Pre-insolvency advisory: The governance case for getting early advice

Pre-insolvency advisory: The governance case for getting early advice and staying ahead of what could be a crucial period in your business

Many boards seek intervention from a licensed insolvency practitioner or restructuring professional as a last resort, once the company’s position has already deteriorated. Dave Broadbent, a licensed insolvency practitioner at insolvencypractitioners.co.uk, argues that this decision must be scrutinised and sets out why normalising early advice as a good governance practice is imperative.

Dave is a highly experienced licensed insolvency practitioner with nearly 30 years of experience advising SMEs on insolvency and restructuring procedures. He is a former regional chair of R3 in Yorkshire and plays an active role in the profession by delivering seminars to accountants and other insolvency professionals.

Boards regularly bring in external advisers for audit, cyber risk, and ESG assurance, without treating the engagement as an admission of failure. Financial distress must be treated in the same vein, as it’s a risk category that must be monitored and acted upon early. In my experience, boards often delay contact with a licensed insolvency practitioner to avoid associations with insolvency; however, the earlier advice is sought, the greater the options available.  

Where pre-insolvency advice is treated as separate from ordinary governance practice, professional insolvency advice is delayed, and the options are narrowed as a result. Financial distress must be treated as a standing governance matter, well before it becomes a formal insolvency event.

Simple procedural changes to build this into board practice can make tangible differences.

• Add financial distress indicators to the board’s standing risk register, reviewed with the same regularity as other principal risks
• Establish a relationship with a licensed insolvency practitioner ahead of time, so help is always on hand 
• Treat a periodic diagnostic review as routine oversight, in the same way boards commission audits or covenant reviews, rather than reserving it for times of visible distress

In practice, it’s usually a matter of a board agreeing to review a small set of financial indicators at each meeting, and nominating the finance director or company secretary to connect with a reputable insolvency practitioner. Boards that build this rhythm into their governance find pre-insolvency conversations easier to have.

A pre-insolvency review is a diagnostic exercise which involves examining:

• cash flow forecasts
• the company’s asset position
• the company’s ability to meet obligations
• existing finance arrangements
• creditor relationships

The board receives a clear assessment of the company’s position, along with which options remain realistically open, whether informal negotiation, restructuring, or formal procedures. This is paired with a critical view of which options best fit the board’s own objectives for the business. It produces clarity for the board, which makes it better placed to communicate with shareholders, lenders, and creditors.

An early review gives directors a clear assessment of their financial position and sufficient steer on the timing of restructuring activity. Early advice leaves scope for informal negotiations with creditors, restructuring finance arrangements, or turnaround planning. Building early advice into board practice is a marker of good governance that protects a company’s options as much as its directors.