RECESSION is here, according to the OECD. The respected think tank believes the UK economy will shrink for the rest of 2008.

With bankruptcies and financial chaos already a nightly news staple, it’s difficult to be optimistic. Recessions hit smaller outfits hard. Bigger firms have deeper pockets, better credit lines and more assets to fall back on. Moreover, large companies often take a ‘like it or lump it’ approach towards paying bills when times are tight, since they know suppliers are desperate. As contracts dry up and invoices go unpaid, it’s all too easy for a small company to drift towards insolvency.

We looked a couple of issues ago at recovering debts and keeping cash flowing. But the unfortunate truth is some readers of Audio Pro International will see their companies struggle in a protracted economic slowdown.

If you face insolvency, it’s vital to seek legal advice as soon as possible – you may be able to salvage something if creditors support a rescue plan. Moreover, even as a company faces its imminent demise, the directors and staff have legal responsibilities; failure to follow the proper procedure could trigger criminal proceedings.

So what should you do if your company faces insolvency?
Understand what ‘insolvency’ really means
A company is insolvent if it is unable to pay its debts. Section 123 of the Insolvency Act 1986 states that a company is deemed unable to pay its debts if it fails to comply with a statutory demand for a debt of over £750, as it shows the company is unable to pay its debts when they fall due, if it fails to pay a judgment, decree or order of the court in favour of a creditor, is simply unable to pay its debts as they fall due, or is found to be in a situation where the value of its assets are less than the amount of its liabilities, taking into account any contingent and
prospective liabilities.

Read that again
Technical definitions are important because you need to determine objectively when a company becomes insolvent. Certain transactions can be set aside if entered into within a specified time before insolvency.

Seek legal advice – immediately
There are often alternatives to compulsory or voluntary liquidation. A rescue or restructuring may suit your creditors as well as the business. Administration, administrative receivership, company voluntary arrangements and schemes of arrangement should all be explored.

Put together a rescue plan with up-to-date financial information Rescue mechanisms rely on agreements or arrangements with the company’s creditors, who need figures demonstrating the company can become profitable again. Involve all major creditors, since any creditor owed more than £750 can liquidate your company.

Check your personal exposure
In liquidation, any debts you personally guaranteed will be liable for repayment. Do you have the funds?

Insolvency abuse
Flouting your legal obligations could result in criminal proceedings, even after the company has ceased trading.
Do not trade in a way that will prejudice creditors if it appears there is no reasonable prospect the company can avoid insolvent liquidation. This amounts to ‘wrongful trading’, and a court may order any present or past directors of the company to contribute to the assets of the insolvent company.

Do not remove assets from the company or trade in a fraudulent manner. Company directors can be made to contribute to the company’s assets if they’ve misapplied, retained or appropriated any money or property of the company or breached their duties. If not a director, you may still be liable for fraudulent trading – a criminal offence.