As of 11pm GMT on the 31st January, 2020, the United Kingdom left the European Union, meaning that many businesses had to work around red tape, as well as challenges related to workforces, supplies and transport. In March of the same year, the first restrictive measures around the COVID-19 pandemic saw households and businesses alike face unforeseen pressures, including ‘non-essential’ staff working from home, temporary closure for retail and hospitality businesses, and large percentages of workers facing furlough, or in some cases, redundancy.
Whilst restrictions around COVID-19 have been dropped in 2022, businesses are still affected by issues they have faced in the last two years, along with continuing problems like disruption to supply chains, and new problems such as inflation rising to the highest levels in 30 years, along with fast rising energy costs. With all of these worries, when faced with the risks of insolvency and any other pressures, it’s important that directors take early action and seek advice on how to mitigate these risks.
Assessing and reducing insolvency risk
Whilst many businesses may have had long-term business plans in place at the start of the decade, the series of events of the last 2 years have meant switching to a plan to survive the new normal of living with the effects of the pandemic, along with other economic challenges. In some cases, plans for growth have switched to restructuring to remain viable.
As directors who previously had profitable businesses now face the unknown, along with reduced resources, it’s important to consider the actions that can be taken to assess and reduce the risk of insolvency. What do directors do to find their way through current economic challenges?
Assessing a company’s insolvency
There are two main factors for directors to assess for insolvency. Firstly, they should keep a close eye on cashflow; if a company cannot pay their debts as they fall due, then it is considered insolvent. Directors should also pay close attention to their balance sheet, as a company is also considered insolvent if the value of their assets is less than their liabilities.
Reducing the risks
If there is concern about the cashflow or balance sheet of a business, then the best thing directors can do to navigate the risks of insolvency is to seek professional advice at the earliest possible time. Insolvency practitioners help businesses to understand the insolvency options available for them.
Insolvency does not always mean that a business must cease trading and close - there may be options for restructuring and refinancing to rescue the company, however, directors must also be aware of the risks and liabilities that directors can face when continuing to trade. Whilst a director’s duty is usually to follow the best interests of the company, at a time of financial difficulty, they must put the interests of creditors first.
If directors fail to act in the interest of creditors, actions can be taken against them for wrongful trading, breach of duty or deceit, and they can face disqualification. In order to navigate the associated risks of insolvency, directors can:
Contact an insolvency practitioner for professional advice
Assess the financial position of the company on a regular basis, looking at the most up to date cashflow and balance information
Communicate with creditors to ascertain whether more lenient payment schedules can be agreed upon
If you are concerned about insolvency or are seeking advice on how to navigate your way through the challenges brought on at this time of uncertainty and economic change, you can contact BEACON by calling 02380 651 441.