When is a good time to go bust?

Following the demise of City Link, announced on Christmas Day many may be wondering if that was the best time to announce it.

There is rarely a cataclysmic event that means that a company should stop trading immediately, it is more often a gradual decline that management should spot and try and turn the business around. Turning a business around will usually be the best outcome for creditors, but not all businesses can be turned around which means some business will fail and go into administration or liquidation.

The truth is that there is never a best time to go bust. There will always be creditors that loose money as an insolvent company will by definition not have enough assets to pay off all of its debts. Had City Link ceased trading a few days earlier the subcontract delivery drivers may have lost less, but the customers that had parcels in the distribution centres would have no doubt incurred additional costs to deliver, or there may have been many more householders waiting for their goods to be delivered.

The duty on the directors is to try and minimise the loss for creditors generally. This can involve making difficult decisions. In order to complete a project materials may be required that go unpaid but by completing the project debtor money will come in.

Sometimes by trying to take appropriate action the directors may bring about the demise of the business. For example, by protecting new customers by not taking new orders will mean that the business runs out of work and could close sooner - on the other hand, taking on new orders without the certainty that the company can deliver would put those customers at risk of loss.

There will often be a difficult balancing act carried out by the directors and their advisors to try and minimise the damage. Having spent many years advising directors of businesses in distress, I know how hard these decisions are. There are frequently many different stakeholders in the business, lenders, customers, suppliers and employees to name just a few. There will be no one solution that suits them all and the insolvency practitioner and the directors have to steer a tricky path.

Insolvency practitioners are there to help directors struggling with these difficult decisions but sadly there is not a good time to go bust.

Chris McKay, bursiness rescue & insolvency practitioner
McTear Willliams & Wood

www.linkedin.com
6 January 2015

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