What to look out for which suggests your client may need to seek advice from an Insolvency Practitioner

As a Business Advisor, it’s helpful to be able to identify potential warning signs early. It’s always beneficial to seek advice from an Insolvency Practitioner as soon as possible, to ensure that the company’s board maintains control before there is a threat of creditor action and the loss of control and options.

The warning signs…

The following section identifies some of the warning signs that may indicate that your client should seek advice. By seeking advice, they are not relinquishing control. Instead, they are gaining an understanding of their directors’ duties, considerations for the business under the circumstances and options available (including non-insolvency options in many instances).

Cash flow difficulties

• Creditor ledger increasing month on month.

• Late payment of wages.

• Accruing HMRC arrears.

• Returned direct debits.

Directors considering taking more credit

• As a result of cash flow pressure, is the director discussing applications for working capital loans, overdrafts and corporate credit cards?

• These forms of credit often require personal guarantees to be provided by the directors.

• If the business is loss making, additional funding from these lenders will only serve to fund the losses. This will benefit in the short to medium term, but will compound the position.

Demands for payments from creditors

• As terms of credit are breached, creditors will turn to their legal advisors and debt recovery professionals to recover the debt.

• Written demands for repayment will be sent.

• Court Judgement can be obtained.

• Statutory demands provide the debtor with only 21 days to repay. Should repayment not be made, the creditors can then issue a winding up petition.

• This puts the creditor in control and significantly reduces the options available to the company and its director.

Directors putting more money into the company

• It’s not just lenders that can provide additional funding for potentially loss making businesses. Directors often continue to support a business which is no longer viable.

• Seeking advice at a very early stage can prevent life savings and equity in properties being used to continue to fund future losses.

Balance sheets become negative

• If management accounts are being reviewed regularly, it will be easy to see when reserves are reducing due to increasing liabilities.

• Once reserves have been fully eroded, the director may consider, in conjunction with a review of the P&L, that the insolvent balance sheet is not a temporary position. Instead, it is an indication that insolvency advice may be required.

Conclusions

There are several factors above which may indicate that advice should be sought. This doesn’t mean that the business cannot recover. If advice is sought when the company has full control and is not at threat from creditor action, it provides the directors with multiple options. This includes the ability to make informed decisions on the future of the business.

At CG&Co, we will provide initial advice with no charge or obligation for your client to proceed to a formal engagement. This initial step can help to allow informed decisions to be made for the benefit of the company, its directors, employees and other stakeholders.