What is a Notice of Intention and What Does it Mean for Creditors?

Due to rising inflation rates, interest rates and considerable uncertainty within the construction industry, insolvency rates have increased. Specifically within the construction industry we have seen an increase in the appointment of Administrators and an increasing number of Notices of Intent to appoint Administrators. 

The number of administrations for September 2023 in comparison to September 2022 rose by 47% (Click here to read more about September 2023 Statistics). 

Administration may allow the company to trade out of insolvency opposed to the alternative option, liquidation. What does this have to do with a Notice of Intention? We explain below. 

What is a Notice of Intention?

A Notice of Intention (NOI)  is filed either by a company, its directors or a floating charge holder (usually a bank) outlining that they wish to enter the company into Administration if an immediate solution to the company’s financial problems cannot be found. The notice which is filed at court contains details of the intended insolvency practitioners should the company enter into administration.

How does this affect the company’s creditors? 

Once the notice has been filed, a protective dome (Moratorium) is placed over the company. This safeguards the company from any creditors wishing to take legal action, including issuing a Winding-up Petition, against the company in order to recover their overdue balance without express permission from the court. This can be a powerful tool for a company in financial distress as it provides a breathing space to allow them time to resolve the company’s financial situation, for example selling part of or all of the company to raise funds or to find a licensed insolvency practitioner to handle the Administration proceedings. 

How long does the Notice of Intention last?

This moratorium lasts for 10 business days. It is possible for the company to apply for an extension and gain an additional 10 business days, as long as the court deems the extension in favour of the creditors and that the moratorium is not being abused for the companies benefit, for example, avoiding legal action taken by creditors.  

Once the Notice of Intention expires and provided that no additional notice of intention or appointment has been filed, a creditor can continue to take legal action. It is worth noting however, that the company may not have the funds to pay the full balance owed and this should be taken into consideration.

When can’t a notice of intention be filed?

A Notice of Intention cannot be filed if the company has entered into Administration within the last 12 months or a Winding-up Petition has already been filed against the company. 

Are there any disadvantages for the company?

The Notice of Intention is a very public event and can damage the company’s reputation and its ability to continue trading with suppliers and clients who are aware of the notice and therefore the company’s financial difficulties. 

Is Court Action The Best Way Forward?

Number of Judgments Increasing

On 7th September 2023, the Ministry of Justice released their quarterly statistics for the second quarter of 2023, covering the period from April to June 2023.

During this period a total of 276,965 judgments were secured, marking an increase of 11,679 when compared to the previous quarter, which spanned from January to March 2023. It’s noteworthy that this figure represents the highest number of judgments secured since July to September 2021 when 285,560 secured judgments were registered.

Default Judgments

If the defendant fails to respond to the claim served to them within the 14 day period either by filing an acknowledgment of service providing them with an additional 14 days to raise their defence or by disputing the claim, then the judgment will be secured by default.

Out of the 276,965 judgments raised, 255,649 judgments (approximately 92%) were default judgments, an increase of 15,235 when compared to the prior quarter. Again this is the highest number of default judgments since July to September 2021 when 260,780 default judgments were secured.

Defended Cases 

In cases where a defence is raised, both the claimant and defendant will receive a directors questionnaire. A judge will then assess the value of the debt as well as the completed questionnaires and will provide a decision on whether the claim should be treated as a small claim, placed on multi-track or placed on fast track. The difference between these three routes are as follows

The Different Court Tracks

Small Claims Track: Usually cases under £10,000, once the claim has been defended the costs cannot be recovered, if the claimant wins the case, they can however recover the court fee and solicitors cost for issuing the claim.

The statistics show that for the second quarter of 2023, 10,264 claims were classified as small claims. Which is a reduction of 1,585 compared to the previous quarter where there were 11,849 small claims. Despite the decrease in the number of small claims, the average time between the small claim being issued and the trial has increased to 52.3 weeks marking the longest lead time recorded since prior to 2009.

