The Scenario
Alan is a company director of a successful French food import business that he has been running for the past ten years (specialising in the various types of mange tout that are available). This company always has been successful and the cause of the problem was due to a second import business that Alan tried to set up, dealing with suppliers in Taiwan. The success of his first business was down to Alan's superb grasp of the French language and his subsequent failure in Taiwan was due to his non-existent knowledge of Taiwanese.
Alan thought he was getting a fantastic deal on 5,000 flat screen TVs for £100,000 (£20 each!!) and snapped up the lot by taking out 3 loans and maxing out 4 of his credit cards. Unfortunately, the fact that the TVs were plastic replica display TVs was lost in translation and Alan was left with huge amounts of useless stock. Alan's friend, Dave, kindly took the TVs for £10,000 (no one else would purchase them) but Alan has been left with £90,000 bill that he just can't afford to pay.
Alan earns about £65,000 from his French import business (after taxes), has a number of share options in the company and owns two properties (one in England and one in France). Both the properties have security in excess of 90% of the value of the houses and the house in France is rented out to cover the cost of the mortgage and maintenance fees.
How we could help
Cases like these are highly complex and each situation could be entirely different from another. We would need much more information before the best advice can be given. With the information at hand, however, these are the options available to Alan:
- IVA – This is definitely an option for Alan due to the level of debt and the fact that he is a Director of a company. The houses are likely to be unaffected due to the level of security against them.
- Negotiate with Creditors- Alan could explain the situation to his creditors and providing that he could prove that he can afford to pay them a reasonable amount, the creditors might accept this. It would be the best option if Alan thought that his income from his business is likely to increase in the near future.
- Debt Management – A possibility if Alan could afford to pay debts back in less than 5 years.
Examples of questions we may need to ask before advice can be given include:
- What does the business do? When did it start? Is is profitable? How many employees does it have?
- What is the debtor's stake in the business? Do they have any shares? Do they have any Director's Loans?
- Does the business have any assets (buildings, vehicles, machinery etc.)?
- Is the business' profits increasing year on year, remaining the same or decreasing?
For directors of companies, we also need slightly different information than regular traders:
- Last 3 Years of audited accounts.
- Company history
- Last Tax Return.
- 12 month cash flow forecast.
- Management Accounts.
Second Property?
A second property can make the procedure much more complicated. Creditors will not accept the debtor having a second property if, by not having the property, the creditors would receive more money. This means that if the property is not rented out and the rent is not covering the mortgage and maintenance, the creditors would expect the property to be sold to release monthly surplus.
To Trade or Not to Trade?
For the creditors to accept the IVA, the debtor must prove that the business can sustain a level of income that will support the debtor and allow them to make payments to the IVA. If the business in not making money or very little money and projections show that this is not going to increase then the best option for the debtor would be to wind up the business or stop trading and work for someone else. Often, however, the debt has been run up starting the business, because of a period of bad trading or due to illness. In these cases the business is usually profitable and if it can continue to be so an IVA is usually a good option (IVAs are specifically designed for traders / self-employed).
* Please note that all characters and scenarios described are fictional, and are purely for illustration purposes
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