Irish Motor Management
December/January 2010
Motor retail insolvencies continue to rise with high profile casualties now occurring on a regular basis. Stephen Tennant examines some of the issues facing management in this difficult trading climate and analyses key areas for consideration.
1. Is the company insolvent?
There are two commonly used methods used to determine insolvency.
The Cashflow Test - can the company pay its debts when they fall due? Many of the recent motor dealership failures would have been insolvent on this basis as cash was ultimately not available to make essential creditor payments.
The Balance Sheet Test - does the company owe more than it’s owed or are the company’s assets exceeded by its liabilities? If yes, than the company could be insolvent. Within the car industry it is uncommon for a dealership to be classed as insolvent under this test due to the high net book values attached to their stock.
2. Am I guilty of reckless trading?
It’s a common misconception that if a company is insolvent then it is automatically guilty of ‘reckless trading’. In reality, this is far from the case as in order to be found guilty of reckless trading an officer of the company must knowingly carry on the business of a company in a reckless manner.
The inclusion of the word ‘knowingly’ means that for an officer to be held liable he must have carried on the business in a manner he clearly knew involved a serious or obvious risk of loss or damage to others and yet ignored that risk because he did not care whether others suffered loss or damage or because of a selfish desire to keep his own company alive.
If reckless trading is proven, the directors, by order of the court, can be made personally liable (without limitation) for the company’s debts from the time they knew the company was insolvent.
3. Troubled times – Management Do's and Don’ts
Do
- build a detailed picture of the company’s financial position including realistic vehicle sales prospects and formulate an action plan. This should include a snapshot of the company’s assets and liabilities to ensure solvency on a balance sheet basis.
- note down decisions taken. Where difficult decisions need to be taken outside meetings, write a file note stating why the decisions were taken. People make mistakes, but if the decision taken was reasonable at the time then it is important that it can be shown why it was taken.
- hold regular management and board meetings, minute the decisions taken and file the minutes carefully (this seems common sense but is rarely done in my experience).
- be honest with yourselves, your employees, your customers and your creditors and ensure that costs have been cut to the bone.
- take advice from professional advisers and talk to your bank.
Don’t
- bury your head to avoid the problem and blame everyone else.
- use guess work while believing that financial figures don’t matter and do not ignore legal paperwork.
- prioitise creditors issues incorrectly and make promises to creditors that you cannot possibly keep. Remember while you may not hope to be able to pay creditors back over time you will have to pay ongoing debts and cash will probably not come in as fast as you think.
- mislead the finance providers/distributors as the integrity of this relationship will be essential for ongoing trading. In the current climate they will be well aware of the issues faced and glad of the opportunity to assist.
It can only be hoped that 2010 will finally see some light at the end of what has been a very dark tunnel. We all hope that trading conditions will improve with a return to something approaching ‘normal’ levels of car sales however until that happens it is a case of weathering the storm while remembering the responsibilities attached to being a company director.
Stephen Tennant is a Recovery & Reorganisation director with Grant Thornton, and also specialises in advising motor retailers. He has been involved in several turnaround, restructuring and formal insolvency appointments and advises several motor dealers on their restructuring and survival plans.