Fast Track (don’t be fooled by the name): These are usually cases over £10,000 but under £25,000. The cost for defending the claim can be recovered, however the costs will be assessed at the final hearing by a judge provided that the costs are reasonable.

Multi-Track: Usually cases over £25,000, costs can be recovered. An estimate is provided at the beginning of the claim, however no additional costs can be added on to the balance once the estimate has been provided to the court.

For fast track and multi-track trials, there has been a decrease of 542 claims issued, decreasing from 3,671 issued in the first quarter of 2023 to 3,129 in the second quarter. It is important to note however, in the third quarter of 2022 (July to September) the number of multi-track and fast track claims had decreased from 3,354 to 3,181 before sharply rising again in the first quarter of 2023.

The lead time between issuing a claim and trial for fast track and multi-track claims stands at a staggering 78.2 weeks, a slight decrease from the 80.2 weeks reported in the first quarter of 2023. This marks the first decrease in this figure since January to March 2022.

Enforcing a Judgment & Current Time Frames

Once judgment has been obtained, it becomes possible to enforce it. If the judgment amount is below £600, it can be enforced by County Court Bailiffs, while amounts exceeding £600 can be enforced either by a Bailiff or High Court Enforcement Officer and amounts over £5000 can only be enforced by a High Court Enforcement Officer.

A High Court Enforcement Officer (HCEO) operates under a writ of control and County Court Bailiffs under a warrant of control. In the period from April to June 2023, a total of 78,340 warrants were issued. This marks a substantial increase of 6,390, in comparison to the previous quarter where 71,348 warrants were issued. This is the highest number of warrants issued since January to March 2020.

Conclusion

In conclusion, the information above highlights the challenges with pursuing legal action, especially if the claim is defended. For small claims, the average lead time from issue to trial has reached its highest point in over a decade.

In the event that a judgment is secured, it does not guarantee payment, even if the judgment is enforced and it does not make the claimant a secured creditor should the debtor company enter into insolvency. 

It is also highly important to consider the financial implications for both the claimant and defendant as defended claims can result in substantial expenses for both parties. We strongly recommend conducting a comprehensive credit check and an insolvency check on the debtor company before embarking on legal action. If the debt is disputed or is likely to be disputed, it may be more cost effective to consider an alternative route such as debt recovery before pursuing court action. 

This proactive approach to due diligence is essential in making well-informed decisions regarding the suitability of pursuing legal action, especially in light of the ongoing upward trend in insolvency rates. This can aid in avoiding unnecessary costs and ensuring that the chosen legal route aligns with your specific circumstances and objectives.  

On Friday 13^th October the latest Insolvency Statistics for September 2023 were announced. Below, we shed light on how these statistics may impact you and your business.

Company Insolvencies

Year on Year Comparison

Company Insolvency has risen by 17% in September 2023 when compared to September 2022. The total number of company insolvencies in September was 1,967, let’s break that down.

For the month of September there were 1,576 Company Voluntary Liquidations, 255 Compulsory Liquidations, 11 Company Voluntary Arrangements and 125 Administrations.

Administration has increased by 47% when compared to September 2022, followed by an 19% increase in Compulsory Liquidations, 14% increase in Creditors Voluntary Liquidations (CVL’s) and lastly there was the same number of Company Voluntary Arrangements (CVA’s) as the same month in the previous year.

A Month on Month View

Compared to August 2023, insolvency rates for the month of September have decreased. In August 2023, 2,308 registered company insolvencies were reported 732 more than September 2023.

A decrease in CVL’s by 304 and Administrations by 70 can be seen when comparing the September 2023 statistics to the August 2023 statistics. The only increase in September 2023 comes from Compulsory Liquidations where we can see an increase of 34 and this may partly be due to the rising number of Winding-Up petitions that are presented by HMRC.

