Commercial lease forfeiture - the final straw

If a company director delays seeking professional insolvency support for their financially distressed business, they run the risk of trading while insolvent and breaching their directorial duties. Creditor action can often trigger company directors to confront the matter head-on and reach out to an insolvency practitioner to facilitate company rescue or close shop.

Chelsea Williams, a commercial debt adviser at Scotland Liquidators, examines the journey undertaken by most distressed company directors before they are overpowered by financial difficulties, including the threat of forfeiting their commercial lease.

The road to insolvency is a winding road

While seeking early advice from a licensed insolvency practitioner can help restore business health, some businesses may collapse under the weight of business debts, creditor pressure, and deteriorating financial health.

If the early warnings of insolvency are missed, business health can rapidly decline. While it’s common to misread these signs as teething problems or seasonal challenges, if creditor interests are compromised, the business is in the danger zone.

At breaking point – to stay or to go

The role of an insolvency practitioner is to nurse financially distressed businesses back to health unless there’s no prospect of recovery. Once an insolvency practitioner intervenes, they will stress test the company to check two factors – cash flow and income vs expenditure.

Cash flow

Is there sufficient cash flow for the company to meet financial liabilities when they fall due? If income exceeds expenditure, the company will be in a positive cash flow position, whereas, if expenditure outweighs income, the company will quickly become cash flow deficient.

Balance sheet

The company balance sheet records the value of company assets and company liabilities. If this is disproportionate and liabilities outweigh assets, the gap must be reduced to rebalance the scales.

The cash flow and balance sheet test for insolvency determines whether business health can be restored or if the company is beyond rescue.

Where does this leave commercial landlords?

While a company on the brink of insolvency will be in the firing line of creditors, company directors must act vigilantly as to not fall foul of preferential behaviour, such as preferential payments.

As commercial rent is one of the highest outgoings for a company, payments may be delayed if there is insufficient cash. If a distressed company puts their commercial rent liabilities on the back burner, this may leave the landlord with no other option but to apply more pressure.

Commercial lease forfeiture is mostly pursued as a last resort by landlords when previous efforts to collect funds have failed. This can have devastating consequences for commercial clients, as once access to property is revoked, this can immobilise company operations and trigger a circuit of problems.

This will mark a turning point for company directors as this will prompt them to take steps to remedy the financial position of the business or bring the chapter to an end.