When the going gets tough………

Posted 2014 by admin

I am a natural optimist and always try to seek out positives from any situation.  Sometimes it can be quite challenging though!

A major part of our work involves looking after clients when times are bad as well as when they are good.  Indeed looking after clients when things are going wrong is arguably the most important thing we do, as that is when clients often need most help.  I can expect to have about two crisis clients a year where we need to put in an intense amount of effort, to get them to the other side where they are profitable and viable again.

Recognising insolvency is important.  Some businesses have cash flow problems as a result of slow payers but many more have cash flow problems because their liabilities exceed their assets and they may be insolvent.  In fact, being unable to pay your debts as they fall due is one of the statutory definitions of insolvency.   If the directors continue to trade whilst knowingly insolvent they could create a personal liability relating to debts incurred after they became aware (or should have) that they were insolvent (wrongful trading).

If the business is rocky but there is light at the end of the tunnel then it is important that you work closely with an experienced advisor to avoid the risk of personal liability.  If insolvent but continuing to trade the directors must put creditors interests before their own and keep a good paper trail of the decisions made and the reasons for them.

In many cases, though, liquidation or administration is unavoidable.  It may be that a creditor serves a winding up petition to either force payment or bring finality to the situation or that the directors decide that for whatever reason it is the only thing to do.  In any event, there are essentially two routes to winding up an insolvent company:

If, as a result of a winding up petition, the Court puts a Company into liquidation then the Official Receiver is appointed liquidator and, if there are no assets, will usually deal with the whole process.   This has the benefit of being free but the experience is generally more stressful for the directors!

The alternative is to appoint an Insolvency Practitioner to conduct the entire proceedings.  This can be expensive and either has to be financed by the directors personally or from the Company’s assets (at a cost to creditors).  Insolvency Practitioners are generally appointed where there are substantial assets and the bank or major creditors want to protect their interests and/or investigate the directors or alternatively where the directors want to buy back from the liquidator / administrator some or all of the trade of the insolvent company.  This may be a ‘pre pack’ where the agreement is made to buy back the trade at the same time as the company goes into administration.

This is only a very brief overview of a very complex area and as always professional advice should be taken to make sure that the course taken is the right one for you.

If you would like to know more please get in touch at cdavies@ross-brooke.co.uk

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