#crisis—social media and insolvency

#crisis—social media and insolvency
The growth of social media over recent years has affected all aspects of the business life cycle. Will Richmond-Coggan, a partner and solicitor-advocate at Pitmans LLP, takes a look at how social media issues can arise if a business becomes insolvent.

What social media-related issues can arise on insolvency? How are these issues significant to a business experiencing insolvency?

The very immediacy and reach of social media, which makes it so attractive a tool for communication with customers and other stake-holders in a business for much of the time, can pose significant problems for a company on the cusp of insolvency, or where insolvency has become inevitable. These risks can be in relation to third party (ie external) social media, but also in relation to the social media accounts owned and operated by the business itself.

The first risk arises at the pre-insolvency stage, where recovery may still be possible provided that creditor relationships can be carefully managed. In those circumstances, panic spread by a disgruntled customer, employee or creditor via social media, can be fatal to that recovery strategy. Anxiety about the business can spread like wild-fire, leading to a race between creditors to get paid before it is too late. Ironically, in their anxiety they will undoubtedly cause the very thing they fear—the failure of the business. Similarly, there is often a period between the presentation of a winding-up petition and its formal advertisement in the London Gazette, during which negotiation with the petitioning creditor may be possible without other creditors needing to be alerted—the advantage of that negotiating window can be lost if news of the presentation of the petition leaks out via social media.

Equally, though, even once the insolvency process is underway, social media can present a variety of challenges. The most important of these is the ownership of the company’s social media accounts. While, formally, these may be an asset of the business, the practical reality may very well be that the login details are in the hands of relatively junior personnel and, depending on the implications for them of any insolvency process, they may be inclined to inflict further damage on the business’s reputation as a parting shot via the social media platforms to which they have access. This is particularly problematic where the company is entering administration, with a view to trading out of insolvency, or where there is a plan to dispose of some or all of the company through a ‘pre-pack’ sale.

Are some types of social media more significant in an insolvency context than others?

The significant social media in this context will vary from company to company. Obviously the most popular platforms are always likely to be of some significance, but a business which promotes itself largely through visual media is more likely to have focused on building its reputation through the image-based social media sites, whereas a knowledge-based business may be most concerned with the comments pages on blogs that it operates, or on the more professional-focused social media platforms.

What steps need to be taken in relation to social media upon insolvency?

The steps that need to be taken follow on logically from the risks identified above. The first step for any company which has identified a solvency risk (although it is equally true of any company concerned with its public reputation) is to conduct regular social media audits of the company and its brand(s) to ensure that no adverse commentary (particularly where it is exaggerated or untrue) is appearing on social media platforms. If, broadly speaking, the information published is true and accurate (except where there may be issues of breaches of confidentiality) there may be little to be done about it. However, it is still important for the business to be aware of how its reputation stands and of any gathering negative sentiment that may accelerate the time-frame in which remedial action needs to be taken. Equally, an untrue allegation that the business has already entered insolvency but is continuing to trade could be extremely damaging and may require a prompt response—even (depending on the circumstances and the severity of the implications) urgent injunctive action.

Once the decision has been taken to place a company into insolvency (and, as mentioned above, of particular significance when a traded administration or a pre-pack are being considered) the focus turns to the company’s own social media assets. It will be important to know, before any announcements are made to staff or the general public, who has access to the social media platforms operated by the firm or on its behalf. If possible, control should be placed in the hands of those who are going to guide the business through the insolvency process, so they have control over any public messages or announcements that may be made, rather than risking having a formal press release with a carefully crafted message being undermined by contrary (perhaps disparaging) observations via social media.

Who needs to take these steps, when and how?

In the first instance, it is the company’s responsibility to take appropriate control of its public reputation, through monitoring of external social media, and having proper structures and procedures in place in relation to the control of its own social media platforms. Once an insolvency practitioner is involved, particularly where they are able to be brought in prior to any formal insolvency steps being taken, the company would be prudent to place such matters into the hands of that professional, or at the very least to liaise closely with them to understand their requirements.

Auditing the company’s external social media reputation can be as simple as typing the name of the company and/or its associated brands into the major search engines and looking at the results that appear in the first few pages. Targeted searches within the sites of the major social media platforms might also be appropriate, and there are more specialised web-based services which can conduct a more detailed analysis of the business's online reputation. Such steps should ideally already be being taken as a matter of course, but should certainly be considered as soon as any risk of insolvency has been identified.

Similarly, a prudent company will already have a clear idea of who within or outside the business has control of its own social media content. Once the possibility of insolvency is being considered it is absolutely essential not only to identify where that control lies, but as far as possible to transfer that control into the hands of those who are going to be making the key decisions about the future of the business (whether that is the directors, or an external insolvency practitioner).

What are the risks and possible consequences if the appropriate steps are not taken?

The risks are probably apparent from some of the previous answers, but in brief the main risk is to the company’s reputation. Negative sentiment on social media can spread extremely rapidly and to a very diverse range of recipients. As mentioned previously, the effect of this could be to cause the company’s creditors to become less amenable to negotiation over payments, therefore increasing the risk of, or hastening, the company’s insolvency. Negative information about the company may also cause disaffection among the workforce, again diminishing the possibility of recovery, and may have the effect of harming the company’s brand to the point where a prospective pre-pack purchaser would be deterred from purchasing.

How do you see this area developing in the future?

The main way in which this area is likely to develop is through the ever-widening range of social media platforms through which a company is likely to engage with the public, or in which the company’s reputation is likely to be discussed. This increases the burden of monitoring on the company or its advisers, and the risk of negative commentary going undetected until the stage where it has done lasting harm to the business’s reputation. Equally, however, monitoring technology is also becoming more sophisticated, and so the scope for forming an accurate sense of a business’s standing online is also likely to be improved.

Lexis®PSL practical point: Social media and insolvency is covered in training materials: Social media—training materials and Practice Note: Social media in insolvency and restructuring deals.

Will Richmond-Coggan is a partner and solicitor-advocate at Pitmans LLP. He is a specialist in social media disputes and works closely with the firm’s insolvency practice.

Interviewed by Alex Heshmaty.

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About the author:

Stephen qualified as a solicitor in 2005 and joined the Restructuring and Insolvency team at Lexis®PSL in September 2014 from Shoosmiths LLP, where he was a senior associate in the restructuring and insolvency team.

Primarily focused on contentious and advisory corporate and personal insolvency work, Stephen’s experience includes acting for office-holders on a wide range of issues, including appointments, investigations and the recovery and realisation of assets (including antecedent transaction claims), and for creditors in respect of the impact on them of the insolvency of debtors and counterparties.