SME Insolvency

SME insolvency is an unfortunate but real challenge that many UK businesses are currently facing. Here we offer you our Insolvency: A Guide for SMEs

The economic climate, influenced by factors such as the rising cost of living, inflation, interest rate rises, the ongoing consequences of Brexit, the COVID-19 pandemic, and global economic uncertainties, has placed significant pressure on companies. This is especially true for small and medium-sized enterprises (SMEs).

Our director and lawyer Sarah-Jane Butler gives us an overview of the insolvency landscape in the UK. She also explores the legal issues related to insolvency. We will aim to offer practical advice on how small businesses can manage their affairs. This can help minimise the impact on their operations, suppliers, employees, and clients.

The State of Insolvency in the UK

Graph showing insolvencies since 2009

The number of businesses facing insolvency in the UK has been on the rise since the end of the Covid-19 pandemic, with many industries experiencing unprecedented challenges. A recent article from the BBC (Firms going bust on track for worst year since 2009 – BBC News) has stated that “the number of companies going bust this year is on track to be the highest since the depths of the financial crisis in 2009.”

There are nearly 38,000 companies in critical financial distress, according to data prepared by analysts Red Flag for Begbies Traynor. Julie Palmer, from Begbies Traynor, quoted by the BBC said, “This was down to a combination of higher inflation and borrowing costs twinned with weaker consumer confidence and demand”. Support measures during Covid – including furlough, bounce-back loans and forbearance on the part of HMRC – kept company failure rates low. However, those supports have fallen away at the same time as inflation and interest rates have risen. This combination has hit companies’ bottom lines and their customers’ pockets. Thus, the outlook for many businesses appears to be bleak. 

When facing possible insolvency, it is crucial for small business owners to be aware of their legal obligations and the options available to them. Here are some key considerations:

1. Insolvency Proceedings

Understand the different types of insolvency proceedings in the UK, including administration, liquidation, and company voluntary arrangements (CVAs). Each option has its implications and requirements. Therefore, it is essential to seek legal advice to determine the most suitable course of action.

Types of insolvency proceedings in the UK

  • Administration – you hand your business over to an insolvency practitioner. Creditors cannot take action. The administrator draws up proposals for the next steps. 
  • Administrative receivership – appointed by a floating charge (usually a bank) to recover money that is owed to it and other preferential creditors.
  • Liquidation – can be done by a solvent or insolvent companies. Insolvent companies are closed through voluntary or compulsory liquidation. Overseen by a liquidator they ensure contracts are completed. Assets are sold and debts paid where possible.
  • Company voluntary arrangements – a binding agreement between a company and its creditors for payment of its debts over an agreed timescale. 

See Gov.uk for more detailed descriptions.

2. Directors’ Duties

Directors of companies facing insolvency must act in the best interests of creditors. Failure to do so can result in personal liability. It is vital to seek legal counsel to ensure that you are fulfilling your duties and protecting yourself from potential legal ramifications.

3. Dealing with Creditors

Engage with your creditors proactively. Transparent communication can help in negotiating payment terms and possibly avoiding legal action.

All situations will be unique, and depending on your own business you may be able to mitigate the risk of insolvency by considering the following advice.

Managing Supplier Contracts

  1. Review Contracts: Examine the terms of your contracts with suppliers. Look for clauses related to termination, payment terms, and force majeure, which might provide relief or flexibility in challenging times.
  2. Negotiate Terms: Reach out to suppliers to discuss your situation and negotiate more favourable terms, if possible. Building a cooperative relationship can be beneficial for both parties.
  3. Prioritise Payments: Identify key suppliers that are crucial to your operations. Prioritise payments to them to maintain essential services and goods.

Dealing with Employees

  1. Transparent Communication: Maintain open lines of communication with your employees. Being transparent about the company’s financial situation can help in building trust.
  2. Explore Alternatives: Before resorting to redundancies, explore alternatives such as reduced working hours, job sharing, or voluntary unpaid leave.
  3. Legal Obligations: Ensure that you are aware of your legal obligations regarding employee rights and redundancy payments. Non-compliance can result in legal action and additional financial strain.

Encouraging Prompt Payment from Clients

  1. Clear Payment Terms: Ensure that your invoices have clear payment terms and follow up promptly on any overdue payments. Look again at your contracts and payment terms because if the parties do not agree on a payment date, the standard payment term is 30 days from whichever date is the latest out of receipt of the invoice; receipt of the relevant goods or services; or verification/acceptance of the goods or services (where applicable). So, if your payment terms are longer, try to renegotiate.
  2. Incentivise Early Payments: Consider offering discounts or other incentives to encourage clients to pay their invoices early.
  3. Build Strong Relationships: Invest in building strong relationships with your clients. A good relationship can lead to better payment behaviour and possibly more business in the long run.

Final thoughts of our insolvency: a guide for SMEs

Facing insolvency is a daunting prospect for any business. However, with the right legal advice and proactive management, it is possible to navigate these challenging times. You can minimise the impact on your operations. By understanding your legal obligations, managing supplier contracts effectively, dealing compassionately with employees, and encouraging prompt payment from clients, you can work towards stabilising your business and securing its future.

Remember, seeking professional advice early is crucial in making informed decisions and maximising your chances of recovery. Don’t hesitate to reach out to legal and financial experts who can guide you through this complex process.