Opinions Please

Bandara

Hi all,

Any suggestions or input that I can pass on would be greatly appreciated.

I'm helping out a friend who has found himself in serious difficulty in a convenience store he operates. He's only paid about 20% of his rent since January last year (with some agreement from the landlord) and has been unable to sell the business. He's losing money rapidly and has not been able to pay himself in almost a year. He is meeting with his landlord in the next few days and he feels that the writing is on the wall. (I told him the writing was obviously on the wall a long time ago). He believes he'll be asked to leave.

The biggest problem he has is that he owes a finance company approx 100K for the equipment in the shop. The stock will come close to covering what he owes suppliers, but he believes there will be a shortfall.

He's looking to get out with as little debt as possible. We had a chat about it and I've given whatever advice/pointers that I could to help. I would be interested to see what anyone else with experience in this situation had to say.

Obviously solicitors etc will be involved in the process but at this stage its more so about negiotations aimed at addressing the debt and keeping things to a managable level.

Cheers

HT.

EKRIUQ

Firstly, it’s a shame that so many businesses are finding it really difficult at the moment under current circumstances and you factor in the high rents and huge overheads that a convenience store operates under.

I’m only going on what I could do under this position and I’m sure others will have other ideas I don’t know the convenience store business that well, but I have other service and retail business’s.

Firstly I’m assuming that your friend is a limited company, so now is the time to use the advantage of being a limited company which means that he is only liable to the company’s assets which in this case is very little. With regards to the landlord I can’t see him coming after your friend as he probably hasn’t anything to get so will be happy to just get clean repossession of the building even though your friend could just stay there rent free until a court order to vacate which could take months. Not nice but can be done.

Have a good talk to an accountant doesn’t have to be his own account but can be a new account and go to him with all the details and leave him do most of the correspondence with creditors. This guy’s job won’t be looking after his accounts but more in the rounding up of the business. (May be a good idea to tell him your have provisions made for his bill)

Keep the suppliers that he really needs onside and keep them paid and hold off on the others until he’s ready to wound up and see what’s left in funds and then maybe offer them a portion and tell them to keep the remainder on account but don’t expect quick payment. If they refuse this tell them he’s winding up the company and they will have to join the list of other creditors, forget about sales reps now as being friends as he has to look after himself and will have to play hardball. I’m pretty sure there will be a shortfall but try to spread this out evenly among suppliers.

If he owes the finance company €100,000 this then means he owns the equipment which I’m guessing he’ll probably only get €25,000 resale value maybe low, but realistic.So the finance company should be the last to deal with and the hardest to get away from with out any damage to his credit but the company may as well get hit for a big amount instead of a small amount if hits going to get hit.

Firstly get your new accountant to write a letter detailing difficult times in the market and see can they reduce payments or maybe to a more manageable amount if they refuse this which is highly possible then time to play hardball again and inform them the company is going to severe financial difficulties and they may have to join the creditors list of a company with no money or they may need to renegotiate because a little is better than nothing and may keep your friend from getting into to much debt.

Sorry I rushed this answer a bit but just a couple of ideas, it’s not easy, any liquidation closure isn’t and he could be struck off as a director are all possibilities that I hope won’t happen

--amadeus--

The biggest issue is going to be the proportion of the debt that he has personally guaranteed. I know that when I took out loans to finance my start up I had to personally under-write the bank loans. Anything attached to teh Ltd Co can of course be folded into that Ltd Co on closure. It is highly possible that your friend will escape with nothing more than a hard lesson learned and a damaged reputation.

When a business gets into that level of difficulty the owner has to be 100% selfish - no sentiment, no best friends, no favour banks. Some people he knows and likes are going to be very peeved at him when they discover that he has left them high and dry and gone bad debt on them. He needs to ensure that every action he makes is primarily aimed at self protection. And on that note he needs to be careful that he doesn't get accused of reckless trading - in particular taking on debts that he has a reasonable idea he may not be able to pay. So ordering new stock at this point could well fall under that heading.

Be aware as well that a Ltd Co is not a 100% infallible protection. Some people attempt to close one insolvent Ltd Co but carry on trading under a different Ltd Co. If your friend attempts this - or anything similar - then the courts can "lift the veil of incorporation" so he needs to ensure that everything is as legally clear as possible from a debt assignment pov.

It sounds like this is terminal and the longer he goes on the worse things will get. As advised above he needs to get onto an insolvency specialist and get the business closed as cleanly as possible.

Bandara

Thanks lads, very very helpful stuff that I'd never have considered

Anyone else with any comments?

elgransenor

He needs to consider the possibility of reckless and or fraudulent trading if he has a company and runs the risk of disqualification and/or restriction as director for a few years if he knowingly continues trading whilst technically insolvent.

