Insolvency risk review

Most insolvency risk is visible long before it turns into a crisis, but only to someone who looks at the whole picture. A group moves cash between its companies, a dividend is paid after a good year, a guarantee is signed to secure a subsidiary’s loan, the accounts are filed late once and then again. Taken one at a time, these are routine. Read together after a failure, they are what a trustee or a court examines first.

A risk review looks at the same facts in advance, for your own company or for a customer, supplier or acquisition target you rely on. It shows where the exposure lies and what can still be corrected, and it usually covers:

• the rules on the going-concern basis of the annual accounts, and on what an auditor must report when that basis is in doubt;
• the rules on the solvency and liquidity tests a company must pass before it pays a dividend, buys back shares or returns capital;
• the rules on intra-group loans, cash pooling, cross-guarantees and management fees, and on how they are judged when one company in the group fails;
• the rules on security already granted over the company’s assets, and on how much remains free to support new financing;
• the rules on how far a parent company answers for its subsidiary, and on when separate legal personality stops protecting it;
• the rules on keeping the books and filing the accounts on time, and on the conclusions drawn when a company falls behind;
• the rules on directors’ liability insurance, and on what it covers once a claim follows an insolvency;
• the rules on assessing a customer or supplier before extending credit, and on the protections that can be written into the terms.

Our lawyers can support you with this.