Over 12 months on from the ‘end’ of the pandemic, does the future look any better for companies in England and Wales?

It would appear not, in the short-term at least, given the current economic challenges in the UK.

Therefore, it is as important as ever for companies in financial distress to seek timely professional advice (whether that be from solicitors, accountants or Insolvency Practitioners).

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Current challenges for companies

The current market conditions being faced by companies in England and Wales are arguably some of the most challenging seen in recent times.

Contributing factors, to name a few, include rising interest rates (the Bank of England base rate rose again in May 2023, this time to 4.5%), high inflation (inflation remained stubbornly high in April 2023 at 8.7%), increased fuel prices, the ongoing energy crisis and persistent supply chain issues.

Factors such as these, coupled with the ongoing cost of living crisis, have impacted companies across the whole spectrum of the UK economy, some quite severely.

The financial strains being placed on UK companies can be seen in the high number of reported corporate insolvencies.

The statistics for England and Wales for 2022 show a considerable rise to over 22,000 formal insolvencies (the highest level for 13 years).

Most recently, in April 2023 alone there were 1,685 company failures - although 15% fewer than the number in April 2022, this number is higher than both during and before the Covid-19 pandemic period.

Included within the April 2023 figures is the high-profile insolvency of 150-year-old law firm Ince Group PLC which collapsed into administration, appearing to demonstrate the extent to which most companies, regardless of their size and apparent financial strength, are susceptible to the current economic pressures.

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Risks of not seeking timely professional advice

Given the challenges currently faced by many UK companies, the risks of not seeking timely professional advice are ever more apparent.

The obvious risks to a company in any degree of financial distress are that it becomes, or is in danger of becoming, insolvent or ends up having to cease to trade.

This, in turn, could have a detrimental impact on both existing and potential trading relationships with third parties, as well as, of course, on the owners of the company, who may lose their equity stakes in the company and who may also be exposed to personal guarantees previously given in support of the company’s liabilities.

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Risks to individuals

The risks to individuals involved in the management of a company (i.e. company directors) are that they breach their statutory and fiduciary duties to the company and its creditors by continuing to trade at a time when the company is insolvent or on the cusp of insolvency, known rather ominously as the ‘twilight period’.

This period can creep up on companies, so directors need to be vigilant to avoid ‘sleepwalking’ into insolvency.

If a company does enter the ‘twilight period’ and then becomes insolvent and subsequently ends up in a formal insolvency procedure.

This could ultimately result in actions being brought against the company’s directors in their personal capacities by an insolvency office holder (i.e. a liquidator or an administrator) in relation to, for example, breach of fiduciary duties, misfeasance or wrongful trading, or by the Insolvency Service by way of director disqualification proceedings.

Given the above, it is imperative that companies, through their directors, seek appropriate professional advice as early as possible when there are signs that the company may be in financial distress.

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If professional advice is sought at an early enough stage, it may be possible for a company to avoid insolvency altogether through.

For example, a properly thought-through and executed restructuring of the business.

Even where a company is already insolvent or on the cusp of insolvency, it is still essential to seek professional advice to benefit from that advice and demonstrate proper governance on the part of directors.

Also, it is worth noting that insolvency does not necessarily mean the end of the road for a business, as it may be possible to save a company through.

For example, a company voluntary arrangement or to preserve the company’s business as a going concern through administration.

Where those procedures are not viable, it will probably be necessary to consider liquidation.

In summary, the options available to a company in financial distress will depend on the circumstances of each case.

Company directors may also wish to seek professional advice in relation to their duties and obligations to the company and its creditors and the risks of personal liability, although such advice is usually coupled with advice provided to the company as described above.

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Financial distress and insolvency can be very stressful and difficult scenarios for all involved with the management of a company.

However, by seeking timely professional advice and experienced guidance, both companies and their directors can successfully navigate the issues they are experiencing and can often find a positive solution.

Where advice is sought from a suitably experienced insolvency and restructuring lawyer, then, depending on the circumstances, a referral to a licensed insolvency practitioner may be appropriate.

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It is important that your seek timely professional advice if your company is in financial distress. Our insolvency solicitors can provide professional legal advice to support your business.