Finding out your company cannot pay its debts as and when they fall due is every director’s nightmare. Not repaying the debts and pretending they don’t exist isn’t an option; ignoring the problem will only lead to creditors taking more extreme steps to recover what they’re owed. In the worst case, the company’s future could even be at risk.
So, if you’re a director and you find your company is insolvent, what action can you take to combat the problem and prevent further, more damaging creditor action?
How do companies get into debt?
It’s easier for a company to fall into debt than directors might realise. Causes can include, but are not limited to:
- A rise in the cost of resources.
- Unexpected expenses disrupting the company’s cash flow.
- Overspending or having too many non-essential outgoings.
- A change in customer spending habits impacting takings.
These might not be enough to trouble the company on their own, but they can cause problems when combined.
Signs that your company could be insolvent
Having debts to pay doesn’t automatically mean the company is insolvent, so long as the company has incoming payments that can cover its outgoings – it can therefore repay its bills as and when they fall due. If the company is struggling to do so, however, it could be a warning sign of financial issues.
If you suspect your company is insolvent, look out for the following:
- Your cash flow is imbalanced, and the company cannot pay its bills on time.
- Your balance sheet has more liabilities than assets, including the cash in its bank account.
- Creditors have filed legal action to recover what they’re owed.
What can happen in insolvency?
As a company director, you should know?if your company is solvent or insolvent. In the latter case, you should take immediate action before the company’s creditors intervene.
This creditor action can start with repayment reminders, often by telephone and letter. Getting these can be stressful, and as tempting as it may be to ignore them, creditors are unlikely to forget and may escalate their debt recovery action.
County Court Judgements (CCJs) and Statutory Demands can have longer-lasting effects than simple reminders if not addressed as a priority. Failing to repay or challenge CCJs within the time stated in the judgement can damage the company’s credit file, making it harder to take out credit in the future.
Ignoring CCJs can lead to creditors going further and petitioning to wind up your company. Your creditors can apply for a winding-up petition if the company owes more than £750. Once a winding-up petition is advertised in the appropriate gazette, it becomes a winding-up order. The company’s bank accounts freeze, making trading impossible, and the company subsequently enters compulsory liquidation.
Your conduct as director in the time leading up to the insolvent period is investigated, and if it’s deemed you didn’t act in the company’s best interests, such as continuing to trade while knowing that the company was insolvent or taking on work that it could not deliver, you could face accusations of wrongful trading. This means you could lose the company’s limited liability protection, potentially making you personally liable for the company’s debts.
What can directors do about company insolvency?
While what’s described above might sound scary, a company becoming insolvent doesn’t necessarily mean it will close. Directors wanting to try and salvage their company and protect themselves from wrongful trading accusations have several options.
If the company had a feasible business model before the debts became problematic, the company might be able to repay a portion of its debts in monthly instalments at a tailored, affordable rate. This is called a Company Voluntary Arrangement. Overseen by a licensed insolvency practitioner, the process lasts around five years, and once it concludes, any remaining unsecured debt is written off. If more substantial work is needed to alleviate the company’s debts, directors can explore administration. Administration involves an insolvency practitioner taking control of the company, where they’ll make the changes necessary to return it to a profitable state and appealing to potential buyers.
If the company’s debts are of such a level that recovery isn’t feasible, directors can voluntarily put the company into liquidation. They can do this by entering a Creditors Voluntary Liquidation (CVL). The company stops trading, after which it ceases to legally exist, and its staff are made redundant. Doing so draws a line under the company’s unsecured debts. It allows the directors to move on and start afresh, free to pursue paid employment or even start a new limited company.
To summarise
Your company is insolvent if its liabilities outweigh its assets and it cannot repay its debts as and when they fall due. Regardless of how the company accrued the debts, creditors can take action to recover what they’re owed; some of which could lead to the company closing through compulsory liquidation if ignored. As director, you should always be aware of your company’s solvent position. Ignoring the signs of insolvency will only worsen the situation. Therefore, you should take decisive action to reach your desired outcome. This could involve repaying the company’s debts in affordable instalments, restructuring the company back to a profitable state, or voluntarily entering liquidation and drawing a line under the insolvency.
