Entering the twilight zone: how to deal with impending insolvency

MT EXPERT: Insolvency is a terrifying prospect for any business owner - but if you enter it gracefully, there's a good chance you'll come out the other side, says Caroline Benham.

by Caroline Benham
Last Updated: 04 Jul 2014

La Senza is once again hanging by a bra strap after it reported this week that, for the second time in under three years, it was entering administration.  

Ultimately, cashflow problems can affect the best of us even if the business as a whole seems to be doing well. But spotting when financial issues are more serious than a temporary cashflow glitch is vital for directors, who could face personal financial liability or even disqualification for decisions they make when their business enters the Twilight zone – the period before administration when you realise you can't pay your debts when they’re due. 

Don't be an ostrich 

If your business goes into administration, your decisions may be reviewed and challenged by an insolvency practitioner. As soon as you have any inkling it’s in financial jeopardy, act quickly by appointing an insolvency lawyer and discussing your problems with an accountant or insolvency practitioner so you and your directors know what to do next. Ultimately, if you can show you’ve taken the proper steps to minimise your company’s losses, personal liability shouldn’t be triggered.

Focus on your creditors

In the UK, companies may still be able to trade in the twilight zone (which is what La Senza is trying to do). If this is the case, directors must be clear about their personal duties to both the company and other stakeholders during the twilight period. From the very start of the twilight zone, directors are required to shift their focus away from the needs of the shareholders and act in the best interests of the company’s creditors – it is their needs which now become paramount and as a board of directors you should be taking steps to minimise their losses. 

Minimise spend

Now you're focusing on the interests of the creditor, do what you can to maximise return on the debts you owe. Cut down on spending wherever possible, pay by cash, minimise financial commitments and prepare regular financial statements and projections.

Keep a record

Create an audit trail to back up your decisions by holding regular and minuted board meetings, in case your actions come under review by an insolvency practitioner later down the line. Involve the auditors where appropriate and keep major creditors and investors informed of all major discussions.

These records will be important to protect against later scrutiny of your decisions by insolvency practitioners who will check for, among other things, any fraudulent or wrongful trading. Most well-run businesses will never encounter these problems but those who don’t risk personal financial liability and/or disqualification from acting as a director for up to 15 years

- Caroline Benham is associate in the commercial dispute resolution team at Gardner Leader law firm

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