Let’s be honest; no one wants to talk about insolvency

Insolvency is a touchy subject. However, reluctance to consider your cashflow situation seriously and objectively can very quickly lead to big problems. Laura Keegan, senior associate solicitor and insolvency expert, discusses what businesses need to do.

A business can only pay its creditors if it has sufficient cash coming in. A 2022 study by Barclays found that 58% of SMEs in the UK were waiting for late payments. Intuit Quickbooks estimate that SMEs spend 56.4m hours chasing debts which is worth more than £6.3bn to the economy each year. It is more important than ever for directors to know the early warning signs, both within their own businesses and that of their customers. Many directors don’t appreciate that failing to pay debts as and when they fall due is a legal definition of insolvency. This can have serious impacts on their statutory duties to the company and its creditors.

A director cannot be personally liable for company debts (a supplier couldn’t pursue a director personally for an outstanding invoice). However, if a director fails to act in the company's or its creditors' best interests, there can be personal liability to compensate the company for any losses. Sometimes things are outside of your control. In a world where economies are so interconnected, regular monitoring and due diligence are vital.

Get to know your customers

Most of us are very good at getting to know our clients and customers at the initial engagement phase but rarely continue that due diligence after contracting. That’s not to say that everything is hopeless! As with any business risk, small steps to establish effective internal procedures and policies do - help. This can include:

• Having a robust set of terms and conditions, which clearly set out your invoicing and collection policy
• Understanding the early warning signs of financial difficulty within your sector
• Having a clear internal invoice collection procedure so that overdue debts are sent out to a reputable invoice collection team, specialists in recovering overdue debts without damaging those important commercial relationships
• Implementing ongoing monitoring and due diligence in respect of the financial position of key parties in your business, whether customers or suppliers and understanding your rights as a creditor

If you are ever concerned about the financial position of your business, seeking early specialist legal and accounting advice is key - but you can only seek that advice early if you are alert to the risk.

For more information, contact Laura using [email protected] or 0191 211 7970.