Quarterly Overview

The decrease of Insolvency figures in September 2023 provide a positive outlook however there has been a net increase of 242 Insolvency cases for this last quarter July to September 2023 and therefore insolvency levels are still increasing despite the decrease of insolvency cases in September.

Individual Insolvency

Year on Year Comparison

In September 2023, there were 7,271 individual insolvencies, a decrease of 27% when compared to September 2022.

The total number consists of 671 Bankruptcies, 2,913 Debt Relief Orders and 3,687 Individual Voluntary Arrangements (IVA’s).

The majority of the decrease in individual insolvency cases for September 2023, comes from a large decline of Individual Voluntary Arrangements, in September 2023, there was less than half of the amount of Individual Voluntary Arrangements in comparison to September 2022.

Month on Month View

Small increases in Bankruptcies and Debt Relief Orders can be seen when comparing September 2023 to August 2023. However Individual Voluntary Arrangements have continued to decrease by 1487.

Quarterly Overview

Over the previous quarter July – September 2023, there has been an overall decrease of 1020 in the number of cases of individual insolvency and this is due to the decline in Individual Voluntary Arrangements which have decreased by 1294 cases over the quarter.

Conclusion

Company insolvency continues to climb with Company Voluntary Liquidations and Compulsory Liquidations increasing mostly overall.

The decrease in individual insolvencies is generally positive, indicating a potential improvement in the financial well-being of individuals. However, the decline in Individual Voluntary Arrangements suggests fewer people are opting for this debt resolution method, which might have implications for creditors in recovering overdue funds.

In conclusion, now is the time to closely monitor clients and key supplier accounts, review your credit management tools and processes and consider implementing if you do not already, the use of a credit reference agency.

According to a recent survey conducted by Top Service Ltd, 85% of individuals employed in credit management did not initially plan for it to be their chosen career path. A significant number of individuals working in credit management express feelings of being undervalued. In some cases, they believe that the sales function within a business receives more acknowledgment and appreciation, despite the fact that the challenges of reducing risk & maintaining cash flow are equally demanding.

Emma Reilly FCICM, CEO at Top Service Ltd explains why credit management is so important for businesses of all sizes.

Maintaining Cash Flow

One of the primary reasons credit management is essential is its impact on cash flow. To ensure a continuous flow of cash, it’s crucial to strike a balance between offering credit to attract customers and collecting payments promptly. Effective credit management helps businesses anticipate and manage their cash flow, allowing them to meet their operational and financial obligations.

Reducing Financial Risk

Every business faces the risk of non-payment or late payments from customers. This risk can increase with a lack of effective credit management. By implementing a robust credit management system that includes credit checks and setting appropriate credit limits, a business can reduce the risk of financial losses due to non-payment.

Recognising the initial indicators that a customer is facing cash flow challenges can significantly reduce your financial exposure in cases of insolvency. In the current economic climate, insolvency rates have reached unprecedented levels, making the reduction of financial exposure a pivotal aspect of credit management. Access to the best credit management tools to highlight early warnings & and the ability to react appropriately, without doubt results in less debt & more cash for your business. 

Improving Profitability & Building Strong Customer Relationships

Proper credit management can also have a direct impact on a company’s profitability. By collecting payments on time and reducing exposure to bad debts, a business can maintain healthier profit margins.

Credit management is not solely about collecting payments; it’s also about building and maintaining strong customer relationships. When customers feel that their payment terms and credit limits are fair and flexible, they are more likely to remain loyal to your business. Effective credit management strategies can help strike a balance between financial prudence and customer satisfaction, fostering goodwill and trust.

Supporting Growth

Effective credit management can also support a business’s growth. By managing cash flow and reducing financial risk, a company can reinvest its profits into expanding operations, launching new products, or entering new markets. With strong credit management practices in place, businesses can better position themselves for long-term success.

