Navigating corporate contentious insolvency: Why early action matters

Insolvency is not a term which has positive connotations, being essentially the opposite of what corporate entities are setting out to achieve. In reality, the term “insolvent” is simply a situation where, at any given time, a business does not have sufficient cash on hand to pay its due debts. Corporate entities, especially those in a phase of growth, are constantly looking to balance commercial objectives with financial capability. It is therefore a necessity that those running businesses have regard to the company’s proximity to insolvency. In this article, we will explain what corporate contentious insolvency is and the importance of acting early.

What is contentious insolvency?

Contentious insolvency is simply when a disputed or litigious situation arises in the context of an insolvent situation. Disputes of this nature can occur before the business enters a formal insolvency process, or of course afterwards as the appointed office holder begins to investigate with the objective of realising funds for creditors.

Examples of contentious insolvency includes, but is not limited to, allegations of:

• Fraudulent conduct;
• Wrongful or fraudulent trading;
• Improper asset transfers; or
• Breaches of fiduciary duty.

The importance of acting early

One of the simplest pieces of advice is that prevention is better than cure. Some instances of contentious insolvency relate to actions taken by individuals which are objectively wrong (such as fraudulent trading, where the Supreme Court recently confirmed that office holders could pursue entities who had no management role in the liquidated entity). In others, such as claims of director misfeasance, there is responsibility for company directors to have early awareness (and where necessary action) of insolvency circumstances.

The benefits of considering the company’s financial position and the potential of insolvency at an early stage are broad:

1. First and foremost, a comprehensive awareness of the company’s financial position gives decision-makers all the information needed to make informed decisions, allowing for a more efficient running of the business. If there are issues, these can be identified and there is then more time to address/resolve them. If there are not issues, this information can be utilised to drive the business forwards.

2. Identifying an issue earlier often means that there are more options available to attempt to resolve it. These could include –

• Proactive discussions with creditors to agree restructured indebtedness.
• Commercial review of debtor position and action accordingly.
• Raising of finance through either lending, investment or sale of assets.
• Identification and management of significant cash drains/commitments.
• In some instances, nothing where this can be suitably justified.

3. For directors, ignorance will not result in avoidance of liability. There is therefore no benefit to not understanding the companies’ position. In fact, proceeding in this way deprives you of the opportunity to do something about it.

4. Where it is identified that the company is bordering on insolvency, the law is that directors are under a duty to consider the interests of creditors. Without consistent/early consideration of the same, this duty cannot be complied with.

5. In director misfeasance claims, the Supreme Court has explicitly stated that directors taking professional advice on the company’s position is a relevant factor in determining if they should be personally liable. Taking external advice can relieve stress and/or give directors confidence, by informing decision-making responsibility.

Consistent documentation of the efforts being taken to understand and react to the company’s financial position is also important. Proper corporate documentation can often fall by the wayside in the process of running the company itself, but in circumstances where events do not unfold as expected, a clear trail of governance, and the reasoning for taking such decisions, is the easiest way of directors showing compliance with their duties.

Our Insolvency and Commercial experts offer guidance at every stage of this process, be it early consideration/prevention, assistance with management of financial difficulties or active contentious insolvency matters.

The role of pre-insolvency restructuring

Before the situation escalates into formal insolvency, there is often an opportunity to restructure and stabilise the business. This pre-insolvency phase involves measures such as:

• Debt renegotiation or rescheduling
• Sale of underperforming assets
• Changes to management or business operations

The objective is to avoid formal insolvency altogether and restore the company to a sustainable footing.

Successful restructuring does not just offer a second chance; it can prevent disputes down the line. When companies act early to address financial difficulties, they can often avoid the sort of failures or misconduct that trigger contentious insolvency proceedings.

When those opportunities are missed, investigations during the insolvency process may reveal missteps that could have been resolved beforehand.

This reinforces a key message: early, informed action is critical.

Looking ahead

In future articles, our insolvency experts will explore contentious insolvency from the perspectives of directors, creditors, and office holders. Topics will include common triggers for disputes, director liability, creditor claims, and the powers and responsibilities of insolvency practitioners.

Whether you are managing risk, pursuing recovery, or navigating complex investigations, understanding your position is essential in today’s financial and legal landscape.

How can our Insolvency solicitors help?

Our insolvency specialists advise directors, creditors, and office holders across the full spectrum of contentious insolvency matters. From early-stage restructuring advice to representing clients in complex disputes and investigations, we offer clear, strategic support tailored to your position.

Our specialist team combines deep technical expertise with a commercial understanding of what is at stake, whether you are looking to protect your interests, enforce your rights, or navigate an evolving situation.

If you are involved in an insolvency matter, early advice can make all the difference. Get in touch with the team today on 01202 525333.