PrintSpeak survival guide: avoiding wrongful trading

nil recessus carborundorum

success story...

avoiding wrongful trading

This week’s success story is about a managing director who was unaware of changed legislation and found himself on the brink of wrongful trading. The BPIF Financial Alliance gave good advice to help him avoid a disqualification order.

This printer, based in the south-west, is a family-owned label printer with a thirty-year history and 26 employees. When the business hit some financial difficulties at the outset of what was still then called ‘the credit crunch’, the managing director and his

brother-in-law, the operations director, decided to invest £250,000 in a new combination narrow-web press for inline processing as a way of offering cheaper unit costs and attracting more volume.

No solid financial information

But while the business reasoning behind this was sound, the financial reasoning was not. Another family member looked after the company’s accounts, but there was no finance director – and the lack of solid financial information meant that the MD and the operations director were at real risk of taking on a debt that they might reasonably have known there was no prospect of repaying. This, in the eyes of the law, is wrongful trading, and the MD was risking both personal liability and a disqualification order.

The lack of solid financial information meant that the company was about to take on a debt that there was no prospect of repaying

The MD had got as far as seeing demos of the press he wanted to buy when the accounts manager called his attention to recent cashflow forecasts. This made him realise that his plan to finance the press was unrealistic; more than this, in fact, the company was facing insolvency within a few months.

State of shock

In a state of shock, the managing director called the BPIF, whose Financial Alliance offered advice about where to go next.

The first thing the consultant suggested was that the company should invest some time and money in producing accurate cashflow projections, with both incoming and outgoing cash streams plotted against dates; he spent some time with the accounts manager, showing her the necessary skills to do this.

Careful trading

Once they had been produced, the projections allowed the company to get a proper handle on its finances, and confirmed that insolvency was not as imminent as the MD had thought; in fact, with careful trading and efficiency savings, it might be avoided altogether.

Despite the good news, the consultant advised against purchasing the press and instead recommended a programme of manufacturing process improvement conducted by Vision in Print, “which was nowhere near as glamorous, but helped to get us back onto a decent financial footing – and didn’t cost the earth,” said the MD.

Back from the brink

The consultants also recommended appointing an appropriately qualified finance director, which the MD duly did. The combined measures pulled the company back from the brink of insolvency, and today it continues to trade with a better foundation for success.

what is...

avoiding wrongful trading?

At times of economic difficulty, even the most skilled company directors can be at risk of wrongful trading, says Marcus Clifford of the BPIF Financial Alliance

A company director can be called to defend a charge of wrongful trading if they incur a liability after becoming aware (or if they ought to have been aware) that the company cannot meet that liability. This means the directors are acting against their duty to the company’s creditors and shareholders to minimise potential loss

Minimising the risk of wrongful trading can be helped by seeking advice as soon as the directors are aware that the company is in financial difficulties. Advice should be recorded in writing, together with details of its source

Another mitigating step can be to keep up-to-date financial information, including good cashflow projections with projected implications in meeting the payment of due bills

Hold regular board/directors’ meetings and make sure that decisions and their reasoning are recorded

If insolvency looks imminent, this should be brought to the attention of the board and directors without delay; in these circumstances, almost without exception, the company should not incur new liabilities

If insolvency looks imminent, take every step with a view to minimising the potential loss to the company’s creditors and shareholders; make sure this is recorded and documented

When a company is insolvent, directors’ duties and responsibilities change, and in particular a director’s duty to creditors overrides all other fiduciary duties. Seek specialist advice from a qualified insolvency practitioner on this score

who can benefit from...

avoiding wrongful trading?

Clearly, every director will want to avoid wrongful trading – but there are some situations where it’s hard to steer clear

Trading in difficult times calls up the question of directors’ fiduciary responsibilities. Legislative requirements concerning wrongful trading are now quite onerous, and there are specific risks that directors must be aware of when incurring liabilities – such as new equipment or new premises – in times of financial difficulty

Directors whose survival strategy is to spend their way out of recession may be at risk of wrongful trading, by incurring debts that the company’s cashflow projections suggest may not be supported by incoming revenue

Take advice from a specialist consultant or insolvency practitioner, even when insolvency is not staring you in the face. Often things may not be as bad as initially feared; many consultants have been called into a disaster zone and walked away from a healthily trading company – but it takes an expert to sort it out

Often the problems that lead to wrongful trading are underlying and endemic. A programme of process improvement can help maximise efficiency while costing very little

Welcome to the PrintSpeak Printers' Survival Guide - helping you to ride out the recession

The pages of the printing trade press have recently read like a Domesday roll-call of print's great and formerly glorious. Who could have predicted the failure of Borcombe SP, Kelvin Print Group, Quebecor, Capital, Printhaus, Butler and Tanner, Celloglas and more? With margins on print lower than they've ever been, the current global economic crisis is magnifying the cracks in every print business model.

But for every bad news story, there are plenty of success stories. Here at PrintSpeak, we decided to pull together a weekly newsletter looking at printers who recently hit a sticky patch - and what pulled them through. We hope it will provide our readers with food for thought. A struggling business is not necessarily a failing one - and knowing who to call is half the battle. In the coming weeks we'll be looking at subjects including factoring, debt collection, credit management, VIAMBOs, cost rate reviewing, credit insurance, financial restructuring and more - building a library of business know-how and giving you the contacts and knowledge to ride out the recession.

Karen Charlesworth
Publisher, PrintSpeak
karen@printspeak.co.uk