Insolvency has a much wider definition than the simply being a negative balance sheet where liabilities exceed assets. For completeness it includes:
- Liabilities exceed assets – a negative balance sheet
- Cashflow test – can the company meet it’s liabilities as they become due, if there is an HMRC time to pay (or other agreement with a creditor) then the answer is no
- Being in receipt of a Written Demand for Payment or Unsatisfied Judgement
As we come out of recession the demands on cashflow will increase so the second point may well apply to many companies at a point in time. Under insolvency law, at that point the directors responsibility is not to put creditors at risk in the actions they take and to treat all creditors fairly, so no creditor should be treated as preferred. In order to protect themselves the directors should consider taking the following steps:
- Take professional advice, whether that be their accountant or an insolvency practitioner
- Take positive action, recognise the position they are in and take steps rather than putting their head in the sand
- Justify any expenditure (to the extent that it will improve the position of all creditors)
- Keep notes of actions and reasons for them (however small)
- Keep notes of board meetings, however unofficial they may appear
- Make sure you have up to date management information (eg management accounts, daily sales reports, cashflows)
- Ensure there is no deterioration in the financial position
- Ring fence any deposits – don’t rob Peter to pay Paul
- If insolvency proceeedings are taken these will all be seen as positive steps
- Resignation as a director does not help as the rules apply to any director in the last 3 years
Many more companies than realise it may be caught by the cashflow test and while many of the steps are just good business practice this is an area directors should be aware of. Thanks go to Isobel of Bretts Business Recovery who presented a seminar on Insolvency from which this was prepared. This is general advice to directors facing insolvency and may not fully apply to your situation so you should seek professional advice before taking any steps based on the contents. If you would like advice in this or other areas feel free to call. Alastair Wood, AW Accounting, Gravesend, Kent – Accountants who “speak your language”