He needs to consider not just the difficult situation he is in now but if he is a young man he will want to get the show on the road again down the road.

He needs to speak to a solicitor or accountant or both imho.

Darragh29

Hi HT,

My two cents worth is that he is in kind of deep with the figures involved. Can I ask if he has if he examined why the business is not working for him??? Is there any way that this can be turned around??? Is he in the wrong location or what is the reason for the business not being viable now???

DubTony

--amadeus-- wrote: »

The biggest issue is going to be the proportion of the debt that he has personally guaranteed. I know that when I took out loans to finance my start up I had to personally under-write the bank loans. Anything attached to teh Ltd Co can of course be folded into that Ltd Co on closure. It is highly possible that your friend will escape with nothing more than a hard lesson learned and a damaged reputation.

If my experience is anything to go by he'll have personally guaranteed everything except utilities and rates. The banks give nothing without personal guarantees, especially on refrigeration and shelving, as they're practically worthless (20-25% of original value if in good condition) once installed. I'd imagine labour has a lot to do with that.

He needs to ensure that every action he makes is primarily aimed at self protection. And on that note he needs to be careful that he doesn't get accused of reckless trading - in particular taking on debts that he has a reasonable idea he may not be able to pay. So ordering new stock at this point could well fall under that heading.

So are you saying that if a guy is operating a business at a loss, as this fellah seems to be doing, and tries to keep his business going in the hope it will turn around he can be accused of this? Seems a bit tough to me. Don't most business owners do their best to keep going? Surely just sitting back and doing nothing would be more of a "crime".

DubTony

Hammertime wrote: »

I'm helping out a friend who has found himself in serious difficulty in a convenience store he operates. ......... He believes he'll be asked to leave.

If he's asked to leave does that release him of any obligations he may have with regard to a lease on the property (if he has one)?

--amadeus--

DubTony wrote: »

If my experience is anything to go by he'll have personally guaranteed everything except utilities and rates. The banks give nothing without personal guarantees, especially on refrigeration and shelving, as they're practically worthless (20-25% of original value if in good condition) once installed. I'd imagine labour has a lot to do with that.



So are you saying that if a guy is operating a business at a loss, as this fellah seems to be doing, and tries to keep his business going in the hope it will turn around he can be accused of this? Seems a bit tough to me. Don't most business owners do their best to keep going? Surely just sitting back and doing nothing would be more of a "crime".

Yea - I leased equipment and had to guarantee it, not being from a retail background I didn't know if he could have got the fixtures from a specialist on HP without a personal guarantee. Long shot though.

On reckless trading I am no expert and you would need a solicitor for a definitive answer but I understand it works on "reasonable person interpretation". As in would a reasonable but impartial observer consider teh actions reckless?

So a well financed business with cash reserves (or access to funding) suffering losses in low season but with expectations of a seasonal upswing wouldn't be reckless if it went under. Likewise if a business had made obvious efforts to cut costs, continued trading at a loss and then folded. However if a business has significant debt (long and short term), is running at a loss and has minimal seasonal variation and teh owner decides to order a load of new stock and advertising on credit in the hope that sales miraculously pick up is a different matter - in that case it might be safe to say that a reasonable person would have know that wouldn't work and the actions are reckless.

It's often a threat thrown around by those owed money when a business is closing to try and get as much out as possible "pay up or I'll report you for reckless trading". It's a good threat because it works.

Darragh29

DubTony wrote: »

So are you saying that if a guy is operating a business at a loss, as this fellah seems to be doing, and tries to keep his business going in the hope it will turn around he can be accused of this? Seems a bit tough to me. Don't most business owners do their best to keep going? Surely just sitting back and doing nothing would be more of a "crime".

I agree with you there Tony. There is a long road to be travelled between genuinely trying to cope with an unprofitable business and arriving at a point where you could be guilty of reckless trading. As far as I know, reckless trading is more to do with using the business for personal gain at the expense of the viability of the business operation. For example, if you were drawing a lot of money from the business or arranging directors loans for the business when the business was not profitable enough to sustain this. This is reckless trading, but there is no way that every instance of failure, can be taken to mean that the director has traded recklessly. If this was the case, 80% of us would be guilty of reckless trading!

Hammertime, I think that your friend at some stage looked at this business and saw it as having enough potential to invest in. Obviously there are current trading problems, but is there a case to be made at all for getting out a clean sheet and seeing if the books can be balanced???

His landlord might not be as quick to throw him out as he might think, 'cos I doubt there will be a queue of people lining up to rent the premises in the currrent climate.

elgransenor

--amadeus-- wrote: »

Yea - I leased equipment and had to guarantee it, not being from a retail background I didn't know if he could have got the fixtures from a specialist on HP without a personal guarantee. Long shot though.

