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Avoiding insolvency is crucial for maintaining the financial health and longevity of any business. Insolvency can lead to severe consequences, including legal action, loss of assets, and even bankruptcy. However, with proactive management and strategic planning, businesses can significantly reduce the risk of insolvency.

Annecto Legal helps insolvency practitioners and distressed businesses in finding the right litigation support, funding and insurance for their insolvency cases. Moreover, we also help insolvency recovery teams to secure the best result for creditors in insolvency litigation.

What are the warning signs of insolvency for businesses?

Recognising the warning signs of insolvency early can help businesses take corrective actions before the situation becomes critical. Here are some key indicators that a business might be heading towards insolvency:

Persistent cash-flow issues

• Consistently negative cash flow: Regularly spending more cash than what is coming in.
• Difficulty paying bills on time: Struggling to meet obligations such as rent, utilities, and payroll.

Increasing debt levels

• Rising debt without increased revenue: Taking on more debt to cover operational costs without corresponding revenue growth.
• High interest payments: A significant portion of revenue is going towards paying interest on loans.

Overdue payments

• Unpaid taxes: Falling behind on VAT, PAYE, or corporation tax payments.
• Creditor pressure: Receiving frequent reminders or threats of legal action from suppliers and creditors.

Declining sales and profits

• Falling revenue: A steady decline in sales figures over time.
• Shrinking profit margins: Reduced profitability due to increasing costs or falling prices.

Asset liquidation

• Selling assets: Disposing of business assets to generate cash, especially if these assets are crucial for operations.
• Leasing back sold assets: Selling assets and leasing them back, indicating a desperate need for cash.

How to avoid insolvency

It is crucial for businesses to acknowledge their financial difficulty and take immediate action to address them. Failure to meet financial obligations will make your business formally insolvent, which can lead to winding up or forced liquidation. However, with the right support, businesses can recover, and it does not have to signal the end. Several strategies can be implemented to encourage business survival:

Restructuring

Restructuring is a proactive approach to financial difficulties, aiming to stabilise and revitalise a business before it becomes insolvent. It can include financial restructuring, operational restructuring, and organisational restructuring. Restructuring can help businesses return to profitability and shift litigation risk off the balance sheet.

Company Voluntary Arrangement (CVA)

A Company Voluntary Arrangement is a legally binding agreement with creditors to pay debts over time at a manageable level, with the remainder often written off. Creditors prefer this arrangement over receiving nothing in a liquidation scenario. Even if faced with a winding-up procedure, businesses can still establish a CVA if they act swiftly.

HMRC Time to Pay Arrangement

Struggling to meet HMRC payments for PAYE, NIC, or VAT can indicate potential insolvency and result in penalties or asset seizures. A Time to Pay Arrangement allows businesses to spread arrears over a specified period, helping manage finances and avoid insolvent liquidation.

Funding options for restructuring

When it comes to restructuring a business to avoid insolvency, litigation assets may be used to generate cash to pay for restructuring costs, such as lay-offs or tax liabilities. A claim for money has a present value and could either be sold outright or used to attract funding for both the legal costs of the actual claim, and any wider costs of the restructure.

In circumstances where litigation is the only asset of the business, understanding these options and getting best value is critical. In mergers and acquisitions, potential litigation can depress the value of a business as a buyer will use the prospect of a costly dispute to reduce the sale price. Insurance can be used to shift litigation risk off the balance sheet, allowing a seller to secure full value for the business.

Equally, if buying a business with litigation risks against it, the buyer may insure against such claims upon purchase, to immediately benefit from the removal of said liabilities.

Funding and insurance options for insolvency cases

When pursuing insolvency litigation, legal costs can escalate quickly. Therefore, it is essential that parties are aware of the funding options that are available to them. Listed below are some of the cost-effective options for funding insolvency litigation:

After the event insurance 

After the event (ATE) insurance is a type of insurance that can provide cover for legal costs in the event that a case is unsuccessful. This option can be particularly useful in cases where the outcome is uncertain, and the costs of losing a case could be significant. ATE insurance is often used with conditional fee agreements and contingency fee agreements. ATE can also be used to meet Security for Costs applications, sometimes sitting alongside a Deed or Indemnity. There are many providers of ATE insurance and it can be useful to have a broker secure the best deal and explain the different options.

Third party litigation funding

In some cases, third party litigation funders may be willing to provide funding for an insolvency dispute claim in exchange for a share of any financial settlement or damages awarded. This option can be attractive when there are no funds to pay for legal fees, but the case is strong and there’s a good chance of making a recovery. There are many different forms of non-recourse third party litigation funding, ranging from disbursement funding up to full funding for all legal costs and an IP’s WIP. Annecto Legal is well placed to explain the different options and what could be available on any particular case.

Why choose Annecto Legal?

At Annecto Legal, we have experience in advising businesses on how to avoid insolvency. We also assist a wide range of clients in finding the appropriate funding, assignment options and insurance for restructuring and insolvency cases.

Annecto Legal regularly assists licensed insolvency practitioners and liquidators who are involved in the administration or liquidation of a company, as well as trustees in bankruptcy. If you are in the process of pursuing or defending an insolvency claim and want to find out whether we can assist in helping you fulfil your obligations and secure the right deal, then contact Annecto Legal now.