We know that trusted advisors will meet resistance to recommendations to their clients in financial distress that they should speak with an Insolvency Practitioner (IP). There are a few reasons for this including:
- The misconception that Insolvency Practitioners (IPs) should only be consulted when a company is ready to enter insolvency.
- A belief that consulting an insolvency practitioner will only have one outcome – an insolvency.
- Reluctance to face up to reality.
This article sets out three different reasons to see an insolvency practitioner where the outcome isn’t an insolvency appointment.
1. To understand all the options
IPs are licenced and regulated experts in dealing with financially distressed companies and individuals. At a time when those in the middle of a financial crisis are often too entrenched in the day-to-day stressful process of trying to keep things afloat, an IP can do an independent review of the situation then give clear guidance as to the true financial position and available options.
Apart from insolvency, these options might include negotiating reduced settlements or time to pay agreements with creditors.
Negotiating new or restructuring existing financing may be the answer.
Each or a combination of all can be done informally or as a formal Creditors Voluntary Arrangement, ultimately rescuing the business and saving jobs, avoiding formal insolvency.
2. To know what the worst case scenario looks like
Whilst it is always good to hope for the best, it is also wise to prepare for the worst.
IPs understand how much directors invest, emotionally and financially, in their business, and how difficult that makes facing potential closure. Whilst they see the signs of distress like cash flow problems; increased debt, typically with HMRC; falling profits, often due to price cuts to win business in the misguided hope that a busy business is a profitable one, it is difficult to face the true position. The IP can make an independent assessment and place the basic facts before directors to facilitate a frank and honest discussion about the state of the business together with the options and practicalities of winding up the business to maximise return and minimise stress.
IPs can advise directors if they are at risk of accusations of misfeasance by, for example, paying a preferred creditor or selling assets at undervalue, or of wrongful trading if, knowing the business is insolvent they carry on trading and the company position worsens, in addition to potential issues of personal liability for company debt.
3. To take back control of the situation
In addition to the worry of paying wages, paying creditors, and winning new work, the additional stress of creditors’ potentially forcing the company into liquidation often leaves directors feeling powerless to deal with the fate of their businesses.
A conversation with an insolvency practitioner will clarify the practical steps and consequences that can be taken by a director.