Author: Guy Thomas

A businesses relationship with its lender will always go through changes, particularly when the environment in which the business operates changes. Whilst we may wish it otherwise when borrowing, most lenders are very conservative organisations. As such they are more likely than not to react in specific and predictable ways to different stimuli.

Put another way, whilst it pays to try and understand how your businesses lender operates, some things are always going to get a reaction and that reaction may be harsher then you anticipated or planned for.

One such example is when businesses spring “surprises” on their lender.

One almost universally accepted way to “fall out” with a lender is to surprise them with a major event without given them forewarning or without seeking their comments/approval.

A bank recently stepped in before the owners of a company could sell their business (a wholesale bakery business) after they found out the shareholders of the company had tried to buy the company themselves for a significantly reduced price.

The Sunfresh Baker which produces over 40million muffins for supermarkets and small shops each year, is a family owned business. It’s  Directors Mark and Stephen Taylor, who are also brothers, tried to buy their £9m turnover bakery for a mere £50,000 after struggling to pay creditors. However the abortive sale was halted when Israeli-based Bank Leumi discovered the chain of events and urgently placed the company into administration appointing an Administrator of their choice.

It is believed that the directors, had not informed the bank’s UK asset finance arm about the transaction in advance, despite the bank owning a floating charge over the bakery’s assets.  In a bid to safeguard the position of creditors, Leumi appointed MCR as administrators. Following a second valuation by MCR on an “in-situ basis,” the Taylor’s were asked to pay another £70,000 for the business. The Taylors eventually bought the company for £120,000.  According to MCR documents, the brothers paid £35,000 as initial consideration and are due to pay monthly instalments of £5,000 until October to make up the full amount.

A total of 167 creditors were owed £3.4m but it is not clear how much each will receive. Leumi, owed £1m for invoice finance, is expected to get its money when debts are collected. However Barclays, which extended £132,000 overdraft facilities; is less certain to see a return.

A full report of the administration and conduct of directors is expected to be submitted to the Insolvency Service within six months.

Prior to the insolvency the company last filed accounts for the year to the end of October 2008. These showed a pre-tax loss of £365,337 and it had net liabilities of more than £200,000. According to draft accounts, it made a profit of £1.1m on sales of £9.4m in the year to October 1, 2009.

The sale of the business has saved 140 jobs at the company, which will now trade as Taylors the Bakers.

Helpful hints for company directors and owners facing insolvency:

1. Consult an insolvency specialist. Insolvency is a complex area with many pratfalls for the unwary. Taking advice at an early stage can help avoid the easy mistakes and help you plan the way ahead for yourself and the business
2. Keep your creditors informed. If you don’t keep them informed then they will assume the worst and act accordingly, wouldn’t you?
3. Review the circumstances regularly. Looking at it once and assessing the situation is not enough; having taken advice, mark out a plan, review the plan and ensure roles and responsibilities have been clearly set out within the management and encourage open discussion about how it is being implemented
4. Keep a record for yourself. Sadly, although we hope for the best you must plan for the worst. Things can and do go wrong. If they do and your decisions are reviewed it will often be done several months hence and with hindsight. Keep a written record of your key decisions and the evidence you had to hand when they were made. Do not assume that record will be available to you in several months time
5. Try to treat creditors equally. A common difficulty for directors in these circumstances is the pressure to treat some creditors better than others.  Although the pressures to do so will be great, you must always take advice before agreeing to this. It is a very common criticism for directors of insolvent companies and can even lead to personal liability
6. No surprises…. As above, banks really, really hate surprises an act accordingly when they find out.