Don’t wait too long to take advice if your business is struggling!
Often there are limited options available because the Directors of the company have left it too long to obtain advice about their struggling business. In some cases, there are no funds left from which to pay fees.
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.
Also, if there are causes for concern then these need to be dealt with sooner rather than later as when the company enters formal insolvency there is a timeline which kicks in for the Insolvency Practitioner (IP) to investigate the directors conduct and any suspicious translations. With any connected party transactions the IP can go back five years and with unconnected party transactions they can go back two years. In some cases where there has been fraud these timelines can be extended even further.
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.
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 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 with the threat that the Personal Guarantee if one exists will affect the directors personal assets.
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.
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