The earlier you can spot the signs of distress, the better. The more time you give yourself and the more assets and resources you have available will give you a better chance of making the changes necessary to turn the business around. The ‘Twilight Zone’ is the period between the company having financial issues and either returning to profitability or entering a formal insolvency process.
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In reality this period could be at least 2 years before an insolvency would likely occur given the powers available to Insolvency Practitioners to look back at any actions taken by directors over this time period.
You can never take advice too early but it is very easy to leave it too late. If you wait until the bailiffs are at the door, you can’t pay the wages tomorrow or have defaulted on a ‘time to pay’ arrangement with HMRC your options will be limited and a formal insolvency may be unavoidable.
In my experience (and I have the grey hairs to prove it) when financial problems arise, or the prospect of insolvency looms, however remote, it becomes more difficult for directors to make rational judgements during this ‘Twilight Zone’, should the company stop trading and if so when?
This Twilight Zone is of fundamental importance to directors. Whilst the government may wish to encourage entrepreneurs, the harsh reality is that Insolvency and Company law does not favour a director who trades on to the detriment of creditors when a company is either insolvent or close to it.
This puts directors who already have many duties in an invidious position as their duties will change to include a duty to act in the best interests of creditors until the company’s future is determined, leaving them open to claims of:
- wrongful trading
- personal liability
The courts place great reliance on those directors who seek and obtain competent and independent advice from a Licensed Insolvency Practitioner…but all of this creates a number of problems for both the courts and the professional advisors.