When directors of distressed companies finally reach out to an Insolvency Practitioner (IP), it’s often later than ideal.
That timing is shaped by a few recurring misconceptions and missteps. Here are the big ones, and why they matter.
Waiting for “certainty” instead of acting on warning signs
Many directors delay because they’re hoping things will turn around, such as a new contract, funding, or seasonal upswing.
By the time cash runs out or creditors escalate, options like restructuring or informal agreements are far more limited.
Poor financial visibility
Outdated or inaccurate management accounts make it hard to assess the real situation.
Directors may rely on gut instinct instead of up-to-date cash flow forecasts, which leads to delayed or misinformed decisions.
Treating cash flow problems as temporary glitches
A surprising number of businesses operate profitably on paper but collapse due to a lack of cash flow.
Directors sometimes think, “we’re profitable, so we’re fine,” ignoring mounting arrears to HMRC, suppliers, and rent. Insolvency is about the ability to pay debts when due, not just balance sheet health.
Selectively paying creditors when firefighting
Directors sometimes prioritise certain creditors, often those shouting the loudest, while ignoring others.
This can create preference risks, where payments made before insolvency are later challenged.
An IP will scrutinise these decisions closely in an insolvency situation, and this can lead to the disqualification of a director and personal liability.
Using personal funds without a clear strategy
It’s common for directors to inject personal savings or take on personal debt to keep the business afloat.
There is also a temptation for a director to sign personal guarantees to secure additional funding for the company.
Without a structured turnaround plan, this can simply deepen personal exposure without improving the company’s viability.
Not documenting decisions
When things deteriorate, directors need to show they acted reasonably and in the creditors’ interests.
Failing to keep records of decisions, advice taken, and financial reviews can create problems later if conduct is examined.
When should directors speak to an Insolvency Practitioner?
Most of the above mistakes come down to delay, being overly optimistic, and having an incomplete understanding of legal duties.
A short conversation with an Insolvency Practitioner at the first signs of distress is usually low-cost and can significantly widen the available options.
