Top Insolvency Questions from Accountants

Having worked in insolvency for many years, I’ve observed that accountants often express similar queries when dealing with clients in financial difficulty. To address these common inquiries, here are the most frequently asked questions by accountants regarding the insolvency process and their roles in it.

Must I complete ongoing work or bring the client’s accounts and tax matters up to date?

If your client enters an insolvency process, for example, liquidation, your obligation regarding ongoing work and other services depends on your terms of engagement with your client. You should review same to check your termination or insolvency clauses. It is unlikely that you are obliged to carry on so in general, you should not continue with work but should contact the Insolvency Practitioner (IP) to discuss same. The IP takes over the company’s affairs and may well ask you to complete or undertake certain pieces of work. If the work is instructed by the IP, they will pay for same. This may include things like running final payroll, preparing P45s, preparing a final VAT return and so forth.

Will I get paid for my work?

You will rank alongside other unsecured creditors for unpaid work done.

What are my obligations to provide information to the Insolvency Practitioner?

You are required to provide all relevant records and information about the company’s financial affairs. This includes, but is not limited to, financial statements, tax records, bank statements, and any other documents that pertain to the company’s assets, liabilities, income, and expenses.

In Scotland, you can claim a Lien over the records but you must still allow the Insolvency Practitioner to access and copy the records to get any information they need.

If the IP believes you have information relating to the company’s assets, business or financial affairs and you do not cooperate, Insolvency legislation empowers them to request you attend their office to provide such information and they can also apply to the Court to have you publicly examined before the Sheriff to obtain the information they need.

Can I continue to act for my client if they start a new business?

Again, the short answer is yes but you should consider:

What were the reasons for failure of your client’s last business and assess any potential risk associated with taking on their new business as a client.
Ensure there is no conflict of interest.
Consider your professional reputation. Does this client align with your practice’s risk tolerance and reputation management policies?
Check the director has not been disqualified.
Ensure your ongoing business relationship with the director does not impede any ongoing investigations relating to the insolvency of the previous business.

That aside, you should treat this as you would any other new client and do your usual background checks, engagement letter and ongoing monitoring.

If in doubt, seek advice from your professional body.

What are the implications if I advise clients on financial matters prior to insolvency?

It is assumed that any advice you give your clients is given in your capacity as a professional advisor and that you have acted with integrity and professionalism, in which case, barring negligence has no implications.

Where you should be careful is in crossing the line between giving professional advice and exerting influence over the director to the extent that you are effectively taking part in the control of the company. In these circumstances, you should be considered to be a Shadow Director.

A Shadow Director is someone who:

consistently influences the decisions of the directors out with your professional role, that is, you are influencing decisions in a personal capacity beyond the scope of your professional advice.
Whose directions the directors are accustomed to acting on ( there needs to be a pattern of habitually directing the directors)

Shadow Directors are subject to the same duties and liabilities as formally appointed directors, including personal liability for wrongful trading and so forth.

How to avoid being a Shadow director:

Maintain clear boundaries between providing professional advice and making decisions for the company. Ensure your role as an advisor is distinct from any executive decision-making.
Document your interactions and advice to demonstrate that your role is purely advisory and that decisions are made independently by the formal directors.
Communicate clearly that your advice is just that – advice – and ensure that the formal directors understand their responsibility to make independent decisions.

Quick summary

Must I complete ongoing work or bring the client's accounts and tax matters up to date?

If your client enters insolvency, your obligation to continue providing services depends on your terms of engagement. Generally, you should stop ongoing work and contact the Insolvency Practitioner (IP), who may instruct you to complete specific tasks, with payment provided by the IP.

Will I get paid for my work?

You will rank alongside other unsecured creditors for unpaid work done.

What are my obligations to provide information to the Insolvency Practitioner?

You are required to provide all records and information about the company’s financial affairs to the Insolvency Practitioner (IP). In Scotland, while you may claim a lien over the records, you must still allow the IP access to copy them. Failure to cooperate could result in the IP compelling you to provide information through court action, including a public examination.

Can I continue to act for my client if they start a new business?

Yes, you can continue to act for a client if they start a new business, but you should carefully assess the reasons for their previous business failure, check for any conflicts of interest, and consider the impact on your professional reputation. Ensure the director is not disqualified, and that your relationship does not interfere with any ongoing insolvency investigations. Treat the new business like any other client by conducting background checks and adhering to standard procedures.

What are the implications if I advise clients on financial matters prior to insolvency?

Advice given in your capacity as a professional advisor typically carries no liability, provided you act with integrity and professionalism. However, if you cross the line between giving advice and exerting control over the company’s decisions, you may be considered a Shadow Director, which carries the same duties and liabilities as formally appointed directors. To avoid this, maintain clear boundaries, document your advice, and ensure the directors understand their responsibility to make independent decisions.