Emma comments “One positive outcome of the 2019 pandemic was the shift in focus towards cash management. During this period (at the very least at the initial stages), selling activities were largely halted, trade counters closed, and sales representatives were unable to travel. As a result, the spotlight turned to the essential functions of collecting payments, bringing greater attention to the contributions of the accounts teams, credit controllers, and credit management functions. It’s my hope that the credit management function of a business continues to be celebrated and recognised for its contribution to business’. 

The Department for Business & Trade have released the latest statistics for September 2023, but what does this mean for you and your business? We discuss below the Turnover Forecast for October, the Turnover Trend and Future Price Increases. We also provide our advice on how to keep yourself protected from increased rates of insolvency and minimise the risk of bad debt.

1. Turnover Forecast:

• October Expectations – In October 15% of currently trading businesses anticipate an increase in turnover, whilst 17.3% expect their turnover to decrease. The majority (57%) of trading businesses however, are expecting their turnover to stay the same for the month of October.
• September Comparison – The turnover forecast for October is quite similar to that of September, where 55% of trading businesses expected their turnover to stay the same, and 18% expected an increase.

2. Turnover Trends:

• August 2023 – In August 2023, 23.6% of trading construction businesses reported lower turnover compared to July 2023 while 56.1% reported no change in their turnover and 14.3% of currently trading businesses saw an increase in turnover.
• July Comparison – Notably, in July 17% of trading businesses reported their turnover was higher in comparison to June 2023. This is a 3% decrease in trading businesses reporting an increase in turnover in comparison to July, it is also important to note that July saw the first increase in companies reporting an increased turnover since March 2023.

3. Future Price Increases:

October Pricing Expectations – Price increases remain steady as this October, 16% of construction companies are expecting to increase their prices. This was the same proportion of construction businesses increasing their prices for September 2023.

The majority of construction companies, (58.7%) are expecting their current prices to remain the same for this October and 2.5% of construction companies are expecting their prices to decrease.

What does this mean for your business?

In Summary, at this current time the figures above show that many companies are expecting a steady turnover and pricing for October has remained consistent, this could indicate a level of stability within the industry. However, the 17.3% of trading businesses still anticipating a decrease in turnover in combination with a decline in trading businesses reporting an increased turnover in

August in comparison to July, displays that there is still a degree of uncertainty and for this reason it is crucial to remain vigilant and adaptable in your business plan, to do this we recommend the following

Enhancing Your Credit Management Strategy:

Evaluate and Elevate: Elevate your business’s financial health by conducting a thorough review of your credit management practices. This strategic assessment is the cornerstone of safeguarding your operations and bolstering your cash flow.

Information is Power: In today’s dynamic business landscape, knowledge is key. Seek out the finest credit information provider tailored to your industry. Stay ahead with the most current data, including insights into how other suppliers have fared with their payments. Armed with this knowledge, you can make astute, data-driven decisions.

Timely Action, Tangible Gains: Time is money, especially when it comes to overdue invoices. Swift action is your key to enhancing cash flow and mitigating the risk of insolvency. Proactive measures ensure that your revenue stream remains robust and resilient.

The Insolvency Service released the latest set of statistics for August 2023 this morning, to understand what this means for you and your business please find a summary of the key points below.

Registered Company Insolvencies:

In August 2023, 2,308 registered company insolvencies were reported, this is an increase of 367 insolvencies when compared to August 2022 where 1,941 insolvencies were reported.

These figures are higher than seen both when Government measures were in place in response to the Covid-19 pandemic and pre-pandemic levels.

Among these insolvencies 221 were reported to be compulsory liquidations, representing a 45% increase in comparison to August 2022. Compulsory Liquidations have continued to climb after the pandemic partly due to the rising number of Winding-Up Petitions presented by HMRC.

However when it comes to registered company insolvency, the majority were Creditors Voluntary Liquidations (1,880), this is an increase of 13% when compared to August 2022.

Individual Insolvencies:

A total of 8536 individual insolvencies were reported to have taken place during August 2023. This is a decrease of 1,048 as 9584 individual insolvencies were reported in August 2022.

