For directors of companies navigating a period of financial difficulty, it can be a challenging process.  Where financial distress exists, the competing interests of a large number of stakeholders come into play. These stakeholders can include shareholders, customers, employees and a wide array of creditors such as HMRC, landlords, suppliers and finance providers, to name just a few.

Plotting the most appropriate path through a financially distressed scenario requires a balancing of those interests and requires directors, as the ultimate decision makers, to have a sound understanding of the implications of their choices.

Each company’s situation will have its own unique challenges. There is no script or manual to follow and there is of course no requirement for directors to have a qualification in the range of restructuring options available. 

However, that is the reason that specialist advisers exist. 

Restructuring advice is no different to other specialist areas such as employment law, health and safety legislation and GDPR (to name just a few). Directors in financially distressed situations are expected to seek input from advisers with the appropriate skills, experience and qualifications who can provide the company with meaningful assistance and advice, whilst the directors retain control. Those decisions may be subject to subsequent review if a formal insolvency process becomes necessary and taking appropriate advice at an early a stage as possible is not something that would attract any criticism.

The focus should always primarily be on preserving a business and its value, however, where a formal insolvency process becomes necessary there are various implications for directors, of which they need to be aware and where even the definition of 'Director' in those circumstances needs to be clearly understood.

Insolvency Practitioners are licensed by RPBs (Recognised Professional Bodies) and have the qualifications, skills and experience to assist companies in financial distress. They operate in an industry which is rightly highly regulated, and they are required to know and understand the insolvency and non-insolvency restructuring options available, of which there is a wider range of solutions than many directors realise.

In August this year the Insolvency Service (a UK government agency) took action to wind up a number of connected businesses involved in the provision of misleading advice to directors of companies in financial distress, encouraging a scheme whereby directors and owners would disassociate themselves from the company’s debts while retaining assets. More can be read here.

The importance to a company of choosing an appropriately qualified and experienced adviser cannot be underestimated. Where a company is insolvent, directors have an obligation to act in the interests of creditors and should obtain input from an adviser with the appropriate levels of skill and experience. As with many other things in life, alternative offers of a quick fix that sound too good to be true should be viewed as such. Directors making decisions to engage unscrupulous advisers need to understand the potential implications of doing so which can, in certain circumstances, have potential for future disqualification and a restriction on that individual’s ability to run a business in the future.       

Licensed Insolvency Practitioners are well placed to assist in understanding the implications of decisions. The action recently taken by the Insolvency Service against rogue advisers seeking to undermine the formal insolvency regime only underlines the importance of the role that licensed Insolvency Practitioners have in these scenarios.

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