We often advise individuals about the financial outlook for their businesses. Sometimes, after considering the available options, our advice is that a business is insolvent or that insolvency cannot be avoided.

For the people sitting in front of us, this can be a distressing position to be in. A business is rarely just a business. Behind the financial figures are people’s livelihoods, homes and families, and it is entirely understandable that those wider considerations can influence how business owners approach the situation.

As legal advisers, our role is to provide clear, practical advice that can be understood and acted upon. That means looking at the position in front of us, explaining the options available and helping decision-makers understand what each course of action could mean.One of the most important parts of that advice is recognising when taking no action could itself create further problems.

 

Understanding the legal position

Business owners in the UK have considerable freedom to make decisions about how they operate their businesses. Where a company is experiencing financial difficulties, however, that freedom is subject to important legal duties.

If a business is insolvent, or cannot avoid insolvency, decision-makers should act in the best interests of creditors rather than themselves. In particular, once they know, or ought to know, that the business is insolvent, decisions should not put creditors in a worse position.

This is why establishing the financial position of a business is so important.

When we provide advice in these circumstances, we consider the solvency of the business and the options available based on the facts in front of us. The advice is tailored to the particular circumstances and is intended to help decision-makers understand their legal duties, manage the risks and consider the appropriate way forward.

 

Why doing nothing can make matters worse

It is understandable that a business owner may hope that circumstances will improve, particularly if they have invested years of work in building the business. However, while a decision is being delayed, liabilities can continue to accrue.

If a business is unable to pay its debts when they fall due, creditors may continue to provide goods or services without being paid. They may then spend time and money pursuing those debts through correspondence, bailiffs or court proceedings, only to find that the business ultimately cannot pay.

There may also be new or previously unforeseen liabilities arising during this period, adding further unpaid claims.

Doing nothing can therefore leave creditors worse off, even where there was no intention to cause them loss.

This is not about an adviser being right or having their advice followed. It is about making sure that decision-makers understand their position and have the opportunity to take appropriate action at the right time. In an insolvency situation, that timing can be particularly important.

 

Taking action can feel uncomfortable

For a business owner, deciding that a business cannot continue in its current form can be one of the most significant decisions they face.

There may be employees to consider, relationships with customers and suppliers, and personal financial commitments. There can also be a strong sense of responsibility towards a business that may have taken many years to build.

That is why conversations about insolvency need to be approached with care as well as legal expertise.

In some circumstances, informing creditors that a business is insolvent and unable to pay them may be an important part of acting in their interests. It gives creditors clarity about the position and allows them to make their own decisions about managing unpaid debts and their cashflow.

While this may be uncomfortable in the short term, continuing to trade without a realistic prospect of meeting liabilities can create further risks.

 

The value of professional advice

This is where specialist legal advice and support from insolvency practitioners can be particularly valuable.

Our role is not simply to tell a business owner whether they are solvent or insolvent. We help them understand what that position means, what options may be available and what their legal responsibilities are.

Where appropriate, professional advisers can also act as an intermediary between the business and its creditors. Having that separation can provide some breathing space and allow business owners to focus on understanding the position and considering the next steps.

Seeking advice does not necessarily mean that a business will have to close. It means gaining a clearer understanding of the position and the options available before circumstances dictate what happens next.

The earlier advice is sought, the greater the opportunity there may be to consider those options carefully and take appropriate action.

 

When taking the next step matters

There is rarely an easy answer when a business is facing financial difficulties. However, recognising the position and seeking appropriate advice can help prevent a challenging situation from becoming more serious.

For business owners, taking action may not feel like the easiest option. But where insolvency cannot be avoided, understanding the position and acting at the right time can be an important part of meeting legal duties and protecting the interests of creditors.

Sometimes, the most responsible decision is also the one that is hardest to make.

If your business is facing financial difficulties, seeking professional advice at an early stage can help you understand your position and the options available.

If you would like further guidance and advice, please contact Azher Quyoom, partner in our insolvency and corporate recovery team, on (01904) 275250 or email azher.guyoom@andrewjackson.co.uk