In my experience, the majority of directors who call our insolvency department for advice, have left it so late that there are very limited options available. In fact, quite often there are even insufficient funds left to put the company into liquidation!
Generally, the earlier advice is sought, the greater the range of options that are available, with winding up always being the last resort, unless the director favours that route. Contrary to popular belief, an Insolvency Practitioner will always try to work with the directors with a view to salvaging a business.
However, many directors do continue running the business without seeking professional advice, in the hope that the company’s fortunes will turn around. Even in these circumstances, it is advisable to have an insolvency practitioner on board in order to reduce the risk of a claim for wrongful trading should the company end up in an insolvent procedure in due course.
In my view there are many signals to look for that might indicate a potential problem looming, and I would strongly advise directors to seek prompt advice in the event of one or more of these occurring.
The most obvious one of course is cash flow. When businesses cannot pay their debts as and when they fall due or worse still, they start robbing Peter to pay Paul, it is a clear indicator of a business in trouble.
At this stage, directors often sink more of their own money into the business as they cannot imagine a life without the business that has earned them a good income for the last however many years, often even decades. However, when this situation arises, it often transpires that the director is not actually earning a living; he or she is shovelling money into a black hole and not even drawing a salary, as cash flow cannot support it.
Eventually, creditors start to obtain CCJ’s against the company, which cause the business further difficulties.
By this time, the bank often starts to put pressure on by reducing overdraft limits and requiring the directors to provide personal guarantees. Rarely do banks entertain advancing further funds at this late stage of the life of a company, certainly not without some form of security.
Directors then find that their business is overstaffed but they cannot afford to make reductions in numbers, as there are insufficient funds to make redundancy payments. I would mention that staff (and directors who were properly employed) are paid their statutory entitlements including redundancy, arrears of wages, holiday pay and payment in lieu of notice, by the Redundancy Payments Office, but only after a formal insolvency procedure has occurred such as a liquidation.
Unfortunately, this seems to be the stage when many directors seek advice for the first time. Of course by now suppliers have not been paid for a significant length of time, HMRC are owed PAYE, VAT and Corporation Tax and are threatening to wind the company up, key members of staff have left and the bank overdraft is up to its limit.
It is generally extremely difficult to escape from this spiral without a significant injection of cash meaning businesses rarely survive once things get to this stage.
However if advice is taken much sooner, the outcome can be vastly different.
If you have any concerns about the viability of your business, even if you just would like the comfort of us supporting you through difficult times, please speak to your MFW partner or give me a call.
Partner and Head of Insolvency