web statswebsite tracking software Advice for Businesses on the Brink of Insolvency

Over 17 Years in Business

Recent Transactions

£100,000

To Small Van Courier providing deliveries in Ireland.

£250,000

To Small fashion importer and exporter

There was a time when decisions about corporate turnarounds were only driven by equity and debt holders. Now, small business owners and directors are increasing their sophistication in dealing with their failing business. So much so, those same financiers of equity and debt are comfortable with trying to rebuild these businesses before letting them become completely insolvent.

In these troubled economic times, directors of many different companies are finding that they are close to violating the Companies Act of 2006. Under this Act, directors should continue trading close to the edge of insolvency, which can cause great detriment to creditors. If a company’s insolvency is pending, the director is accountable to creditors’ interests, which take precedence over anything else. Continuing to trade while on the brink of insolvency could lead to being found guilty of wrongful trading. The end result is liability for Director Disqualification.

Conduct Qualifying as Wrongful Trading

Some examples of wrongful trading conduct include:

  • Failing to keep proper PAYE and VAT accounting records
  • Failing to prepare accounts, file accounts or make returns to the Companies House
  • Letting debt to Crown and other debtors build up
  • Failing to submit tax return
  • Taking excessive salaries
  • Taking credit even though it is known that the company lacks reasonable prospects of paying the debt on time

It is important for any director or business owner to begin seeking advice during the early stages of apparent insolvency before it reaches crisis level. There could be ways to protect everyone’s position and possibly keep the company afloat.

Between 2006 and 2011, Director Disqualifications have increased by 23 per cent. The most common culprits have been failing to pay Crown debt and/or defaulting in Time to Pay Arrangements.

Time-Critical Process

For many, the natural reaction to these sorts of financial pressures is simply to ignore the fact that there is a problem. However, sweeping everything under the rug does not make the problems go away. They will resurface and then it will be too late to do anything productive to turn things around. This is a costly decision for any director to make even in tough financial times.

Being aware of director responsibilities, while continuing to trade within the parameters of the law, can lead to better outcomes. Starting over after being disqualified is much harder when the economy is recovering from a recession.

The key is to act quickly in receiving independent advice to overcome the challenges of difficult times. Whether the goal is to save the business from the brink of insolvency or to have a smoother passage beyond the point of no return, damage can be minimised.

Opportunities exist for businesses to come back from the threshold of bankruptcy. There are voluntary arrangements and restructuring procedures to a viable rescue route. When a rescue is not possible, there is an orderly process to liquidating company assets.

Four Ways to Get Back on Track

Before the business becomes completely insolvent, the time-critical process requires strong management skills and an urgent cash infusion to get things back on track. This typically requires identifying the source that is causing the downward spiral. The process can be difficult for owners and/or directors because it requires an unbiased and objective approach.

Strategic, operational and financial positions will need to be diagnosed properly. The best advice is to stop digging, acquire expert advice and apply the following four things to get back on track.

1. Take a proactive stance on critical issues.

Taking a proactive position is essential to dealing with critical issues that could mean life or death to a business. The early stages are the most time-critical to get the necessary cash and stakeholder support for moving forward. Indecision can prove fatal to having a successful turnaround because of uncertainty. Key stakeholders might get nervous about the chances for favourable results.

2. Set realistic expectations about possible outcomes.

The need for cash to move forward might require the need to dispose of assets considered non-core to business operations. Another option for a cash injection might be to have a divestment strategy where leadership can refocus on core business functions. Realistic expectations about asset values are important.

The adviser will get professional valuations of various assets that need to be sold. Because time is critical, a long negotiation process will do nothing to advance the situation if the owner is not pleased with the asset prices. This does not mean that everything will sell at dirt cheap prices. It does, however, mean that stakeholders will need an open mind to keep the final objective in focus.

There is a duty of care that the director owes to creditors and shareholders to obtain the proper value. Valuations will help them meet the obligation to act in the shareholders’ best interest. It is unrealistic – and a possible breach of duty – to try and hold out for a better price that is likely unattainable.

3. Trust the advice of a professional adviser.

Management and owners have a financial, operational and personal tie to the business that is unmatched. They usually know the business better than any outsider who comes along to help rescue the business. Often, this is the problem and will necessitate a certain level of trust that the professional adviser will act in the best interest of all stakeholders.

Being too close to the business can keep some owners from recognising the areas that need improvement or change. If technological advances or social factors have changed the environment, the company may need to change how it does business. Disregarding the advice of a professional adviser who has an objective point of view and understands the change is needed is not a good idea.

4. Stick with the turnaround plan put in place.

All of the efforts put into analyzing the problems that put a business on the brink of insolvency and making changes are futile if management does not stick with the plan. Establishing normality is not the only reason a business goes through a turnaround process. Improvements to processes are for long-term changes to encourage future growth, better cashflow and profitability for the business.

Everyone must be committed to seeing the process through to the end. The process of turning a struggling business around can be long and difficult. However, a successful process will bring financial rewards.

When Insolvency is Unavoidable

Hovering on the brink of failure from financial distress is a position that many businesses can be in, especially during tough economic times. The right intervention during early steps can help businesses achieve a turnaround that is sustainable and acceptable for everyone involved. There are times, however, when an orderly wind down is the only appropriate option for the business. For either case, preserving most of the value is critical to benefiting stakeholders.

Financially distressed situations require equally dedicated attention to make sure things are resolved efficiently. Innovative solutions that are sensitive to problems the business faces to minimise the reputational and financial impact of closing.

Hitting a rough patch is not the same as being on the brink of financial ruin. There are times when reaching a voluntary arrangement to pay off creditors is not possible. Either there are not enough assets to inject cash or the business waited too long to address the problems. Winding up is now the only option and voluntary liquidation proceedings must commence.

Voluntary liquidation is the way winding up is achieved when the business has become insolvent. With bankruptcy, businesses have a greater stigma to overcome than it would after voluntarily winding up operations. During winding up proceedings, assets are disposed of by a liquidator. The proceeds are used to pay off as many debts as possible. The timeframe to complete this process is usually 12 months after a special resolution is filed.

Business debts are prioritized based on hierarchical levels. Similar to bankruptcy proceedings, these debts are paid off in that order. The major difference between a voluntary liquidation and bankruptcy is that the business will not earn a black mark from bankruptcy if voluntary liquidation proceedings are followed.

Conclusion

The effects can be far-reaching for any business that is under financial pressure or on the brink of insolvency. Not only are business owners and directors affected, but also the company’s reputation and stakeholders depending on success. Dealing with the issues upfront in a timely, efficient manner will help owners and directors find active steps to either keep the doors open or close the business.

A key practice for turning financial problems into a financial recovery process is acting quickly at the first signs of trouble. Many businesses have a greater chance of survival by accepting outside advice or input on the best way forward. It takes expertise and an objective viewpoint to develop a recovery plan that will return the business to being in the black.