How to get back on your feet after business insolvency

Once you receive one sign that your business may be headed to insolvency, it may seem that all your finances instantly start spiralling out of control; but giving up is out of the question. It is how you deal with this downfall that will determine the future of your career and business.

When the odds are stacked against you and your business and you see yourself heading towards corporate insolvency, the key is to never back down. Having the right mind-set is only half the battle – trying to keep your head above water counts more at this stage of your business than ever before. Facing up to the problem is vital.

Some warning signs that you may be headed in the direction of corporate insolvency are as follows:

• Ceiling borrowing: Borrowing the maximum amount from the bank/suppliers on behalf of your business just to make ends meet is commonly known as ‘ceiling borrowing’. This is a telling sign that your company is on the brink of insolvency. Take a step back and strategise how you could cut down and function on the bare essentials, just for a few months, to avoid constant ceiling borrowing.
• Lack of salary for directors: Insufficient funds to pay the people in charge means your business isn’t functioning as it should, especially if it is not in the founding stages.
• Constant pressure from creditors: If your mortgagors, lenders, bank, credit card companies, etc have been pestering you more than usual recently, then you may be in trouble. If you are receiving calls and emails requesting immediate payment and have failed to act on this, this is a red flag and needs to be actioned right away. Failure to do so could result in notices demanding payment. This is even more the case if you have been receiving calls and emails requesting immediate payment. This means you may soon receive a payment demand if nothing is done soon.

If you are reading this and trying to identify any signs that your business may be declared insolvent too, then this is a rather strong place to be, even though you may not feel like it right now. Identifying the warning signs of insolvency before you actually land in it could be your saving grace, and can save you a lot of time and sleepless nights further down the line.

So, at the peak of your financial distress, what is the first thing you need to do? Knowing you have a problem, and acknowledging the problem is key. A basic understanding of corporate insolvency will help you assess your situation, and as simple as this sounds, the term is often thrown around with little grasp of what it actually means.

The term ‘corporate insolvency’ is when the finances of a company are under stress, as circumstances may arise where the directors are at risk of facing personal liability for decisions they make without properly understanding their duties to creditors and the legal consequences of their action or inaction.

Effective cash flow management is vital from here on out if you would like your business to enter the “rescue zone” that is, you don’t need a professional or accountant to tell you that. Liquidation is also an option, but that is the last case scenario, and something any good business person will want to avoid at all costs. If you are struggling with debts consider other options as well, maybe using Individual Voluntary Arrangements could be the answer. Have a look at this IVA forum to give you an idea of what you would need to show your insolvency practitioner if you are in that situation.

Talking about the problem with a professional may be your first step to tackling and ultimately solving your problem. Pretending the problem isn’t there will only magnify the problem. When seeking advice it is important to make sure you are speaking to a qualified insolvency professional, rather than a middle man or a broker who will have hidden charges. Obviously, this extra expense won’t do your finances any favours.

This may be a lonely time, but having a clear plan of action and seeking advice can make you feel less isolated. Letting your workforce know is something that may seem unbearable but it is necessary to get your team on the same page. It’s better for them to find out from you rather than the local press- this will knock team morality more than anything else. The main aim is to return to solvency, rather than ‘save face’. Of course, your business reputation is rather important, but it is how you deal with this situation that will keep you in business, rather than a short term ‘keeping appearances’.

As expert Jamie Playford points out: “Directors that know their business is failing will attempt everything humanly possible to save the business, even if the strategy is incredibly risky. If a director trades a company when it is insolvent and the position is made worse for creditors, then the director is potentially at risk of a wrongful trading claim. In worse situations, directors may deliberately incur debts knowing that they will never be able to pay them back.”

As an insolvency practitioner, Jamie Playford strongly advises that directors come to him and other practitioners at earliest signs of trouble to ensure they do not fall foul of these issues and to act as a sounding board to sense check any decisions that they are considering.