Company directors have a duty to act in the best interests of creditors when their business becomes insolvent. This typically includes preserving assets, mitigating further losses and, on some occasions, ceasing to trade. If the appropriate steps are not followed, directors may find themselves in trouble with the Disqualification Unit of the Insolvency Service, and/or be held personally liable. Unfortunately “I didn’t realise” will not be an accepted excuse.
At these uncertain times, directors must remain vigilant of potential signs that their business is struggling and seek advice from others when they are in doubt. To assist, we have collated a few examples of common signs that a business is heading for trouble and what the potential implications could be for directors.
Lack of financial information
Running a business can be tough. Dealing with the day to day matters such as client satisfaction, HR and winning work are often extremely time consuming and it is easy to overlook the financials. It is vital for directors to continually review and analyse a company’s financial performance. Without doing this it is almost impossible to spot potential issues at an early stage.
Directors are often brilliant at what they do, but can find general business maintenance and particularly the financials confusing and are put off by it. This is why having a bookkeeper and/or accountant providing monthly support is invaluable.
Increased book debts
At times of economic uncertainty, it is likely that your struggling business is not alone. You may find that customers are taking longer to pay, or you are only receiving part payments. Aged debtors will increase, as will the number of bad debts.
It is critical that outstanding payments are monitored closely and chased promptly to help you maintain your own cash flow.
Hit your limit?
Is your bank refusing to extend your overdraft? Perhaps your suppliers are reducing payment terms or you are having to provide personal guarantees to obtain more credit.
Directors who find themselves in this position should speak to a professional before seeking alternate funding or injecting personal funds into a business.
Mounting debts due to HMRC
We have seen on more than one occasion where directors decide to delay submitting tax returns to avoid payment. This may result in additional fines or penalties on top of any debt due. Interest and charges on tax debts can be significant. Not paying a tax bill on time may seem like a good option to assist with working capital restraints, but the task of settling the liability at a future date will become increasingly more difficult.
It is also worth noting that in the event of insolvency, ‘trading on crown debts’ is one of the key factors considered by the Insolvency Service in determining whether a disqualification order is sought against the directors. This, coupled with the fact that HMRC seem to be gaining more and more powers to impose personal liability upon directors, suggests that allowing HMRC liabilities to accrue is not a good idea.
Incurring late payment interest and charge
Much like a Blockbuster video that wasn’t returned on time, an unpaid debt will start to incur interest and charges. If you find you are having to pay interest or charges regularly due to cash flow constraints this is a sign that something needs to change. Your accountant is not just there to crunch numbers, they can help implement strategies to change your company’s fortunes.
Picking and choosing who to pay
Another sign of a company struggling is when a dwindling cash flow means you are having to pick and choose which of your creditors will be paid this month.
It can be tempting to decide to pay off any loan due to you, a family member, friend or perhaps a supplier who you wish to do business with in the future. After all these parties are legitimate creditors and are owed money. Regrettably things are not that straight forward if the company subsequently enters an insolvency process. If a desire to prefer can be demonstrated, a director can face personal liability and disqualification.
Creditors escalating their collection process
Have your received a CCJ, statutory demand, writ or even a winding up petition from a creditor? Has a bailiff attended your trading premises to enforce a debt? When debts mount it is common to see one or a number of creditors take steps to collect their debts legally. Unless it is an anomaly, one legal action tends to be followed by another until the fate of the company is taken out of your hands.
Legal action against a company should not be taken lightly. Even if a payment can be made to prevent the action escalating further, the company’s credit score will suffer along with its reputation. An effective company rescue strategy is always dictated by timing. If one or more creditors take legal action, seek advice at an early stage to explore your options.
We realise it is difficult to admit you need help or make the decision that your company may no longer be financial viable. The sooner you seek advice the more options you will have available to you. If there is anything within this blog that relates either to your business or client and you would like to discuss it in further detail, please contact us for some free, no obligation advice. We are here to help.