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Finding appropriate solutions - key messages

23rd January 2023


Peter Worrall


Charles Russell Speechlys LLP

The UK economy is in bad shape, having to battle on multiple fronts, including ever-rising inflation, a falling pound and an energy crisis exacerbated by current political spectrum.  In this hugely unstable climate, businesses will be leaning on their advisors more than ever before to help them shelter from what is proving to be a surging storm.  However, even in difficult times, there are always options available to businesses and accountants, together with solicitors, can assist business owners find the most appropriate solutions.  Sometimes reaching for a formal insolvency procedure such as a Company Voluntary Arrangement or a Creditors Voluntary Liquidators may not always be necessary.

Instead, directors should follow 4 key messages:

  • Directors’ duties - directors need to be aware that they owe a fiduciary duty to act in good faith and in the interests of the company.  This includes acting in the best interests of the company’s creditors - the more likely the insolvency, the more the creditors’ interests should be taken into account and when insolvency is inevitable, the creditors’ duties are paramount.  Being aware of these duties will ensure that directors are always acting in the best interest of the company and its creditors.  Unfortunately, the consequences for breaching these duties are dire and will attract personal liability on behalf of the directors.
  • Obtaining advice - If the directors are concerned that the company is at risk of insolvency, they should not delay in obtaining advice.  If there are bona fide options available to rescue the company, these options can be explored, provided that the decisions being reached and the reasons for those decisions are recorded, and the company is not at the point where insolvent liquidation is inevitable.
  • Cash is king – cashflow is the mainstay of any business.  Positive cash flows is likely to result in the success and growth of a business, whereas negative cash flow is simply bad news.  Here are some very simple but effective tips: (1) businesses need to make sure they are on top of invoicing customers –the quicker the invoice is sent, the faster the cash will come in; (2) follow up with invoice reminders – this doesn’t need to be after payment has become due - a reminder can be sent a few days before the invoice is due; (3) offer customers an incentive – discounts for customers who pay immediately, or within 15 instead of 30 days; (4) draw the line – there’s no point “flogging a dead horse” – if the customer has not responded to initial reminders, stop sending them and seek advice from a solicitor on what options are available to recover the invoice.  Acting quickly may put you ahead of the queue if there are other creditors owed money.
  • Keep a close eye on creditors – more creditors are turning to insolvency as a way of pressurising companies to pay their debts.  Strictly speaking, winding-up petitions should not be used as a debt recovery tool and to do so is an abuse of the court’s process, however, if the creditor is owed a debt which is liquidated (i.e.certain), not disputed and exceeds £750, the winding-up route is proving to be a far more favorable option for creditors.  Once a winding-up petition has been presented and advertised (in the London Gazette) other creditors as well as suppliers will become aware and the bank account will be frozen which will all but prevent the company from trading.  To avoid this happening, companies should engage with creditors at an early stage and enter into arrangements, informal or otherwise, to make payment of debts over a period of time subject to cash flow forecasts.  HMRC are often one of the main creditors for companies, and therefore, company’s should look to enter into “time to pay” arrangements which HMRC will often agree to.

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