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Insolvency, Restructuring & Recovery

Things don’t always work out the way the plans and strategies intended in business. There are times when internal and/or external factors mean that companies run into serious trouble with their finances. When they are struggling to pay their bills, invoices or debts, or indeed simply don’t have the assets to pay their debts and obligations (known as liabilities), it’s time to talk insolvency, restructuring and recovery.

What is insolvency, restructuring & recovery?

Let’s crack these three terms before we take a look at what accountants actually do in these circumstances:

Insolvency – This is when an individual or company is unable to make their debt or obligation payments, or pay them off full-stop, as it does not have enough assets to pay all the liabilities. It’s a position no one wants to be in, and it’s one of the main reasons why all that chatter we do about risk management is so, so important.

In the worst case scenarios, insolvency leads to ‘liquidation’, either by court order or at the company directors’ decision. This is when a company shuts down and sells off its assets to pay the creditors (the parties such as lenders who are owed money).

Restructuring – When a company is struggling to pay off what it owes or with its finances, sometimes it’s possible to implement restructuring measures to reduce financial losses, or in an attempt to avoid more serious developments and formal insolvency procedures in the most serious cases. Other occasions that call for restructuring work are things like mergers and acquisitions, demergers or tax planning.

It can involve the reorganisation of various elements of the business, from operations to ownership, to help generate capital, ease some liabilities or to minimise risk. It also refers to the restructuring of debts. This is when the company seeks to find new terms by which a debt can be repaid in full, such as a reduction in payments stretched out over a longer period of time. Tax restricting to make potential savings here is also an option.

Recovery – This is the advisory services and procedures involved with getting the company back on track after a period of financial difficulty.

The accountants’ role

Accountants in this area work with companies of all sizes who are experiencing these difficult circumstances, as well as individuals. They will work for specialist accountancy firms and professional services firms as part of a restructuring department or an insolvency and recovery department.

In certain formal inevitable insolvency cases, the role of an accountant is, essentially, to save what they can from a sinking ship. In order to deal with insolvency issues, accountants have to take the JIEB insolvency exams and qualify as licensed insolvency practitioners (IPs).

An IP can morph into a variety of different roles depending on each insolvency case. They can, for example, act as an administrator when a company goes into administration – an attempt to rescue a company through selling off assets to repay the creditors (the individuals, banks, financial organisations or other companies the company owes money to) as much as they can.

IPs can also act as a trustee on behalf of the bankrupt individual. They will gather financial information from the debtor (the individual or company declared bankrupt) and sell off assets on their behalf to repay creditors. This means they’ll gather up financial information from the company on their assets and creditors’ claims, sell the assets on behalf of the person or company and make payments to the creditors.

In restructuring, they will conduct audits to assess their client’s current accounting processes and may in the first instance provide advisory services regarding the best ways to restructure. They’ll then conduct necessary adaptations to accounting processes, ensuring that industry standards are all met and upheld.

Accountants who specialise in this area have to be exceptional communicators – there will regularly be necessary correspondence with shareholders, banks, HMRC, investors, creditors, even lawyers. What’s more, sensitivity and discretion is essential. These are stressful times for a company and for all individuals connected with them, so client care is paramount.

Want to be an IP?

This career path is open to school leavers and graduates from any discipline through school leaver programmes or graduate schemes. However, you’ll have to gain experience before you can eventually specialise in insolvency and qualify into the profession. Practising IPs must be registered with the ICAEW or the Insolvency Practitioners Association (IPA).