Sometimes, when a company collapses due to financial pressure, you can put your hand on your heart as a director and say that there is nothing you could have done to save it. The problems you encountered, or the difficulties you faced, may have come on so unexpectedly and had such a devastating or crippling effect on your business that it is fair to say that they were insurmountable.
However, it is extremely rare to find yourself in this position. Indeed, as our resident corporate insolvency expert Michael Clinch explains:
‘In most cases, there will have been clear warning signs of impending financial trouble for many months prior to a company going to the wall. Had the directors picked up on this and sought appropriate advice on their options for addressing the issues they faced, then there may well be a chance that insolvency could have been avoided.’
This is a view shared by the Insolvency Service, which recognises the power that directors often have to pull a financially distressed company back from the brink and which is why they are now developing a guide which is specifically designed to help directors prevent avoidable insolvencies.
It is not yet clear when this guide will be issued, but pending its publication we have compiled our own list of steps you can take to keep your company’s finances in check. This will also help to limit the chances of your conduct being called into question by an insolvency practitioner if it does ultimately become necessary for you to take the difficult decision to close your company down.
Step 1 – Ensure you keep appropriate financial records
As a director, you are under a range of duties when it comes to handling a company’s affairs. This includes a duty to exercise reasonable care, skill and diligence when making decisions on the company’s behalf, which is not something you can do unless you have an understanding of the company’s financial affairs and how well or badly the company is performing. It is important that you recognise this, as the consequence of failing to comply with these duties could include you being ordered to make a personal contribution towards company funds if insolvency does occur.
The only way that you can accurately assess how a company is doing from a financial perspective is if you have access to a comprehensive and fully up-to-date set of financial records.
This may sound obvious, but we regularly have directors coming to us for advice about insolvency concerns based on incomplete or out-of-date financial information. It is important to appreciate that the state of a company’s affairs will always be subject to change, and as such it is important that your financial records are treated as living documents which must be constantly revised to ensure they always provide an accurate snapshot of what is happening at any given time.
Step 2 – Carry out regular financial reviews
To spot potential financial difficulties, you should arrange for regular meetings to be held at which you and any other directors carefully consider and review the company’s financial position.
As well as reviewing financial reports and projections, you should also be on the lookout for warning signs that the company may be coming under potentially concerning financial pressure. Common indicators that this may be the case, include:
- needing to always rely on the full extent of your business overdraft;
- your bank seeking to reduce or renegotiate your credit facilities;
- your bank asking for increased security or new personal guarantees;
- cashflow problems which mean payments due to creditors are regularly late;
- difficulties in getting supplies due to a lack of available credit or poor payment history;
- outstanding sums due to HMRC which you cannot immediately settle;
- rent arrears beginning to accrue on the company’s premises; or
- a lack of ready funds to pay wages and dividends.
Step 3 – Agree a strategy where you have cause for concern
Where a potential problem is spotted, the extent and magnitude of this must be quickly assessed (with the help of external advisors, if necessary) and an appropriate plan of action agreed. Details of all meetings which take place to discuss financial matters, including the decisions made and the rationale for electing to take certain steps, should be recorded via comprehensive minutes.
For financial issues causing low level concern, it may be appropriate to adopt a simple strategy which involves no more than tightening your belts for a few months, i.e. by cutting expenditure where you can and putting a temporary hold on wage increases and staff recruitment.
Where your concerns are more serious – perhaps because the difficulties you are experiencing are being driven by inherent problems within the company itself or within the market(s) in which you operate – then it may be necessary for a broader range of options to be considered, including:
- strengthening your credit control and debt recovery procedures;
- reducing overheads and fixed costs;
- delaying planned investments and capital projects;
- disposing of surplus assets;
- extending current credit facilities, where possible;
- securing new or additional sources of funding; or
- entering into a refinancing arrangement.
Step 4 – Take professional advice where needed
When embarking on a cost cutting, debt reduction or debt consolidation exercise alone is not going to be enough to keep you afloat, then the time will most definitely have come to take professional financial and legal advice. You can explore any avenues by which insolvency might be avoided. You can also reduce the likelihood of you being accused of having breached your duties as a director by continuing to run a company in circumstances where you ought reasonably to have known that you could no longer afford to pay your debts as they fell due or where company assets were no longer enough to cover company liabilities.
Although there can be no guarantee that by taking professional advice you will be shielded from a breach of duty claim, the likelihood of a claim will be significantly reduced where you have taken and acted upon the advice of a lawyer or insolvency practitioner.
Step 5 – Consider all of your options
There are a range of things that you can do, with professional support, to try to save a company or its underlying business. These include, but are not limited to:
- a corporate restructuring plan to allow you to implement a programme of change;
- a Company Voluntary Arrangement (CVA) to enable you to get your debt levels down;
- a pre-packaged or post-packaged administration to facilitate a sale of the company’s business and assets, minus the debts that the company has accrued; or
- general administration to allow an insolvency practitioner to try to rescue the company as a going concern and, if this is not possible, to try to achieve a better result for creditors than would have been the case were you to instead be placed into an immediate liquidation.
Where the company’s creditors are already beginning to circle, then professional advisors can also help you to apply for a moratorium which will prevent creditor action from being taken against the company while you consider your options and try to come up with a feasible rescue strategy.
How we can help
As insolvency law specialists, we have the expertise to guide you through any financial difficulties you may be facing and to support you to make well-informed decisions about how to respond.
Where a company rescue is both feasible and desirable, we will help you to identify the best route by which this can be achieved and guide you through the process of putting your plan into action.
Conversely, where the threshold for insolvency has already been met and a rescue of neither the company nor its business can realistically be achieved, then we can support you while the company is closed down and advise you on how to respond to any questions that may be raised about your conduct and which could result in you being accused of wrongful or fraudulent trading or of misfeasance in office – all of which could lead to personal liability arising.
Contact us
To find out more, please call Michael on 020 78457400 or email michaelclinch@iwg.co.uk.