As a business owner, calling in the insolvency practitioner yourself is similar to inviting the tiger around for tea. Even with the best intentions, what is originally set-out to help you close your business; by engaging the insolvency practitioner too soon it can quickly leave you in deep waters, without a paddle.
When your business is in dire trouble, you meet with the insolvency practitioner. However, beware of making that initial call too early because not everything is always as it seems; keep the phrase caveat emptor (buyers beware) in the back of your mind.
To start with, it’s probably worth you understanding what the typical director of an insolvent business has gone through to get an idea of why he has called on the insolvency practitioner in the first place.
Typically, a company director will have gone through many months of stressful negotiations with HMRC for taxes owed and the bank to try and raise additional funding. Plus, HMRC will probably threaten with legal action and/or seize company assets.
As pride now influences the decision making process, the likely person you turn to may be your spouse, who may already be fed up to the back teeth of the situation as they watch the life savings and family home equity get pumped into the business.
With credit cards maxed out, there will have only been so many times that siblings and parents could accommodate for that extra loan.
So now, emotionally drained and tired through lack of sleep and very often in the process of separation or divorce, the director may finally seek some business debt advice. The first port of call of course is usually the company accountant.
Many right minded and honest accountants will say that they have little-to-no experience of the insolvency area and will likely refer you elsewhere, to an insolvency practitioner.
What is an insolvency practitioner Just what is their role and why Even if you have done nothing wrong, should you beware
Insolvency is big business, with around 16,000 compulsory liquidations every year in England and Wales alone. With 2,500 qualified insolvency practitioners, it is an industry involving many within the accounting and legal professions.
The insolvency practitioner will have many conflicting roles to address, however, in this instance their main duty is to work in the interests of the creditors during periods of business insolvency.
In very simple terms, once you engage an insolvency practitioner the very people you are pouring your heart out to may well be using the information to pursue you personally, later, when your business enters liquidation. There are some things that all directors should know before appointing the liquidator.
The liquidation engagement paperwork itself will tell you to seek your own legal advice when it comes to potential personal liabilities falling out of company liquidation.
Why The reason is very simple. Once the insolvency practitioner is engaged as a liquidator for your company they act in the best interests of the creditors and therefore cannot advise or help you with personal areas that need addressing, due to a clear conflict of interests.
I am not in any way being critical of insolvency practitioners as they are merely doing the job that they are assigned to do. We work with some of the best insolvency practitioners in the UK every day of the week and in their defence they will argue that where a personal guarantee is in place, for example, as a liquidator they must act with due care. In practical terms though, in my experience, the due care element can often be forgotten in the heat of a liquidation.
So what should you be aware of before engaging a liquidator:
If you have personal guarantees with a creditor, such as the bank or another lender the liquidator will not be allowed to help or advise, or negotiate on your behalf as this would be a direct conflict of interest.
Liquidators are commercial animals and are heavily regulated. They need to make a profit to survive. If the fee seems too good to be true ask yourself where the liquidator will recoup the profit Once you engage a liquidator you cannot simply dismiss them.
Meeting with the insolvency practitioner
Do not pour your heart out to the insolvency practitioner before you have your affairs in order as they may use this information against you, later.
Seek alternative, professional business debt help prior to signing the engagement paperwork to gain a more holistic approach which can help protect you as well as addressing the business affairs.
Transfer of funds
If you have paid yourself any money in the previous 24 months or so, you may have to pay back those amounts to the company, even if the company owes you money.
The liquidator, whilst acting on behalf of the creditors, must pursue these amounts and in some cases will resort to personal bankruptcy of the director, if necessary. This was seen in 2007 with the Cheeky Girls as one creditor fought to have their family home, owned by their mother, sold to recoup the 130,000 debts.
You will be required to hand across all company documents to the liquidator, so keep copies of relevant documents/communications that you may need later in case they go astray.
Keep a clear audit trail of expenses and monies that you are owed from the company.
To be absolutely clear, the insolvency practitioner/liquidator is just doing their job. Regardless of the introduction, if you have any doubts about your potential liquidator always look for testimonials on their website or ask to speak to three past clients over the last year.
This will give you a good indication as to how you will be treated. It is something that should not be overlooked. Make sure that all necessary steps are taken and do your homework before you make that call.
This advice should help you think twice before you send the tiger the invite when seeking liquidation advice. Even with the best intentions and wanting to help your business, the insolvency practitioner must comply with their regulations, so do not expect sympathy or personal protection as they will not risk their licence, even if they may want to.
Given that the insolvency practitioners main duty is to work in the interests of the creditors, you should take care when seeking insolvency advice for your business if there are personal areas that need addressing first.
Mike Smith is the managing director of Jameson Smith & Co who provide business insolvency advice solutions to UK Directors and accountants.