Finance – Text
Check unknown vocabulary before you read the text:
from scratch – from nothing; without resources
nil – nothing; zero; having no value or existence
out of the blue – suddenly and unexpectedly
dispute – argue or debate about; discuss
overdraft – the amount of money by which a bank account is overdrawn
goodwill – friendly disposition; benevolence; kindness
Winding Up Petition – Compulsory winding-up is a legal process by which a liquidator is appointed by order of the Court to 'wind up' the affairs of a limited company. At the end of the process the company ceases to exist. Winding up does not mean that the creditors of the company will necessarily get paid. The purpose of winding up a company is to ensure that all the company's affairs have been dealt with properly.
to appoint – to name or assign to a position, an office, or the like; designate
administrative receivers – administrative receivership is a procedure in common law countries whereby a creditor can enforce security against a company's assets in an effort to obtain repayment of the secured debt.
debenture – a certificate or voucher acknowledging a debt
skeleton – something reduced to its essential parts
to assume – take or accept as true
Brumark – the Brumark case stated that unless the proceeds of invoices were placed into a separate (blocked) account the banks could not rely on their fixed charge and such debtors were only covered by a floating charge.
bleak – without hope or encouragement; depressing
to ensue – follow as a consequence; result
WHEN ALL GOES WRONG
A Company Director in his 50th year had built a company from scratch to an annual turnover of £5-6M. The company enjoyed a good reputation for quality and the MD was well known in his industry and sat on various committees in his professional capacity. They say bad luck happens in threes.
Firstly, a large contract the Company had been working on went horribly wrong. Secondly, a key client that the Company had been dealing with suddenly went into liquidation owing them £130,000. Realistically a Nil realization is expected from that insolvency. Thirdly, out of the blue another large client is disputing his bill.
In six months the company has gone from trading comfortably and well to having a real cash flow shortage of £200,000-£500,000.The Bank, which only last year confirmed that it wanted to lend more money to the Company, has gone in the complete other direction and is now talking of lowering the overdraft limit and requiring more security. The Company Director borrows £50,000 from his pension fund and £100,000 over many months from his house and credit cards to re-invest in the business. He sees some financial consultants and starts to realize – too late – that he went to the wrong people. He ages 5 years in 3 months, because he is not sleeping, and spends his time fire fighting and not running his business.
THE EFFECT
He has managed to keep his suppliers' goodwill by constantly updating them, until, without warning, a Winding Up Petition is served by a company which is only owed a relatively small amount, but they are then joined by another creditor. The petition is advertised to go to court in 4 weeks' time. The bank find out on the Wednesday, 2 days after the petition is advertised, and immediately appoint Administrative Receivers under their debenture. All staff are dismissed on the Thursday morning apart from 6skeleton staff.
THE RESULT (FOR THE DIRECTOR)
His income stream is stopped. No salaries are paid into his account. This leaves him with personal problems regarding mortgage, household bills, school fees, and credit cards (increased by his putting money into the company). The bank calls his personal guarantee. He has always assumed that the bank's debenture over book debts will cover the facilities. The bank advises him of the ruling in 'Brumark' and advises him that as a result of this they may not be paid out in full, or at all. His financial future is totallybleak as there is no income. Marital problems ensue.
The company liquidator asks for all loans the Director had repaid to himself, family and friends, in respect of money he had lent to the company over the last two years, to be refunded to the liquidator due to the preference rules.