The reasons for the collapse of Thomas Cook have become the subject of intense debate, with no shortage of explanations being given for its demise.  The figures owed to creditors are eye-watering, with the Daily Telegraph reporting that Thomas Cook bosses were warned before its demise that claims could exceed £10bn.

This raises a question that is relevant to Directors of Companies of all shapes and sizes. At what point should action be taken by a Company Director, to seek assistance from a qualified professional?

The test of what constitute insolvency are broadly described in S123 of the Insolvency Act 1986:

  1. The “cash flow test”- can a company pay all its debts as they fall due?
  2. The “balance sheet” test- Are the value of the company’s assets less than its liabilities?

Nevertheless, the situation is rarely clear-cut. Events can be fast moving and an inability to pay a bill today may be rectified if an outstanding book debt is received tomorrow. Additionally, a Company’s accounts are not always a reliable indicator of the situation on the ground today.

The key for a director is to identify any warnings signs and act quickly on them. A well ran company will have accurate management accounts, and be able to determine whether the Company is heading towards the abyss. A company with a clearly defined business strategy, and in regular dialogue with its accountants, is more likely to have a strategy in place to minimise the effect of a traditional downturn in trade.

It may be understandable for directors to endeavour to trade their way out of trouble before seeking professional help. Nevertheless, if advice is sought from an Insolvency Practitioner at an early enough stage, it could even be possible to implement a turnaround strategy to save the Company. This would remove the need for formal insolvency proceedings.

No two scenarios are the same, but an Insolvency Practitioner can use his experience and judgement to determine whether a Company can be saved or whether insolvency proceedings are appropriate.

Failure for the Director to familiarise himself with the Company’s financial position, keep adequate records or claim inexperience are not acceptable reasons for failure to act. Moreover, if such evidence is uncovered in a subsequent insolvency, this may even result in disqualification proceedings against a Director.

Once it is clear that a Company cannot avoid insolvency, a Director must seek to minimise losses to creditors as a whole and shift focus to protecting the interests of creditors over shareholders. Choosing to voluntarily institute liquidation proceedings, rather than wait for a creditor to do so, is seen as a step towards acting positively in the interests of the creditors.

Failure to do so could lead to accusations of wrongful trading, a civil offence which can result in being held personally liable for the company’s debts. Perhaps more seriously, an accusation of fraudulent trading is a criminal offence which can result in a prison sentence.