How can directors navigate the challenges of facing insolvency?

In November 2023, there were over 2,000 company insolvencies – a 21% rise on the same period in the prior year. ¹ To maximise the chance of businesses surviving when they start to experience difficulties, and to minimise the risks to directors personally, it is important to take action and seek advice as soon as possible.

Warning signs for directors

Directors will usually be aware when their business is facing upcoming financial stress and potential failure. Falling cash reserves, an inability to meet payments on time, delayed receipts from customers, bad debts, and project delays and cancellations by clients are all signs that action needs to be taken to ensure the survival of the business. Significant loan repayments due and banking facilities coming up for renewal can all worsen the company’s position.

Risks for directors

If action is not taken, there will inevitably be additional personal risks for the directors. Personal guarantees given will often be called upon if the company is unable to pay the debts due in respect of them. As well as personal guarantees for borrowings, there may also have been guarantees given in respect of property leases, vehicles and other asset leases and to other suppliers.

If the company enters an insolvency procedure, the conduct of the director will be reviewed and could lead to disqualification from acting as a company director in future if they have not acted appropriately.

They could also be made to personally contribute to the assets of the company if they are found to have continued trading past the point where they ought to have realised that the company could not avoid insolvency. Personal contributions can also be enforced against the beneficiaries if the company makes preferential payments that benefit the directors or others ahead of other creditors, or if assets have been transferred out an undervalue.

What can be done to help save the business?

It is sensible to take as many steps as possible to face up to the issues and find a resolution. Getting reliable up to date management information on financial position of the business and realistic cashflow forecasts is essential.

Coordinated actions should then be taken including some or all of:

• Negotiating realistic repayment terms with HMRC and other creditors.
• Being up front with lenders about the position and working to minimise losses to them and to the company.
• Review possible ways to raise finance, such as asset sales and capital raising, or to reduce costs within the business.
• Investigate rescue procedures for companies such as Restructuring Plans and Company Voluntary Arrangements, which are designed to restructure liabilities and payments so that the company can survive.
• Seek professional advice on how to reduce the risk of personal liability falling on the directors.

The most common reason for companies failing is that solvency issues are not addressed swiftly enough. The clear message to directors is to take advice early and to react proactively to the changing situation.

How can we help?

Our cross-disciplinary teams at Moore Kingston Smith can help evaluate the options, handle negotiations and offer down-to-earth advice on rescue procedures to best enable the company to survive and ultimately thrive. Contact us today.