Having a company fail, either due to financial mismanagement, unpayable debts, or reasons beyond your control, is one of the worst-case scenarios for any director. Regardless of how the company came to be insolvent, you must deal with that insolvency as quickly as possible. Doing so means you stand a better chance of saving the company or achieving your desired outcome.
How could your company become insolvent?
Companies can fall into insolvency for several reasons. Continued economic uncertainty, changing customer habits, and reputational damage can all be contributing factors.
Your company’s business rates could have increased to the point where they’re no longer affordable, which could also apply to the cost of buying raw materials or paying for essential services.
To determine whether your company is just undergoing a financial “bump in the road” or if it’s legally insolvent, you can check for the following:
- The company’s cash flow is imbalanced, and you can’t pay the company’s bills when they fall due.
- Your company’s liabilities exceed the value of its assets on its balance sheet.
- Creditors have filed legal action against the company.
What can happen if you do nothing?
No one likes to find out their company is in debt, so burying your head in the sand in the hope that the problem will vanish or rectify itself is tempting. However, pretending the debts don’t exist and hoping they will go away isn’t a good way of dealing with the issues. They’ll still be there, and if you ignore your creditors’ initial attempts to contact you, they can resort to more drastic measures to try and recover what you owe them.
These measures can go from repayment reminders via phone or email to more formal debt recovery action. This could include issuing a Statutory Demand or County Court Judgment (CCJ). The latter of these negatively impacts the company’s credit file if not dealt with in the time specified in the judgment, making it harder to obtain credit in the future.
Creditors could send debt collectors and even bailiffs to your business premises who will attempt to recover funds or assets equal to the value of your company’s debts.
Can your creditors close your company down?
Continuing to ignore your creditors’ higher-pressure tactics means they can take steps to force your company into compulsory liquidation. They can do this by filing a winding-up petition if you owe them more than £750. Once your company’s bank is made aware, they will freeze the bank account, making trading impossible.
What can you do if your company is insolvent?
If your company is insolvent and cannot pay its debts on time, you should speak to a licensed and regulated insolvency practitioner. These highly trained professionals can assess your company’s circumstances and determine if anything can be done to rescue your company, or whether it would be better to close it down and draw a line under its debts.
Depending on your company’s situation, it could have more than one option.
Formal Recovery Arrangements:
The business model within the company would be viable if not for the burdensome debts. In this case, it may be possible to repay a portion of the company’s unsecured debts in instalments at a rate tailored to what it can afford on a monthly basis. The insolvency practitioner may suggest the company enter a Company Voluntary Arrangement (CVA). This process is most useful when a company has experienced bad debt that has negatively impacted its finances. It allows the company to continue trading while repaying its unsecured debts, usually over five years. Once the arrangement concludes, any remaining unsecured debt is written off.
Company Restructuring:
If the company’s debts indicate deeper-rooted problems, it may benefit more from restructuring. If the insolvency practitioner believes the company would benefit from it, they might suggest administration. During this process, the insolvency practitioner investigates the company’s affairs to assess what action is needed to return it to a profitable state. Whether your company is suitable for administration depends on its circumstances and whether the insolvency practitioner believes the company could be rescued as a going concern, if the company possesses sufficient assets to distribute to creditors, or if the process would achieve better results than liquidation.
Company Closure:
Sometimes, the company’s debts can be of such a level that continuing to trade or recovery isn’t a feasible prospect, or you might not want to run the company anymore. In these instances, the company can enter a formal liquidation process, closing the insolvent company in an orderly manner and writing off its unsecured debts. If you elect to put your company into an insolvent liquidation, it will undergo a Creditors Voluntary Liquidation (CVL), which generally achieves better results than if the company was forced into compulsory liquidation through a winding-up petition.
To summarise
If you suspect your company is in financial trouble, regardless of the circumstances that led to that situation, you should assess its solvent position and determine whether it is insolvent. If this is the case, you should contact a licensed and regulated insolvency practitioner to discuss your options. Depending on your company’s circumstances, it might be possible to repay a portion of its unsecured debts in instalments tailored to an affordable monthly amount. Alternatively, restructuring through administration could be an option depending on the company’s assets. If there is little chance of recovery, then you may be better off closing the company voluntarily before its creditors force it into compulsory liquidation.
