Preparing for Insolvency
Over the last few months, we are being asked more frequently for advice on a weekly basis, by both individuals, business owners and Directors of Companies who are facing financial difficulty and insolvency.
We have been discussing Liquidation, Bankruptcy, Insolvency advice both pre- and post-the company being placed into an insolvency process. Some discussions have been around whether to stop trading, the alternative options facing an insolvent business, whether to reach an informal arrangement with creditors and a myriad of other problems.
This is called the hiatus period which can be anything from six weeks or can last for years and which carries the maximum amount of risk for sole traders and directors of companies
alike.
This is the time when the future of the business or company is uncertain, when the business owners or directors must ask themselves some very important questions such as is the company or business insolvent.
The solvency test is not just a balance sheet measure of whether a company’s assets exceed its liabilities. It must also be able to pay its creditors as and when those liabilities fall due for payment. There are other ways to determine insolvency and these can depend on the size and trade of the industry of the case in question.
You can have a healthy balance sheet but be unable to pay for the ongoing supply of the electricity to keep operating and have other balances outstanding to suppliers.
Is it profitable or loss-making at present time? Although you may be able to provide an example that the business is trading profitably at the present time, the company could still have a burden of debt from previous trading periods.
Or in some cases it could be the opposite, the business could be loss making at present time BUT it may not necessarily follow that it SHOULD cease trading immediately. The business may have a viable future and the Directors and business owner has a duty to act in a way so that the return to creditors is maximised. This is not always achieved by ceasing to trade. It is important to prepare cash flow forecast and projections to clearly show What they are doing if they truly believe that there is a viable business going forward. The directors need to be careful of what they do and do not do in this hiatus period. their actions will be examined later by a liquidator or an administrator when the company or business enters a formal insolvency process.
The business could have a viable future and the directors of the business or the sole trader have a duty to act in such a way, to maximise the return to all creditors. This is not always achieved by ceasing trading could the business be viable going forward when the business is in financial difficulty.
Should the company have to cease trading with immediate effect, the sole trader or directors of the business, have a duty to provide that the maximum return is given to all creditors. The Director must prepare realistic forecasts, clearly demonstrating that
their company is a viable business going forward.
The warning signs for Company Directors become evident when the directors see arrears building up, owing debts to HMRC, creditors pressure ever increasing and any legal threats for substantial bad debt.
Next Steps
If you want to find out anything further about this topic then please feel free to call me on 0330 236 9930, 0330 236 9938 or 07961 116321. All conversations will be in strict confidence. You can also email me vee@navigatebr.com.
This article is for information and interest only. It is not a substitute for full professional advice, which will take in to account the specific and individual circumstances. Navigate Business Recovery Limited cannot accept any responsibility for any loss arising as a result of any person or organisation acting or refraining from acting on any information.
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