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Insolvency Boom - Directors Beware

01 December 2008

Unsurprisingly when the economy slows the numbers of insolvencies rise and although predicted, last weeks’ unveiling of the third quarter insolvency statistics have shown that things are worse than most analysts predicted. Although we are now officially in a recession  provided that businesses keep to the motto that cash flow is king and everything else is commentary then they can survive the lean period which, accordingly to most market commentators will be with us for the next two years or so. 

Snap shot of quarter three : 

  • Bankruptcies - 17,341 in last quarter up 8.8% on last year,  of this the number of debtors petitioning for their own bankruptcy now account for 83.4% of all bankruptcies
  • Liquidations - Up 10.5% at 4,008, up 26.3% on this time last year
  • IVA’s - Up 4.6% compared to last year. 9,746 in last quarter alone
  • Receiverships /CUA/ Administrations - Increase of 65%

With this level of insolvency businesses have got to safeguard themselves against a very real prospect of either customers entering into insolvency before discharging their bills or suppliers going bust without supplying goods ordered.  All of these can have a detrimental impact if not monitored and managed very carefully.  The following steps can be taken to safeguard and minimise the impact on your business:-

  1. Review your customers and their accounts.  Seek independent expert advice if needed.
  2. Look at your terms of business.  Are you protected as best you can be to the full extent allowed by law? 
  3. Are you holding too much stock and are your systems and staff running as efficiently as they should be? 
  4. Do you have enough cash to last a month if no further payments were deposited into your account?

If you feel that you are in a situation whereby you cannot meet all of your repayments when they full due then technically but most importantly, legally, your business is insolvent.  Once you know or ought to  know that your business is insolvent then you must immediately take expert advice.  Under Section 214 of the Insolvency Act 1986 it is an offence for a company to trade which is insolvent. 

As soon as you know (or ought to of known) you may become personally liable as a Director for the debt accruing.  The only statutory defence is that by taking the actions you are taking you are putting the creditors (as a whole and not one particular creditor) in a better position then they would be or would have been if the company had filed for insolvency at that point.

Over the next two years there is going to be a sharp increase in the amount of wrongful trading actions brought against Directors when they knew or ought to have known that their business is insolvent. Directors need to be aware that they do not fall into this category and they should take advice before they put their positions and themselves personally in jeopardy.

For information contact Martin Kingman, Debt Recovery and Insolvency Manager.

 

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