List creditors and minimise debts

CPAG

List creditors and minimise debts

List creditors

Consider the client’s overall situation. Gather information about any personal and business debts for which the client is liable. If the client is a director of a limited company, check whether the client has given any personal guarantees for any limited company debts and whether any guarantees have been called in.

Minimise debts by ceasing to trade

You should not attempt to advise a limited company (or limited liability partnership) on ceasing to trade. That is an area that requires specialist advice.

If a client runs a business but is seriously in debt, they should consider whether to continue trading. The client needs to consider whether the business can improve its situation and trade out of its financial difficulties or, if the situation is unlikely to change, will trading on just increase indebtedness? If the business is a limited company, continuing to trade when there is no realistic chance that the insolvent company can trade out of its difficulties could be deemed an offence at a later stage (and the director(s) could be held liable).

Deciding whether to trade on is a complex area and specialist help should always be sought from a specialist business adviser, such as Business Debtline or the business’s bookkeeper or accountant. Again, a friendly insolvency practitioner may be able to help here.

To help with the process, you can assist the client in drawing up a business financial statement. The business financial statement is similar to the personal financial statement drawn up for the client, except that it deals with the income and outgoings of the business.

If the business financial statement shows that nothing is available for the client to take as an income from the business, and that is unlikely to change, this usually indicates that trading needs to stop. However, the client must obtain specialist advice before taking such a major step. This is because several issues, such as liability for tax or payments due under a business lease, could make the difference between viability and insolvency.

Business assets

Self-employed clients also need to look at any available assets to the business and consider how this affects the business’s viability. The types of assets that a business has varies from business to business. You can help the client to prepare a list of assets by examining their individual circumstances.

Consider the approximate resale value of equipment or machinery. This amount will be different from amounts shown in professionally produced accounts, where the ‘book value’ may be based on the original cost of an item and its theoretical life.

Check if the business has work in hand and consider the contractual status of any agreement. For instance, a painter and decorator may have agreed in the autumn to paint the exterior of an existing customer’s house the following spring. If the customer loses their job during the winter, without any binding agreement, the work may not go ahead.

Lease agreements

Valuing a lease for business premises is complex and can only be accurately assessed by a professional. Leased business premises are not valued in the same way as domestic premises. The shorter the period that the lease has left to run, the less likely it is to be of any value. Also, if no one is prepared to take over the lease, that might create a liability rather than an asset because the tenant remains liable for the rent until the lease expires. Also, the client may remain liable for rent payments under the lease even when they have arranged for the lease to be ‘assigned’ to someone else, if that person fails to pay.

Items like cars and vans should be valued at the price likely to be obtained at auction rather than a price an optimist might expect to get from a private sale. Various used car price guides are available online and from newsagents that give a trade price for reasonably modern cars and vans – eg, . These can be used as a guide.

Debts owed to the business

Check if the business has any debts owed to it and assess the likelihood of the business being paid. Draw up a list of payments that the business expects to receive. Consider signposting the client to specialist business advice on recovering monies that are owed to the business.

Assets owned by the business

A realistic value for any business premises that are owned should be sought. Ideally, a specialist, such as a local estate agent, should do this. However, because there is likely to be a fee for the valuation of business premises, a client’s estimate of value may have to be accepted in some cases. Business premises are particularly susceptible to a fall in value caused by developments in the local area. For instance, the opening of a new supermarket could cause the collapse of a local general store (due to reduced trade) and a corresponding fall in the value of the business premises. Circumstances outside of the business’s control can reduce the value of its assets and the protection that the assets would otherwise have provided from financial problems.

If a client is trading as a partner in a business partnership

This section gives an overview of issues to consider if a partner in a business partnership wants to cease trading. This is a complex area of advice. Clients should be signposted to specialist advice to help make sure that they do all they can to limit their personal liability for any partnership debts.

The decision to stop trading may not rest solely with the client if they are a partner in a business partnership. If the client wants to stop trading but the other partners do not, the client should make sure that they formally end (severs) any written partnership agreement. This will help limit the client’s liability for partnership debts to those accrued during the period they were a partner.

If a partnership has been set up informally and there is no partnership agreement to set out how the client can leave, the Partnership Act 1890 applies. The client should seek legal advice so that an agreement can be drawn up to end their links to the partnership.

Other ways to determine if a partnership exists is to look at the bank accounts and see whose name they are in. Previous tax returns can also help here.

A client should also seek legal advice to see if there are any viable ways to limit their liability for the partnership’s debts and protect themself from future claims. For example, a client could ask the partnership creditors and the remaining partners if they agree in writing that the client is not liable for any debts that subsequently come to light and relate to the period the client was a partner.

A client who wants to leave a business partnership should also give the partnership’s creditors notice that they have left the partnership. The client’s name should be removed from the partnership’s paperwork.

Sometimes informal business partnerships exist between people with personal relationships, such as married or cohabiting couples. In these cases, ending the personal relationship can prompt a need to end the business partnership. Without a written partnership agreement, either party can usually enter into contracts on behalf of the partnership, for which both partners are jointly and severally liable.

Although the same advice applies to these clients, it should be recognised that the couple’s previous relationship may complicate matters. In some cases, it may also limit the amount of information that is available to the client. This is often the case when one partner has made most of the business decisions and the other partner sees themself as a ‘sleeping partner’. The sleeping partner may be unaware of their joint and several liability for the partnership debts.

Minimise other debts

Banks may secure business borrowings against a person’s home.

Sometimes the security is not enforceable if the agreement was entered into as a result of undue influence or misrepresentation by the creditor or another client. This may occur if a person, who is not the borrower, is asked to agree to a charge (security) being made on a property that they either jointly own or have an interest in (perhaps because they live with the owner).

In one case, it was decided that a charge was not enforceable when a client’s wife had signed it but had not been recommended to take separate legal advice and had been told that her husband’s business would be closed down by the bank if she did not do so.1Royal Bank of Scotland v Etridge [2001] UKHL 44; [2002] HLR 4 The law is complex in this area.

If undue influence or other wrongdoing occurred when the security was signed, specialist or legal advice should be obtained.

The debts owed by a self-employed person may include tax debts. If a client is unsure whether they have taken into account all the allowances available to them personally and to the business, signpost to an accountant or bookkeeper for specialist advice. You will also need to refer the client for specialist help (eg, from TaxAid2) if they have failed to submit tax returns.

1 Royal Bank of Scotland v Etridge [2001] UKHL 44; [2002] HLR 4 »

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