On reckless trading I am no expert and you would need a solicitor for a definitive answer but I understand it works on "reasonable person interpretation". As in would a reasonable but impartial observer consider teh actions reckless?

So a well financed business with cash reserves (or access to funding) suffering losses in low season but with expectations of a seasonal upswing wouldn't be reckless if it went under. Likewise if a business had made obvious efforts to cut costs, continued trading at a loss and then folded. However if a business has significant debt (long and short term), is running at a loss and has minimal seasonal variation and teh owner decides to order a load of new stock and advertising on credit in the hope that sales miraculously pick up is a different matter - in that case it might be safe to say that a reasonable person would have know that wouldn't work and the actions are reckless.

It's often a threat thrown around by those owed money when a business is closing to try and get as much out as possible "pay up or I'll report you for reckless trading". It's a good threat because it works.

The critical feature of reckless trading is if it can be shown that the directors have caused the co. to continue to incur debts without having reasonable grounds to believe that the co. would be able to pay its debts as they fell due.

If a director is found to have done so he can be made personally liable for the debts of the company in addition to being disqualified as a director.

The aim is to protect creditors.

If your brother/sister mortgages the house to start start a bakery and gets his first big contract.........which involves supplying a guy in a c store trading recklessly and ultimately your brother/sister gets stung it is not a defence to claim 'ah sure I was doing my best'.

The brother/sister with the bakery is doing his best too and doesn't deserve to be screwed by a director of a company, who has the responsibilities and obligations laid down by law.

I won't even go on to Fraudulent trading.

You might think this is far fetched but if this business goes down then a liquidator will have statutory resposibilities and duties, one of which will be to move to have the director disqualified,at least.

--amadeus--

Excellent reply. Darragh the example you gave was more around fraudulent than reckless trading. As stated above if you take out a line of credit and have even a suspicion that you won't be able to repay it then you are leaving yourself open to a reckless trading claim. It's actually there for the protection of us all.

Darragh29

--amadeus-- wrote: »

Excellent reply. Darragh the example you gave was more around fraudulent than reckless trading. As stated above if you take out a line of credit and have even a suspicion that you won't be able to repay it then you are leaving yourself open to a reckless trading claim. It's actually there for the protection of us all.

I wouldn't necessarily agree with that point because there is a view that I would subscribe to, that if you applied that standard of approach to business, then you should never start out at all, because you are after all taking on a risk. In an ideal world, you would always be capitalised to be able to honour all your debts if they fell due immediately, but in the current climate I think that is completely out the window for a start. Also, if you waited for every I to be dotted and T to be crossed in terms of your finances before starting up, I doubt many people would ever take the jump...

You are entitled to fail for genuine albeit unforeseen reasons I think.

--amadeus--

Darragh29 wrote: »

You are entitled to fail for genuine albeit unforeseen reasons I think.

Absolutely agree on the last part. But it's teh calculated risk part that separates "genuine albeit unforeseen reasons" from reckless.

Of course you take a risk when you open the doors. But you have a plan on how you will manage your cashflow. I spend X, apply markup Y, make Z and Z allows me to repay X. Now if nobody buys at that price point and you go under then that's sad but that's life.

If though you start the year knowing that last year you lost (for example) €50k last year, that sales will be down this year, costs will be up and that you already owe a supplier €25k and repayment is so late they are refusing to release new stock to you. If you then went to a new supplier and ordered another €25k of stock then - IMO - you are trading recklessly, irrespective of if you personally profit from teh transactions. The legislation is there to stop you playing fast and loose with other peoples money.

mistermarketing

Looks like its a job for the liquidator...

I hope he isn't one of these guys who have a flailing company but is still drawing high wages from the company despite its credit position.

I mean he's paying 20% rent, because of this non existent expense he is likely to be making some profit, and if so i hope its ethically going to creditors, and he is not paying it to himself.

It is amazing to see some CEO's of not profitable, investment based companies/or companies who owe €€€'s to creditors, who still draw 100k plus as a paycheque each year, from the funds invested by investors.

(p.s no offence meant, im sure your friend is not as above, i was just making the point, as such happens alot)

WhaLofShi

All this talk of reckless trading. Lads, according to the OP the guy isn't even paying himself. In that position I'd be gone. But there are debts to consider. I've seen guys struggle on believing that things will pick up. Innocent businessmen trying their best to work their way of the situation they're in. If he was out there talking fancy holidays and living it up at the weekends (like that restaurateur the dead model was with), we could talk about reckless trading all day, but he doesn't even pay himself.

I'd say he needs to make a deal with his landlord if he has a lease, but with 100K debt on the equipment alone, he won't get away from that too easily.