Of these individual insolvencies, 648 were bankruptcies, 2714 were debt relief orders and 5174 were reported to be Individual Voluntary Arrangements. (IVA’s).

A decrease in Individual Voluntary Arrangements can be seen when comparing August 2023 to August 2022 when around 7,340 Individual Voluntary Arrangements were reported.

Corporate insolvencies remain at elevated levels compared to both pandemic and pre-pandemic periods. In response to the above statistics, at Top Service we recommend taking the following steps to maximise the level of protection for your business:

Review Credit Management Tools and Processes:

• It’s essential for businesses to periodically assess the effectiveness of their credit management tools and processes.

• Given the elevated levels of company insolvencies, this review becomes even more critical to protect your business from potential financial risks.
• Consider adjustments to your credit assessment criteria in response to changing economic conditions.

Understand Trading Experiences:

Understanding how your current and potential customers are paying other suppliers can provide valuable insights into their financial health.

Industry specific trading experiences give you up to the minute information allowing you to make informed decisions beyond relying solely on credit limits and credit scores.

Businesses can better adapt to the current economic landscape, mitigate financial risks, and make informed credit decisions when they have the best credit management tools available to their industry. decisions when extending credit to clients.

A proactive approach to credit management is crucial in uncertain times to safeguard your company’s financial stability.

To be asked to the judging committee for the 2024 British Credit Awards is an honor that I have been delighted to accept. I’m looking forward to the process and being part of recognising the credit industry and the professionals that work so hard within the industry.

The August statistics for building materials and components released by the Department for Business & Trade provide valuable insights into the current business environment. Let’s break down what these statistics mean for your business:

Price Trends:

The statistics show that 30% of trading businesses advised that they have seen an increase in prices for goods and services that they purchased during the month of July. This has slowly decreased and is the lowest percentage reported since the peak 50% in March 2022. For your business, this suggests that the pressure of price increases might be easing, which could positively impact your procurement costs.

Turnover:

As we continue to make our way through September, 18% of businesses expect their turnover to increase this month. Whilst this is a steady increase from the 15% of businesses expecting their turnover to increase last month (August 2023) 55% of trading businesses still expect their turnover to stay the same for the month of September 2023.

On the subject of turnover, 17% of trading businesses reported that their turnover was higher in July 2023 when compared to June 2023. This is the first increase reported since March 2023. An increase in turnover can be a positive sign for your business, indicating potentially improved demand or market conditions.

Domestic Demand:

An increase in domestic demand has also been reported for the month of July 2023 by 11% of trading companies when compared to June 2023. An increase in domestic demand can present opportunities for your business to expand its customer base or sales.

Future Price Increases:

Looking ahead to September 2023, 16% of trading businesses anticipate raising their prices, with 24% attributing this decision to rising energy prices. It’s important to consider how these potential price increases could impact your business, both in terms of costs and customer demand.

In summary, while there are some positive indicators such as decreasing price increase reports and an increase in turnover, the industry still faces challenges, particularly related to rising energy costs.

Reviewing your credit management practices will without doubt support your business by assessing the risk of extending credit facilities & increasing cash flow.

• Research the best credit information provider for your industry. Having the most up-to-date information and knowing other supplier’s experiences with payments will allow you to make the most informed decisions.
• Taking action on any overdue invoices sooner rather than later, will increase cash flow and reduce the risk of an insolvency occurring before your payment is received.

When a corporate insolvency occurs one of the biggest frustrations our members experience is when they can see large dividends have been paid out to shareholders. 

We’re delighted to be able to explore this subject with the author of this article & Top Service friend, Brendan Clarkson (PKF).

What is a Dividend? 

Dividends are the payments a company pays to its shareholders out of its profits as a return on their investment.

Many shareholder directors take part of their remuneration as dividends – but failure to comply with legal requirements set out in the Companies Act 2016 could have serious consequences.

