Insolvency Service updates insolvency guidance

The Insolvency Service has released detailed guidance and a video to help company directors understand what to do if their business falls into insolvency.

The guidance describes the general duties that a company director must follow including exercising reasonable care, skill, and diligence, and avoiding conflicts of interest, as well as the legal responsibilities which include keeping the company records up to date, such as filing confirmation statements and company accounts on time. The guidance and video also highlight two basic tests which a company director should carry out if they are concerned about the solvency of their company, the cash flow test and the balance sheet test.

The cash flow test checks whether the company is cash flow insolvent with indicators consisting of checking whether the company is facing late payment procedures from suppliers which include receiving issue reminder letters and whether the company has received or faced recovery proceedings.?The balance sheet test involves looking at the value of the company’s assets and liabilities, to see if the liabilities of your company are more than the value of its assets, and your company is balance sheet insolvent.

In an article for Accountancy Daily, Matthew Padian, managing associate at Stevens & Bolton LLP stated that ‘Each company’s situation is different, but companies should be mindful of their significant creditors, particularly banks, landlords and HMRC. These are often the ones with most to lose from a company’s downfall, so it makes sense to deal carefully with each – perhaps rather than engaging in a drawn-out, complicated and expensive general restructuring with creditors as a whole. For companies on the precipice, all possible restructuring options should be explored before calling it quits. These include two recently introduced insolvency procedures - the standalone moratorium and the restructuring plan.’