If a client is facing the prospect of insolvency, it is vital that the warning signs are spotted so that action is taken to remedy the problem as soon as possible.
The earlier advice is sought, the wider the range of options available, increasing the likelihood of a positive resolution for those involved.
Initial warning signs
|Extending payment terms||ignoring calls/letters||VAT/PAYE arrears|
|Bad debts||Loss of turnover / trading losses||Overtrading|
|Delay in preparing / filing financial accounts||Lack of management information||Poor cash flow|
|Applying for additional credit|
Very often if these issues are only short-term problems they can be managed and normal trading restored. When they continue over a longer term, serious issues can arise. Often the client is unaware of these signs and the advisor can provide invaluable assistance in spotting a negative trend and highlighting this to the client.
|Legal letters||Legal judgements||Legacy VAT/PAYE arrears|
|Final demands||Bank overdrawn beyond facility||Extreme creditor pressure|
|Bounced cheques||Supplier withdrawing supply|
These arise when the initial concerns persist and action isn't taken. Contacting a professional advisor is vital at this stage to provide an opportunity to avoid formal insolvency.
Events requiring urgent attention
|Statutory demand||Court orders||Winding up petition|
|HMRC enforcement of debt||Bank calling in overdraft / Loan facility||Unable to pay wages|
In the event of the above, to prevent a formal insolvency procedure, immediate action is required. The client or advisor should seek insolvency advice as soon as possible.
In recent years there has been increased focus in the courts and within the Insolvency Service on the responsibility of directors when a company of business fails. It is vital to remind directors that failure to take appropriate action can (and often does) result in director disqualification or even personal liability.
Some key actions the client should take include:
- Be aware that in an insolvency scenario, directors have a duty to act in the best interests of creditors
- Prepare realistic financial projections to support ongoing trading and document key decisions
- Review position regularly and document it
- Preserve the value of and safeguard the company's assets
- Keep customer deposits separate from normal trading bank accounts
- Do not prefer individual creditors or connected parties
- Do not worsen the creditor position
- Seek professional advice - this is a key matter considered by the courts. If a director has sought advice early in the process, it can assist in avoiding any personal liability action.
Back to: The Options
A PDF version of the full 'Guide to Business Resuce and the Insolvency Process' is available to download here.
Whilst every effort has been made by CavanaghKelly to ensure the accuracy of the information here, it cannot be guaranteed and neither CavanaghKelly nor any related entity shall have liability to any person who relies on the information herein. Information given here is for guidance only. Detailed professional advice should be taken before acting on any information contained herein. If having read the guidance here, you would like to discuss further; a member of our team would be pleased to help you.