The options available to businesses facing financial difficulties

With reports that the UK is set to become the first large European economy to reach pre-pandemic levels of insolvencies, partner, and corporate recovery specialist Azher Quyoom, considers the wider outlook for businesses and the support schemes available

A recent report by the credit insurer Allianz Trade has suggested that there had already been a surge in insolvency numbers at the end of last year, which was expected to continue to increase this year to around 37%. Sectors specialising in utilities, construction and business services are considered to be particularly vulnerable at the present time.

Whilst the UK has a mature and resilient economy, businesses undoubtedly face a challenging period with high inflation, supply chain disruption, Brexit “lagging” issues and uncertain customer spending all coalescing in such a short space of time and causing real headaches for businesses and consumers alike.

Directors’ duties

I often advise business owners who are facing financial difficulties and we discuss the array of legal and non-legal factors that they must consider when trading a business in an uncertain financial situation. Collectively these are often called “directors’ duties”. One of the main reasons that business owners seek advice from an insolvency lawyer is to assess any personal risk – or personal liability, as it is sometimes called.

Directors’ duties primarily derive from legislation such as the Companies Act 2006 and the Insolvency Act 1986. These two pieces of legislation expressly set out the rules and responsibilities that directors should adhere to, who they owe duties to, how directors should conduct their duties and what happens if those duties are breached. Directors’ duties also derive from case law where complaints have come before a court or tribunal and a judge has determined on the issue.

There are other laws, regulations and rules that apply to companies, which business owners should take into account, especially if they are operating as sole traders or partners where personal liability is not as well shielded as with company directors. Whilst the questions from directors, partners or sole traders are often very similar, the main difference between them is the degree of direct risk.

Consider your financial position

Most directors come to me with two main questions when their company is in financial difficulties: –

• Is it right for me to continue to run my business whilst it is in financial difficulties?

and,

• if I do, then what is the risk to me?

The process begins by considering the financial position of the company itself: what are the issues facing your business? What financial, practical and/or legal steps that can be taken? What are the timescales involved? What is the effect of taking or not taking a decision? Will these decisions make a difference?

From a few initial questions, it is often possible to formulate options to answer the first question. Normally, we are able to suggest a way forward, mostly with some changes to how the business is being run and sometimes with changes around reducing liabilities.

Assessing business – and personal – risk

The next stage is to look at risk – both for the business and individual(s) concerned.

The first step is to take a decision, hypothetically, for the business and map out where that takes the business and the individuals concerned. We look at whether a decision improves or worsens the company’s position overall; we look at timescales to get the business back on its feet; and, importantly, we look at the risks involved during that period of time.

It is normal for a variety of options to be put to the directors to turn a business around. Sometimes the options are completely different – such as liquidation versus administration.  Sometimes we present a range of options and explain how each option leads to a possible outcome – and in some cases, it is possible to have variations or tangents based upon on a step-by-step approach. The latter has the benefit of allowing the directors to exit at any given point if the outcome is not as expected or makes the situation worse.

The benefit of taking options-based advice is that you have a plan to follow, which can be measured and risk assessed – and, importantly, you have a degree of control over the situation, which you may not have had previously.

Having a plan allows you to share it with others and with it, the opportunity to explain how you intend to turn your business around. This can be for lenders, creditors, suppliers, or employees.

This is where professional restructuring and turnaround help comes in. Restructuring professionals are experienced in getting to grips with difficult situations quickly, without fuss and with the aim of turning around and/or rescuing a business.

We can help assess risks and formulate plans for business rescue and turnaround. We can also help negotiate with your creditors and lenders so that you can get on with running your business.

The most important thing is to take advice as early as possible, and to continue to take advice throughout the process in order to navigate potentially choppy waters ahead.

If you are considering your financial position, our specialist lawyers can guide you through your options. We work closely with accountants and insolvency practitioners, and we offer free initial consultations. If you are looking for help and advice, talk to the team today by emailing azher.quyoom@andrewjackson.co.uk or calling 01482 325242.

Correct as of 5pm on [13/09/2022]