Warning Signs, bad debts (6)

Question 1

What are common symptoms of cash flows difficulties?

Answer 1

• Breaking an overdraft limit
• Frequent requests to increase overdraft limits
• Frequently revoking issued cheques
• Frequent requests from requests for status enquiring from other providers of finance
• Cheques made out in round amounts
• Hardcore debt in the overdraft
• Cross firing of cheques (can also indicate fraud)

Question 2

When a customer attempts to break an overdraft limit, what questions should the lending banker be asking themselves?

Answer 2

• What has caused the excess?
• Was this an error by the customer?
• If the business profit or loss making?
• Does the account swing from debit to credit?
• Is the trend of average balances worsening each month?
• Is there seasonality in the business?

Question 3

What is overtrading?

Answer 3

When a business expands to rapidly in relation to their capital resources that are available

Question 4

List the actions a bank can take in order to prevent business failure

Answer 4

1 -  Informal chat
2 - Formal facility review
3 - Facility restructure 
4 - Intensive care
5 - Lending review
6 - CCJ
7 - Insolvency action
8 - Liquidation (death)

Question 5

When hardcore debt is evident, what should the bank do?

Answer 5

Conduct a review of the facility and restructure it if necessary. Perhaps a term loan or factoring facility would be more appropriate

Question 6

When a business fails, what will a lending bank need to do?

Answer 6

The bank will obtain a judgement to seize and sell asset or obtain a charging order (allows for a charge to be attached to an asset)

Question 7

What action can the bank take in the event of a borrower defaulting on an unsecured debt?

Answer 7

The bank can obtain a charging order on the borrowers house. When the house is eventually sold, the bank is repaid before sales proceeds are passed to the seller.

What was a unsecured debt, becomes a secured debt

Question 8

What actions should the bank take before insolvency?

Answer 8

• Transfer the business to a specialist business support
• seek to negotiate / implement reduction in the outstanding debt
• Take additional security if possible (i.e. no debentures)
• Claim a charging order

Question 9

Under the lending code, If a banks internal systems indicate that a customer is in financial distress, what should the bank do?

Answer 9

• outline an approach to tackle the financial difficulty
• encourage the customer to contact the bank if they are worried about their position
• offer the customer appropriate and timely options to help reduce further financial deterioration
• direct the customer to free, independent monetary advice

Question 10

Under the lending code, If the customer is in financial distress, what form would the bank ask the customer to provide?

Answer 10

Asset, liabilities, income and expenditure (ALIE)

This will help the bank and customer create and action plan

Question 11

When the bank and customer review the ALIE form, what will they be looking to create

Answer 11

A repayment plan

Question 12

If a business is in distress, the bank may ask the business for more info, such as taking an independent financial review.

What will this include or highlight?

Answer 12

• opportunities for improving cash flow
• the main business activities or new markets
• the business’s investment needs or refinancing options
• any recommendations for the future

Question 13

The lending code states that banks should work positively with a customer to support the long lasting, successful running of the business, on the condition that that customer does what?

Answer 13

• acts in good faith
• keeps the bank informed
• keeps to the agreement they have with the bank
• carefully considers what advisory say
• is prepared to make changes early

Question 14

What is the aim of insolvency law?

Answer 14

To protect and balance the interest of the competing creditors when a debtor enters into financial difficulties

Question 15

Recently insolvency practitioners attitudes have changed towards companies in financial difficulty, how is this?

Answer 15

They are now more focussed on restructuring companies by restructuring facilities rather than closing the business down and selling its assets.

If the business is rescued the creditors are more likely to be repaid than if the business was liquidated

Question 16

What is the key objective for a company going into administration?

Answer 16

The key objective is to rescue the company

Question 17

The appointment of an administrator is designed to achieve what 3 targets?

Answer 17

1 - Rescue the company as a going concern,

2 -Achieve a better result for the creditors than if the company was closed down and assets sold

3 - Sell assets in order to pay a secured creditor

Question 18

What is a winding up petition?

Answer 18

When a creditor asks the court to close down a company

Question 19

Why would the court enforce a winding up petition?

Answer 19

To enable creditors to be paid or to stop a company making its debt position worse

Question 20

Once a company goes into liquidation, there is a freeze period called the statutory memorandum, what is this?

Answer 20

During the statutory memorandum period the company cannot go into liquidation (other than by the administrator)

Also no steps can be made to enforce security over the business unless authorised by the court. This is to allow the administrator to get on with their job

Question 21

The administrator must set aside a portion of proceeds from sales of assets under a floating charge. What is the portion called?

Answer 21

“The prescribed part”

Question 22

What is an administrator receiver and who can appoint them?

Answer 22

They can be only be appointed by someone with a floating charge of the business (signed before Sep 2003).

They act similar to a normal administrator but can only help act if a debenture has been broken and they can only influence assets under floating charge

Question 23

What is liquidation?

Answer 23

Where a company is wound up and assets sold and proceeds given to creditors.

Unlikely administration, liquidation is a terminal process

Question 24

What are the two ways a company can go into liquidation?

Answer 24

1 - Compulsory liquidation

2 - Voluntary liquidation

Question 25

Who can file for compulsory liquidation?

Answer 25

• A creditor who is owed debt

- A creditor who believes they can show that the company has become insolvent

Question 26

What is the definition of insolvency?

Answer 26

• Liabilities are more than assets (it owes more than it is owed)
• The business is unable to pay its debts when they fall due

Question 27

Who can trigger voluntary liquidation?

Answer 27

1 - The company expense

2 - Creditors voluntary liquidation

3 - Members voluntary liquidation

Question 28

What is required for creditors voluntary liquidation?

Answer 28

The company acknowledges it cannot pay its creditors, so it call a shareholder meeting.

The shareholders then vote yes/no to winding up the company, 75% yes required.

Question 29

What is required for member’s voluntary liquidation?

Answer 29

The company must be solvent and must be able to prove it will be able to satisfy its debts for the next 12 months

Question 30

Is there a freeze period where creditors cannot purse charges over assets when a company goes through voluntary liquidation?

Answer 30

No, but creditors or members can apply for a freeze period

Question 31

What are the two main differences between administrator receivership and fixed charge receivership?

Answer 31

• It is over a fixed charge

- Fixed charge receivership statutory powers are laid out in the law or property and not the insolvency act

Question 32

What is a Company Voluntary Agreement (CVA)?

Answer 32

When the company and its creditors agree amongst themselves who will be paid in what order

Question 33

What does a wind up petition trigger?

Answer 33

Compulsory liquidation

Question 34

What happens when a company goes into compulsory liqudiation?

Answer 34

First a official receiver is appointment who will later be replaced by an insolvency practitioner

Question 35

Does a Company voluntary arrangement need to to passed by anyone?

Answer 35

Yes, first the insolvency practitioner needs to confirm that the result of the agreement will be better than if the company goes into liquidation.

Then the shareholders need to pass a vote of 75% yes (by value)