Am I insolvent? – Why pressing the panic button may not be the best idea.Posted: May 13, 2020

The initial shock of the lockdown.

When the government announced the Coronavirus lockdown our telephone began to ring. People were worried, and many owners thought that this would be the end of the road for their business. The virus, the lockdown and the effect they had on trade were clearly devastating. It was a shock to us all. Anyone who successfully owns or runs a business knows they need to look ahead and have contingency plans.

The problem with the lockdown was that nobody anticipated it or could possibly have expected the effect it would have. For many, the threat of insolvency was suddenly very real. It created an understandable panic reaction because when the unexpected happens and we feel threatened our fight or flight response kicks in. Unfortunately, this affects our thinking and we become less capable of seeing things in the calm and measured way that is needed when disaster hits.

Part of our role is to look at a situation in the clear light of day and offer well considered and appropriate guidance in difficult circumstances. Naturally, we have sympathy for your situation and of course we fully understand that you are facing a hard time. Experience though, tells us that the best way forward is to avoid slapping a hand down on the big red panic button. Insolvency is not always as clear cut as it appears.

Are you insolvent?

This is a question with a simple answer and often a more complex response. Let me explain what I mean by that. In simple terms, if you cannot pay your bills as and when they fall due (for example, at the end of a clear term of business, often a month) you are officially in a position of insolvency.

The complexity is that although the definition is clear there may be other considerations. One for example is what exactly being insolvent and ‘unable to pay’ means in a practical way. There is a very big difference between not being able to pay a supplier and perhaps needed to ask them to extend more favourable terms for a short while, and not being able to pay your VAT. Being unable to pay your salary commitments is much more serious, for example, than having to return your lease car because the payment is not viable anymore.

What we need to remember is that while insolvency is a fixed point, the response to it may not be. Just by sitting down and looking through your situation in context, we can sometimes find the solution you are looking for. More to the point we may be able to resolve things without resorting to the drastic measures that are usually buzzing around in the mind of the business owner.

I don’t want to give you the impression that we can save everyone though because, sadly, sometimes the solution is not the one you want to hear, and we do need to take some pretty drastic measures. However, there is no way to know this without calmly looking at what needs to be done.

Wrongful trading

At the time of writing this article, the government response to covid-19 has already resulted in a very big change in the way we view insolvency even though it is on a temporary basis. At an early stage the government announcement that wrongful trading would be suspended for 3 months from 1 March 2020. Wrongful trading is trading past a point when the director knows or ought to have known the Company was insolvent and couldn’t avoid insolvency. If proved the director can be made liable for the additional losses caused by trading past this point. The clear concern from the government is that many directors would simply ‘throw in the towel’ because they considered the Company insolvent because of covid-19.

It is a seemingly small thing that could result in a very different response to your situation. This change was hardly trumpeted, but it could affect your response to your situation. It is ‘your’ situation that is important so you will need an advisor who understands your personal circumstances as well as the big picture. It is not about the grand plans for the wider economy or some convoluted laws, but what things mean practically to you, your family and your business. You need a professional guide because they will be able to give you a clear practical response, as well as a ‘yes or no’ answer to that all-important question ‘Am I insolvent’.

Whatever the specifics, the primary response to any business disaster is to first sit down, cut through the panic and the noise, and get to the core of things. We cannot say we will save your business, sometimes that isn’t possible, but we can deal with your insolvency situation in a calm, collected way that you may have difficulty achieving when you are under pressure.

As life changing as the virus situation is, it needed responding to with the basic question of ‘can this business survive and prosper despite this problem’? Whether it is the end of the road or not depends ultimately on the short and long term viability of a business. This is exactly the same situation that would result from any major financial crisis not just a response specific to the lockdown.

If there is one positive thing to take away from the whole Covid-19 situation it is that sometimes there are more answers than you think. So, when a business disaster happens, before you press the panic button, get the help you need.

Call us if you are in a difficult financial situation and let us assess where you stand before you assume the worst.

Back