Recognising when professional insolvency intervention is essential

Recognising when professional insolvency intervention is essential from a corporate governance standpoint. 

In-house finance and legal teams are well equipped to manage routine risks, such as cash flow forecasting, covenant monitoring, and supplier negotiations; however, once a company approaches insolvency, the risk level enters a different playing field. At this point, professional insolvency advice must be called upon.

Dave Broadbent, a licensed Insolvency Practitioner at insolvencypractitioners.co.uk, sets out where the board’s own oversight ends and specialist input becomes necessary. Dave has close to 30 years’ experience in corporate insolvency and restructuring. He previously served as regional chair of R3 in Yorkshire, the insolvency and restructuring trade body.

Once insolvency becomes a realistic prospect, it’s at this point that directors’ duties shift towards the company’s creditors as a whole, rather than working solely in the best interests of the company, and by extension, its shareholders. If this shift in duty is overlooked, decisions that were previously sound business judgement can expose directors to personal liability.

In my experience, recognising this shift in duty is where even well-run boards get it wrong, often because the transition isn’t always clear. A licensed Insolvency Practitioner can signpost when this shift in duty comes into play.

There are a handful of situations that should prompt a board to bring in a licensed insolvency practitioner, rather than continuing to manage the situation internally:

• Wrongful trading exposure – If a director knew that the company was approaching insolvency and had no reasonable prospect of avoiding liquidation, but continued trading, the director can be held personally liable for the losses made during that subsequent period. As part of an insolvency practitioner’s role is to investigate director conduct, including wrongful trading.
• Sustained creditor pressure – Statutory demands, county court judgments, and winding up petitions indicate potential insolvency and that the knowledge is no longer internal and now known to creditors.
• Cash flow insolvency vs balance sheet insolvency – A company can be cash poor, yet asset rich, and vice versa. In my experience, it’s one of the most common reasons boards act late. A business can be cash flow insolvent, without being balance sheet insolvent, a distinction more boards should recognise.
• Formal procedures on the table – If administration, a Company Voluntary Arrangement (CVA), or liquidation is being discussed as a realistic option, note that these are procedures that only a licensed insolvency practitioner can handle.

Any one of these should prompt a conversation with a licensed insolvency practitioner, regardless of whether formal action is required or pre-insolvency guidance.

Company administration, CVAs, and liquidations are regulated procedures that only a licensed insolvency practitioner can legally administer. Bringing in an insolvency practitioner marks that the situation has moved into a different regulatory space, one that requires specialist expertise.

Throughout my time supporting company directors and board members, the most effective business turnarounds are where I’ve been called in to diagnose a business early, rather than throughout the final stages, where options can often be limited.

An initial review can assess the company’s financial position, clarify whether formal procedures are necessary, and protect directors by demonstrating that they took proper advice at the first sight of warning signs. Once creditor pressure escalates or a petition lands, this narrows the options considerably and increases personal risk for the board.

Good governance involves calling upon regulated specialists when the board’s own expertise ends and specialist support is required.