Why Pay Dividends?

It is common practice for director shareholders to take a nominal salary (or even no salary at all) and take most of their drawings by way of dividends. This approach reduces tax costs as PAYE / NIC are not payable on dividends.

From April 2023, the first £1,000 of dividend income will be received tax-free, but any dividends received in excess of £1,000 will be taxed at a higher rate depending on an individual’s income tax bracket.

Tax is then paid on income from dividends above the dividend allowance. However, tax is not paid on any dividend income that falls within an individual’s personal allowance (the amount of income that can be earnt each year before paying tax).

The table below gives a general idea of how much tax is paid on dividends: 

Dividend Payments – The Law

The payment of dividends is governed by UK law and specifically, the Companies Act 2006 (part 23). This states that:

• A company can only pay a dividend out of accumulated realised profits after accumulated losses.
• Directors must refer to accounts showing the company’s profits, losses, and liabilities, such as the last set of published annual accounts. Interim accounts can be used if reasonable judgement can be made on the state of the company’s profits, losses, assets and liabilities, provisions, share capital and reserves.
• Directors have a duty of care to act in the best interests of the company and its creditors. This includes exercising reasonable care, skill and due diligence and promoting the success of the company, safeguarding its assets, and taking reasonable steps to ensure debts can be settled as they fall due.

Unlawful Payment of Dividends

Unlawful dividends can arise in several different ways, including where profits have been miscalculated or an incorrect figure from the accounts is used, where there is poor record keeping or if the company is insolvent.

To minimise the risk of unlawful dividends being paid, directors should consider the following:

• Use the last circulated set of published accounts or up-to-date management accounts to calculate dividend payments.
• Seek advice from the company accountant to make sure figures are calculated correctly before paying a dividend.
• Keep adequate records of board meetings, conversations, and paperwork each time a dividend is declared. Adequate record keeping and processes will assist a company should any issues arise after a dividend is declared. This includes recording what figures were used to calculate the dividend payment.
• Seek professional advice either from an accountant or an insolvency practitioner if there is any concern around the company’s financial position.

Unlawful Dividends in Insolvency

Unlawful dividends in the context of insolvency refer to dividend payments made by a company that is insolvent or on the verge of insolvency.

Insolvency occurs when a company is unable to pay its debts as they become due or when its liabilities exceed its assets.

When a company becomes insolvent, it’s directors have a duty of care to act in the best interests of the company’s creditors, rather than prioritising the interests of its shareholders. 

Directors must take into consideration the company’s financial position and its ability to meet its obligations before taking or authorising any dividend payments.

If a company pays dividends when it is either insolvent or if it becomes insolvent as a result of paying the dividends, then those dividends may be considered unlawful.

Unlawful dividends in insolvency can have the following consequences:

• Repayment. If the company enters an insolvency process, the appointed insolvency practitioner has the power to demand the repayment of unlawful dividends.
• Directors Liability. Directors who authorise unlawful dividend payments may be held personally liable and be required to solely repay the full amount back to the insolvent estate.
• Misfeasance. If a director’s actions in relation to the payment of unlawful dividends are found to be improper or in breach of their duties as a director of the company, they may be held liable for misfeasance. Misfeasance claims can be brought against the director of a company by the appointed insolvency practitioner or by one of the company’s creditors and may result in the directors being ordered to repay or compensate the company.

An insolvency practitioner has a duty of care to all creditors and must report on the affairs of a company and the behaviour of the director. This could lead to further action against the director such as prosecution and disqualification.

The specific rules and consequences regarding unlawful dividends in general and in company insolvencies are outlined in the Insolvency Act 1986 and the Companies Act 2006.

It’s always worth seeking legal advice from a qualified professional when dealing with dividend distributions to ensure compliance is adhered to with regards to specific company laws and regulations.

*Information contained within this guide is correct as of April 2023.