Wrongful trading? Do I need to worry?

Wrongful trading? Do I need to worry?

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Our audit exempt client a limited company organises classical musical and orchestral events at various very posh London locations. Income in from various sources, advertising, sponsorship and donations and ticket sales.

Donations forms a significant part of the income and this we have been informed is quite normal in these situations where we are dealing with the upper classes of society?? and donations of well over £150k were received this year.

The problem I have is that the company has been going for over 5 years and has always made a loss (although relatively small until this year) and is insolvent. Main creditor is the director (sole shareholder) and bank O/D for which he has given a personal guarantee. No long standing other creditors. I told him 2 years ago that he needs to stop trading if the company can not be turned around. We are just doing the accounts for the current year, which has made a draft loss of well over £150k leaving a deficit balance sheet of £200k. The director sole/ shareholder is a musician pianist by profession and performs at the events with other artists. Very straightforward individual and continues to put more and more money into the company, which I know he cannot sustain. What do I do?

What are my legal obligations? I know we as accountants don't like loosing clients but surely he has to stop!
Martin

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David Winch
By David Winch
19th Oct 2005 08:58

A real difficulty

Martin

This sounds a rather sad case which gives you a real difficulty.

In terms of assisting your client, the best advice may be to urge him to consult an insolvency practitioner and / or a lawyer well versed in insolvency law. He needs to take a good hard realistic look at where he stands and whether the company can continue in future.

Of course, he may be able to whip up sufficient donations or revenues to get back on an even keel. But this may not be possible.

He needs a plan to go forward and, I would suggest, he needs to discuss this plan with the bank.

I take your point that there are no outside creditors, just the bank and this musician.

From your own self-preservation point of view you need to write formally to your client (the directors of the company) pointing out the financial and legal risks of continuing to trade and making future purchases on credit. (You may wish to enclose a copy of the letter to be signed by the director(s) and returned to you as evidence of receipt of your advice.)

You may also wish to add a paragraph to your accountant's report similar to an auditor's 'going concern' qualification, pointing out that liabilities exceed assets and that the continued operation of the company is subject to the continuing support of the bank and the director's personal guarantee and the future availability of donations and income.

Ultimately the decision to continue or cease trading is not your decision - it is the client's.

As a separate point, are there any grants available from Arts organisations which might help?

Good luck!

David
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P.S. I have answered on the basis that you do not suspect, and there is no reason to suspect, the client of any dishonesty. If you did have suspicions then you would need to consider reporting under Proceeds of Crime Act 2002 / Money Laundering Regulations 2003.

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