The Insolvency Service has updated their guidance and added a video to explain to Directors what they should do if their company becomes insolvent.

Called ‘Company Health Check; keeping your business on track‘ the guidance details the signs of insolvency and the consequences that may occur if the situation isn’t managed correctly.

The guidance includes the new Directors’ responsibilities when a company becomes insolvent, as well as the two basic checks a company director must follow if they’re concerned about the solvency of their business, as follows:

The Cash Flow Test

This test checks whether the company is cash flow insolvent, the tests for which include checking whether the company is facing late payment procedures from suppliers, such as reminder letters and whether the company has received or faced recovery proceedings.

Another indicator is if suppliers are insisting on payments in advance for goods or services, and if the company has fallen into arrears with payments to HMRC.

The Balance Sheet Test

This involves a comparison between the value of the company’s assets and liabilities, to see if the liabilities exceed the assets. This would make the balance sheet insolvent.

The guidance also provides further information on:

• Personal liability of trading while insolvent.
• What might prompt the Insolvency Service to open an inquiry into an insolvent company.
• The risks of being disqualified as a director.
• Directors and bounce back loans (BBL).

The updated guidance is published amidst heightened concerns about rising insolvency levels over the coming months, as a result of the increasing financial pressures faced by all businesses. Described by the Federation of Small Businesses (FSB) as the ‘April flashpoint’, businesses are contending with the cost-of-living crisis, surging inflation, the growing cost of energy, increased National Insurance contributions and interest rates, and spiralling import costs.

What do you do if your Company IS insolvent?

There is a new piece of legislation that you need to be aware of, and our recommendation would be that you seek urgent advice from a professional insolvency practitioner.

The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021

The new Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 allows the Insolvency Service to investigate the conduct of directors of dissolved companies, even after the company has closed. If misconduct is found, directors can face being disqualified for up to 15 years, or prosecution.

According to an Insolvency Practitioner we spoke to recently, this is not just an idle threat either. He has seen several such disqualifications since the new Act came into effect. These were NOT unusual circumstances either, but what he deemed to be fairly ‘normal’ situations.

Under the new legislation, the Business Secretary will also be able to apply for a court order to require a former director of a dissolved company, who has been disqualified, to pay compensation to creditors who have lost out due to their fraudulent behaviour.

This is serious stuff!

Until now, once a company was dissolved, there could be no repercussions on the directors, but that’s no longer the case.

Our advice is therefore to ensure directors are mindful of their more significant creditors such as banks, landlords and HMRC. These are often the ones with most to lose from a company’s downfall, and are therefore those who’ll cause most issues, so it makes sense to deal carefully with each.

All possible restructuring options should be explored before conceding to what may appear to be the inevitable. It sounds counterintuitive when looking to improve a company’s finances, but engaging a helpful and practical insolvency practitioner in the early stages really can help to avoid a worst case scenario.

We’ve seen several times over the years that solid advice really can make all the difference.

If you’re unsure about the future of your business, please don’t sit in silence, or worse, lay awake at 3am! Get in touch and we can help you get in touch with someone who can give you solid, pragmatic advice without obligation. If nothing else, you’ll be better informed and you may just find out that you have more options than you may have thought.

The key thing is to get advice based on the new rules before you make any big decisions.