This article was originally published on 18 December 2023. The article was republished on 8 February 2024.

With the likely impact this will have on cashflows and profits, many businesses may face financial difficulty. Faced with such a situation, some directors and business owners may turn to financial advisors in the hope of preventing further deterioration and increasing the likelihood of a turnaround in fortunes.

The key recommendation is to engage early with specialist advisors. This should help to protect value in the business, help ensure that all potential options/solutions are explored, and help with communication and potential support from relevant stakeholders. These can include:

• shareholders
• directors
• lenders and other creditors 
• suppliers and customers

If a business is under stress, its directors and business owners will likely face issues that are new to them. Here are some pointers for company directors and business owners to help navigate unfamiliar territory.

Work out the business’ current financial position

A financial advisor, often an accountant or restructuring specialist, could help directors and business owners understand the viability and underlying issues of the business, and whether cash being generated by the business can keep it operational and for how long. To provide a clear picture of the business’ financial position, an advisor can help in the preparation and review of cash-flow forecasts and up-to-date management information. This is the basis of sensitivity analysis, which determines where the stresses lie. 

Help you communicate with stakeholders

An advisor can assist in conversations with lenders, creditors and other key stakeholders to discuss how they can support a way through the issues identified. Such support may include ways to ease cash-flow pressures, such as Time to Pay arrangements with HMRC, repayment holidays or rescheduling of other debts, and raising alternative finance to help the business through this difficult period. They may recommend the help of a turnaround specialist to assist directors and business owners in stabilising the business.

Explore further options of support

Should the issues run deeper than short/medium term cash-flow problems and the owners/directors reach the conclusion that the business is not viable in its current format, advisors can assist to consider and implement other options available, such as seeking new investment, an operational/financial restructure, or a sale of part or all of the business and/or assets.

Navigate legal complications

Legal advisors can help directors and business owners when faced with the threat of legal action over unpaid debt and they can also explain the implications of raising finance for the business. A legal advisor can assist in seeking to negotiate commercial settlements with debtors and creditors, particularly if the business has received formal demands for payment or other forms of legal recovery.

It may be prudent, and helpful when assessing your options to keep asking ‘what if?’. For instance: 

• What if the intended turnaround, fund-raise, refinance, cost cutting, asset sale or collection of debt due is not successful?
• What if Plan A doesn’t work and we need a Plan B? 
• What if the business runs out of cash, and when might this happen?

If insolvency is likely, engaging an insolvency practitioner to review the insolvency options and plan for that eventuality could have benefits (even if you ultimately avoid the insolvency process). Insolvency advice could help discussions with lenders and other stakeholders. It could also help to achieve a solvent solution.

Insolvency is rarely the best outcome for anyone. However, when it is required, the outcome could be improved for the variety of impacted stakeholders if the process is well planned. It could also help directors/business owners deal with what is likely to be a highly stressful time and may enable the business to be sold or continue to be traded during the insolvency.

A well planned insolvency can improve stakeholder communication so that employees, customers, suppliers and other parties are given clarity on their position and what the insolvency may mean for them.

Directors’ duties under relevant legislation, including the Companies Act 2006, the Insolvency Act 1986 and the Pension Schemes Act 2021, are a complex area and directors may benefit from specialist legal advice to understand and protect their own position, as well as the position of other stakeholders.

In normal circumstances, the primary duty of directors is to promote the success of the company for its shareholders. Where a business is in financial distress and may be approaching an insolvent position there is a shift in this emphasis: directors must ensure that they act in the best interests of all creditors and take all necessary steps to minimise losses to those creditors.

Certain actions, inactions or transactions while a business is in financial difficulty may result in the directors becoming personally liable. For example, selling assets for less than market value, making payments including repayment of director loans or dividends to shareholders to the detriment of creditors in a subsequent insolvency, or actions or inactions detrimental to a defined benefit pension scheme.

It can be difficult for directors to decide whether they should continue trading in the hope of turning the company around or to cease trading to prevent the position worsening. Should they continue to trade and the company then enters an insolvency process, the directors may be personally liable for consequent losses, particularly if they knew or ought to have known that there was no reasonable prospect of avoiding insolvency.

In an insolvency process, the directors will be required to cooperate with the insolvency practitioner and help with matters such as providing the books and records of the company and assist with any investigations.

Early communication with existing lenders may improve the support available, including if/how immediate critical payments and longer-term funding requirements can be covered.

If directors or other individuals have personally guaranteed liabilities of the company, communication with the relevant creditor(s) at an early stage could help parties better understand each other’s situations and explore potential solutions to meet these obligations.

Directors or other individuals who have granted a guarantee should seek separate advice on their personal liabilities. They should be mindful that their personal interests have the potential to conflict with their duties as directors.

Every situation will be different and the things that directors/owners of businesses will need to think about will depend on the specific circumstances of their business. There are professional advisors who have considerable experience of such matters and who are able to help and provide the reassurance and assistance that is needed.

If you’re interested in discussing this article further then please speak with your NatWest representative or contact us here.

Written by NatWest Group Restructuring

This article is published for information purposes only and should not be regarded as providing any specific advice. No member of the NatWest group of companies accepts any responsibility or liability for any loss or damage arising in any way from any use made of or reliance placed on, the same.