By Mike Smith is Director of Jameson Smith & Co.

When your business faces financial ruin, there will be many factors outside of your control. When this happens, it becomes time to call in the insolvency practitioner. However, bringing in these practitioners too early can actually do you more harm and understanding their role is important when faced with financial problems.

Insolvency is a big business in the UK. Approximately 2,500 qualified insolvency practitioners help process over 16,000 liquidations each year. As the economy starts to recover, the numbers of businesses facing financial problems tend to rise, and a growing number of owners need help.

Businesses in financial trouble will usually find themselves in negotiations with the HMRC about overdue taxes, whilst asking the banks to help raise extra funds. Credit cards will have been used to the limit and spouses and family members will have given all they can. However, when trying to solve these financial problems, it will not stop the legal proceedings being filed by HMRC to liquidate your company.

This is when business debt advice is usually sought. The first port of call will often be the accountant, who usually advises to contact an insolvency practitioner because this is not an area within their expertise.

The insolvency practitioner will always work in the interests of the creditor during liquidation. Even if you are the person contacting the insolvency practitioner, their job is to act in the best interests of the creditors. It is important as the director of your own business to understand what will happen when you start the liquidation process.

You should always seek your own legal advice during the closure of your business, especially when it comes to personal liabilities. Once a liquidator is involved they cannot provide any advice or support to you personally as it would create conflict of interests…

So before you contact an insolvency practitioner do consider these issues:

Meeting the liquidator – If you pour your heart out to the insolvency practitioner they can use this against you in the future. Get in contact with a business recovery, or turnaround consultant, or other business debt advisers before you make any insolvency calls to a potential liquidator, as this can help protect you and address the business problems first.

Money the company owes you– If you have paid yourself money over the previous 24 months, you may have to pay some or all of this back. Even if the business owes you money, you cannot simply take it back. The liquidator must act in the best interests of the creditors, and they will pursue you personally to retrieve those funds, regardless of what the businesses owed you.

Transparency – It is important to provide a clear audit trail of expenses and money owed to you from the company, so everything can be accounted for.

Documentation – The liquidator will request all company documentation. So it is worth keeping relevant copies in case they are lost or destroyed.

Personal guarantees – Even if you have a personal guarantee with a creditor, e.g. the bank, the insolvency practitioner will only be able to negotiate on behalf of the bank and cannot advise a best course of action for you, once engaged.
Cooperation – You have a duty to cooperate with the liquidators so be aware and do not ignore communications from liquidators.

Insolvency practitioners become liquidators once engaged and are just doing their job when they are called to help a business close. It is just as important to understand their position in the process. Even with the best intentions, these practitioners have strict regulations that they must adhere to; and personal protection, or a sympathetic ear is not part of their job description.

Just remember that their job is to act for the creditors, so before you make that call try and get your personal situation in check first as this could make you more vulnerable once liquidation proceedings have started.

Mike Smith is Director of Jameson Smith & Co, a business debt specialist. Mike provides business turnaround and insolvency advice and solutions to UK directors and accountants.

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