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What you need to know about advising distressed clients

27 Sept 2023

In today’s increasingly challenging economic climate, it is more and more likely that you will be faced with a client experiencing financial or operational difficulties. Begbies Traynor advise on how to approach this delicate matter with distressed clients.

As an accountant, you are there for your clients throughout the whole lifecycle of their business, through both good and bad times. While we all want to see clients thrive, and their businesses grow, this is unfortunately not always the case. As a trusted adviser, accountants are often the first port of call for company directors facing the possibility of insolvency; it is therefore important that you are able to point them in the right direction.

Enlisting the assistance of a licensed insolvency practitioner during this stage is highly recommended, particularly if your client is already in an insolvent position, or you believe they will soon become insolvent. Your role, however, does not end with making the introduction. The appointed insolvency practitioner is likely to require your assistance in locating certain records and accounts of the company, as well as assisting with the production of an up-to-date Statement of Affairs.

Depending on the current position of the company in question, together with its likely future viability, there are several options which can be considered. Key questions to ask during this time include: How much debt is owing? Can this be repaid? Who does the company owe this to? Are they likely to be amenable to negotiations regarding repayment? Is the company likely to be viable long-term or have its problems taken it beyond the point of rescue?

Restructuring Options

For a company which is currently struggling, yet is ultimately viable going forwards, a form of restructuring could be what is needed to get the business back on track.

This could be achieved by entering into a formal repayment plan with creditors, known as a Company Voluntary Arrangement (CVA). This legally binding agreement requires the indebted company to make regular contributions towards its current debts which will be distributed amongst creditors on a pre-agreed proportional basis. While this can be a great way for a company to refinance its debt, a CVA does require creditor approval, something which could be difficult to obtain if relations have soured due to previous non-payment of monies owed.

Placing the company into administration could be an alternative if a CVA is unlikely to secure creditor approval. While in administration, the company is protected by a moratorium which prevents creditors starting – or continuing – legal action against the business. This gives valuable time and breathing space for directors – along with their accountant and appointed insolvency practitioner – to consider their options moving forwards. It may be the case that unprofitable elements of the company are identified and wound down, allowing the revenue-generating arms of the business to flourish.

Closure Options

While the majority of companies will experience some form of financial or operational difficulty at some point, in some cases, these pressures will become too much for the company to withstand. When a company is beyond rescue, options for bringing the company to an end in an orderly and legally compliant manner need to be explored.

If a company has reached the end of its useful life but is able to repay all its outstanding liabilities prior to closure, then applying for strike-off directly to Companies House could be appropriate. This is done by submitting a DS01 form and is also known as dissolving a company. Be aware that if a company which is insolvent files for strike off, it is highly likely that its creditors will submit an objection which will stop the dissolution process in its tracks.

For a company which is insolvent, strike-off is not an appropriate solution; instead the company must be closed using a formal liquidation process. Liquidation can be entered into both voluntarily by the directors of an insolvent business, or otherwise it can be forced into liquidation by order of the courts.

A company can enter into liquidation voluntarily via a Creditors’ Voluntary Liquidation (CVL). This can only be entered into under the guidance of a licensed insolvency practitioner who will assume the role of liquidator. As part of the process, all assets belonging to the company will be identified before being sold to raise funds to repay creditors as far as possible. Once all funds have been distributed, any remaining debt owed will be wiped out (unless it has been personally guaranteed) and the company will be struck off the register at Companies House.

You can find out more about Begbies Traynor via their Partner Resource Centre page.