What you need to know

If you’re a business owner or director and you can remember a year of trading conditions like the one we’ve just had then you may be one of the unluckiest people in the country.

Not just the external blows of the pandemic and subsequent lockdowns but also the imposed restrictions and closures, the challenge to access the various support schemes and the struggle to keep the business going in the hope of being able to reopen and recover. 

In an ideal world, many companies will be able to reopen in April and resume trading successfully straight out of the gate.

But what if this doesn’t happen?

What if you’ve already cut your expenses back to the bone to try and make it through and now you’ve got the opportunity to trade your way back to profitability – it’s just not happening. 

Would you be able to make more changes to finally enjoy a recovery or are you looking at a situation that’s impossible to turn around?

How can you identify insolvency problems and find the right solution for you and your business?

We’ll highlight some key signs to look out for and tackle before the issues simply become too big to tackle and insolvency becomes inevitable.

Ready for reopening? Book a Business Viability Review to make sure you’re at peak performance 

We’ve already written that the pandemic response has led to the suspension of several of the regular rules and creditor actions that can be taken against insolvent companies. 

These include the issuing of statutory demands and winding up petitions and the suspension of termination clauses and directors’ liability for wrongful trading 

The key point to bear in mind is that the suspension is not only temporary but finishes within weeks- on June 30th to be precise. 

The good news is that if you begin to take action now to identify and address potential issues then you won’t be caught out when restrictions are lifted and creditors are allowed to take action against companies that owe them money again – because they will and quickly. 

Regarding insolvency you might hear a lot of complicated words and formulas but the most important one to remember is also the simplest – a business becomes insolvent if it can’t pay its bills and debts when they’re due. That’s it. 

So what should you be looking for to give you advance warning that this is where the business is heading?

Constant cast flow problems

Personally and professionally, everybody has bad months. Whether it’s down to poor sales, a lack of tight credit control, supply and stock issues – you need to understand whatever is causing cash flow problems and figure out if they are temporary blips or signs of more ingrained issues.

Borrowing limits reached and breached

If the business has an overdraft that it’s never out of or it’s exhausted all its available avenues of credit then this is a major sign of impending insolvency. Engaging in “ceiling borrowing” – where you borrow money just to stand still and pay wages or regular bills is one of the most reliable indicators.

Non payment

Borrowing to pay bills can cause difficulties but not paying bills at all certainly will. Non payment of staff wages is a serious red flag. It’s particularly bad if you aren’t paying staff wages on time and in full because you’re squandering their loyalty and goodwill you’ll need to get through these tough times. 

Non payment of bills Not paying external bills creates creditors who, once restrictions are lifted, are able to bring various remedial actions against a company including statutory demands for repayment or even winding up petitions for debts as low as £750. 

This is a serious threat that has to be treated as such because the next step from here is a court ordering a compulsory liquidation of the business.

Other signs of potential or impending insolvency problems may be individually benign but collectively potentially harmful including high staff turnover, delays in providing company accounts or other financial information, losing regular customers and contracts and even a general downturn in the sector the business operates in. 

Testing and treatment

There’s courses of action available that you can take relatively quickly if you suspect that you’ve got an insolvency problem. 

Firstly you can instigate one of two internal tests to definitively prove if the business is insolvent or not. 

The first is the cash flow test. This is where the business looks at whether it has enough liquidity to pay staff, suppliers, rent and any other bills on time and still has surplus to purchase supplies and new stock to continue trading.

The focus should be on the short term as if there are immediate problems then this test will uncover them.

The second is referred to as the balance sheet test and is more complicated. 

It involves examining the company balance sheet to provide the most recent value of all the businesses’ assets – stock, cash in bank and at hand, debts owed to it, property, vehicles, machinery and digital assets. 

These are then set against all known company debts to all creditors including lenders and HMRC, suppliers, employees or others. 

If the company’s assets are more valuable than liabilities then it is technically still solvent. If the opposite situation is true then the business is technically insolvent as selling everything it owns would not be sufficient to clear the owed debts.

If you are in any doubt get in touch with us and talk to us about your options moving forward. An option you might not be aware of, for example, is an insolvency moratorium

This is where an insolvent business is granted a legal period of respite from creditors and other recovery actions while its directors work out potential restructuring and rescue strategies with the guidance of a licenced insolvency practitioner. 

The moratorium is an official “breathing space” that allows businesses to focus on their path out of insolvency, if there is one, or what other alternative options are open to them.

If you believe the insolvency problems facing your business are insurmountable then take a moment to get in touch. 

We offer a free initial consultation with any business owner or director to discuss the nature of any problems and together we’ll work on a realistic recovery strategy.

2021 could still be the year you overcome your insolvency problems but only if you take action while you still can.