Where have all the assets gone?

Whilst entrepreneurial flair and inventiveness will always mean that people will wish to create  new businesses, the current perceived wisdom appears to be that the one somewhat unavoidable effect of Covid-19 is that there will be more business closures than new ones opening over the next few months.

Many businesses will simply fade away, particularly those of a modest size, but when a business has assets of value, a formal insolvency procedure is often required in order to deal with the situation. When that happens, the insolvency practitioner “IP” has a duty to enquire about the company’s assets and report to creditors.

Feedback from creditors will often refer to the most recent balance sheet filed at companies house and ask what has happened to the assets shown therein. Of course, a company has 9 months from the year end date to file annual statutory accounts and the reality is that many companies are late in doing so, particularly if there are financial problems to address and attention is focused elsewhere. Even if the accounts are filed in a timely manner, they are unlikely to represent financial reality at date of liquidation e.g.

  1. Goodwill : whether purchased or created internally, the fact that the business has ceased due to insolvency usually suggests that there is little value left that someone else will pay for.
  2. IPR and patents : if these are up to date and suitably protected they may still not carry any value if there are counter-claims about ownership and/or a view that they do not provide the basis of creating value if bought by a third party.
  3. Plant and equipment : shown in the accounts at purchase cost less depreciation to date, but such carrying value rarely represents what the assets are worth in a forced sale. In any event, assets may have been sold in a recent period and the cash spent. Further, the balance sheet could show a large value for equipment but this is matched by a finance obligation in the balance sheet which means that there is no net value available upon liquidation.
  4. Book debts : if still on the books many months after being created, recoverability ( in full or on part ) is questionable.
  5. Overdrawn director’s loan account : if the director is a “man of straw” and has spent the money, the potential for recovery is decidedly slim.

These are just brief examples of why one cannot simply look at a set of accounts and draw immediate conclusions, and even when an asset has been identified, the value that might be recovered is often questionable.

The Insolvency Act 1986 “the act” gives the IP power to uplift the company’s accounting records, even if held by a third party. Indeed, the act makes it a criminal offence for a director to destroy/falsify/remove accounting records. In an ideal world, the IP would have early access to the company’s cash book, fixed asset summary and book debt listing so that they can be reviewed in order to direct enquiries about what can be realised. This will usually require assets to be valued independently in order to make sure that taking steps to sell something, or purse a book debt, will produce a net recovery to the estate.

Clearly, the IP will visit the company’s business location(s) and prepare an inventory of what is there, and ask the director/employees what assets may be located elsewhere. It is not unheard of for a director to seek to conceal assets e.g. a car or truck, in the hope that the IP will remain blissfully unaware of its existence. Thus, detailed enquiries are often required and steps taken to recover assets.

It is easy to talk about reviewing accounting records and asking a director for information, but what happens if there is limited cooperation ? The IP may need to consult with the company’s external accountant, ask creditors what they know of the business activity, obtain copy bank statements for review, or look at the company’s website/social media posts. Depending upon how quickly information can be obtained when cooperation is limited, the IP’s task of realising assets is unavoidably delayed. Frustration will often be expressed by creditors about the apparent lack of action, but without evidence of assets, the process can be slow.

Also, the IP may find that a company has created an unfair preference in favour of certain creditors e.g. settled some liabilities and ignored others, or made a gratuitous alienation e.g. transferred an asset to a third party at undervalue. In such circumstances, the IP will wish to piece together the transaction(s) and determine what can be done to repatriate asset value to the estate. Again, the process will invariably take time and creditors will require to be advised accordingly.

The conclusion is that one cannot take a simplistic view of assets e.g. from looking at an old balance sheet or working on the basis of what a company “appears” to own. Sometimes the sad fact is that there are no assets of consequence available to creditors, and there never were. In such circumstances, it is left to the IP to impart the bad news to creditors : not a pleasant task but one that has to be done.

The views in this article are those of Michael J M Reid, licensed insolvency practitioner and partner of Meston Reid & Co, chartered accountants, Aberdeen.  They do not purport to represent those of the firm in general.