputed invoices led to further financial pressure and stress for the business owners.
The director had made best endeavours to achieve a settlement with the main customer in order to bring the relationship to a close and ensure the company had funds to either keep trading, while seeking further clients, or potentially achieve an orderly winding down with all debts settled. However, as the dispute dragged on, it was necessary for the board to seek legal assistance. The company reached a tipping point where the possibility of achieving a satisfactory settlement, along with the prospect of settling all debts, became more and more faint. Even with the assistance of legal provision made available via funding from the company insurers, the director was unable to make good progress in reaching a settlement.
With the directors efforts focused on the dispute and little new business coming in, over time cash flow pressures mounted and an insolvency became more likely. When final attempts to achieve a recovery of sums owed failed, the director had little option to place the company into liquidation. The statement of affairs indicated that any recovery of the debt would be ‘uncertain’ with the prospect of any recovery very much in doubt given the already year-long pursuit of the outstanding sums.
How did BRI Business Recovery and Insolvency achieve a better outcome than the statement of affairs showed in this case at the outset?
This is where we were able to use our expertise to take up the reins and assist the company. First by assisting the director with placing the Company into a voluntary liquidation, before reviewing and taking up the claim against the former customer.
Years of experience in business insolvency meant that the appointed office holders from BRI were able to appreciate and consider the merits of the claim in order to form an opinion. In this case study, a quick decision was taken to immediately pass the paperwork relating to the disputed debt with the former client to an experienced insolvency solicitor. The solicitor, who was prepared to take on the matter on a contingency basis due to the good relationship with BRI and an appreciation of technical experience in these types situations, reviewed the matter and issued correspondence to the debtor shortly after the date of liquidation. Any period of delay was avoided which may have encouraged the other side to consider that the liquidation would mean attempts at recovery would limited.
The diligent review and detailed letter subsequently sent to the debtor immediately led to a promising dialogue with respect to a possible settlement. Despite the delays faced by the director prior to the date of liquidation and drawn-out discussions with the debtor, an offer of settlement was made by the debtor with less than three months having passed since the date of liquidation.
Shortly thereafter a compromised agreed settlement was reached. The liquidation estate is now in funds and creditors are in a much better position than they were only a few months ago when a settlement of the debt, which would produce a return to all classes of creditor, looked very unlikely.
Who has benefitted from the compromised settlement agreed by the BRI Business Recovery and Insolvency office holders?
Prior to a settlement of the majority debtor being agreed and paid it appeared that the most likely outcome in the liquidation would be that costs were met and only the ordinary preferential creditors (i.e. certain elements of employee claims) would receive any return.
Now, however, the ordinary preferential creditors will be paid in full, the secondary preferential creditor will be paid in full and there will also be a return to unsecured creditors. This represents a much better outcome than looked possible within the statement of affairs only a few months prior.
Acting in the creditors best interests
It is one of the fundamental duties of an office holder in insolvency procedures to act in the best interests of creditors. However, to achieve the best results possible takes knowledge, experience and good decision making. In this instance the speed, efficiency and level of detail achieved by the office holders and their instructed legal representatives ensured that an outcome was achieved which no doubt was in the best interests of creditors.
If you or your clients are facing any financial difficulty, please do not hesitate to contact the team at BRI. We will provide the right advice first time every time and even if we cannot help the company avoid liquidation, we can still ensure the best outcome possible for all parties. Contact us today.