Even if a company is insolvent, as its director, you could think of liquidation as a last resort to avoid at all costs. While closing a company can dishearten directors wanting their company to survive, ignoring the problem in the hope that it will go away will only exacerbate it.
Make sure, as director, you’re aware of the potential signs of insolvency, so if your company exhibits them, you know what action to take.
What are the signs that a company is insolvent?
Several telltale signs could indicate that a company is insolvent.
- The company’s cash flow is imbalanced. A company’s liabilities outweigh its assets, or an inability to repay its bills as and when they fall due is often an indicator that the company is insolvent. It may lack funds to pay debts to HMRC or cover staff wages.
- Creditors are sending repayment reminders or issuing legal action. Creditors are within their rights to send repayment reminders to those who owe them money. If the debt relates to a company, these should only be sent to the company’s address during working hours and should be worded professionally without threatening language or instigating that they can act outside their powers.
If you’ve already received reminders, creditors may proceed to take legal action against the company.
If, as company director, you notice any of these warning signs, you should take decisive action to alleviate the problem. Trading on while the company is insolvent without addressing the problem can lead to accusations of trading whilst insolvent and even wrongful or fraudulent trading later.
What can happen if you don’t act quickly and decisively?
Failing to act once you know the company is insolvent can have severe consequences.
- Legal action. If they haven’t already, creditors can issue Statutory Demands or County Court Judgments (CCJs). The latter will appear on the company’s credit file for six years if not dealt with within the time specified in the judgment, making it harder for the company to take out new lines of credit or renegotiate existing agreements.
- Debt collectors and bailiffs. Ignoring these forms of legal action can result in visits from debt collectors or bailiffs. Debt collectors can attempt to reclaim debts on a creditor’s behalf. Bailiffs, or High Court Enforcement Officers, have several powers and can visit the company and attempt to recover items equivalent to the debt’s value.
- Creditors force the company into compulsory liquidation. If the company owes a creditor more than £750, they can apply for a winding-up petition. Once a petition is served, it is advertised in the Gazette. Once the company’s bank is aware, the account is frozen, making trading impossible. If the company doesn’t apply for a Validation Order or the courts reject it, the petition becomes a Winding-Up Order, forcing the company into compulsory liquidation.
Does an insolvent company have to close?
If you act before the company’s debts become unmanageable, the company may be able to avoid closure.
- Repaying in affordable instalments. If the company has a viable business model and would otherwise be profitable if not for its debts, it may be viable for a Company Voluntary Arrangement (CVA). A CVA is a formal repayment arrangement wherein the insolvent company pays a portion of its unsecured debts at a rate tailored to what it can afford per month. CVAs allow the company to continue trading for their duration, maintaining the brand and goodwill with customers. All remaining unsecured debt is written off upon its conclusion.
- Restructuring the company. Directors can explore administration if repaying won’t be enough to keep the company alive. If a licensed insolvency practitioner believes that the company could be rescued as a going concern, the process would achieve better results than if the company is liquidated, or that property and assets could be realised to make a distribution to secured or preferential creditors, they may explore administration as a potential option. Companies are protected from further creditor pressure for the process’ duration, and it provides the opportunity to trim back non-profitable aspects of the business.
Closing an insolvent company.
Sometimes, a company’s debts can be so high that recovery options aren’t feasible, or creditor pressure has reached such a level that recovery is unlikely. Should this happen, you can voluntarily close the company through a Creditors Voluntary Liquidation (CVL). Doing so allows you to choose a liquidator without an official receiver taking control as would be the case in compulsory liquidation. Unsecured debts are written off, all legal action ceases, and it reduces the risk of wrongful trading accusations.
Once the process is complete, the insolvent company closes, its debts dying with it.
To summarise
If your company displays the signs of insolvency, ignoring the problem and hoping it will just go away will only worsen the issue. Check for imbalances in the company’s cash flow, whether it can repay its liabilities as and when they fall due, and if any legal action has been filed against it. Act as soon as you become aware that the company is struggling, and you’ll have more potential solutions open to either rescue or close it in an orderly manner.
