While it may be a worrying prospect and make you feel like you’ve failed as a director, you should take insolvency advice as soon as you become aware that your company may be insolvent. Doing so means you are acting in the best interest of the company and its creditors and increases the likelihood that you’ll achieve a positive outcome.
The company is in financial difficulty
While companies can go through periods of financial difficulty without becoming insolvent, it could indicate deeper-rooted issues in the company and, potentially, insolvency.
As the company’s director, you should always be aware of its solvent position and look out for the following warning signs:
- Decreasing revenue
- Imbalanced cash flow and balance sheets
- An inability to repay its creditors when its liabilities fall due
While these on their own don’t always mean that your company is insolvent, they can be an indicator or a warning sign that shouldn’t be ignored.
Informal recovery arrangements have failed
For small amounts of debt, it may be possible to pursue an informal arrangement with your company’s creditors. While this may work for smaller amounts of debt, it’s likely unsuitable for larger amounts, or if the company has debts to multiple creditors. In which case, the company needs to treat all creditors equally and explore more formal insolvency rescue or closure options.
Legal action against the company
When you owe a creditor money, they are entitled to send you reminders, and if those are ignored, they can take legal action to recover what they’re owed. These can come as emails, letters, and telephone calls during working hours. If these charges relate to a limited company, they should be delivered to that company’s premises and not to you personally.
- Demands and judgments
Creditors can issue Statutory Demands or County Court Judgments (CCJs) to recover what you owe them. The latter of which can negatively affect your company’s credit file if you do not challenge or repay the amount specified within the time specified. This will make it harder to obtain further credit in the future. - Compulsory liquidation
If your company owes more than £750, its creditors can apply to force the company into compulsory liquidation via a winding-up petition. Once advertised in the London Gazette, other creditors can add their claims, and if not contested, the petition becomes a winding-up order. The company’s bank accounts freeze, and the company is forced into compulsory liquidation.
While legal action against your company doesn’t automatically mean that it’s insolvent, it can indicate the company is struggling to cover its liabilities.
Can your company continue trading if it’s insolvent?
If you continue trading while knowing that the company is insolvent, then you are worsening the company’s situation and that of its creditors. This can even lead to allegations of trading whilst insolvent and wrongful trading, which could lead to you being held personally liable for your company’s debts, bypassing your limited liability protection.
Who to take insolvency advice from
If your company is insolvent, it’s important that you take advice from the right people. While unlicensed insolvency advisers may advertise cheaper rates and solutions beyond what others may offer, in reality, that lack of adherence to regulations can lead to issues later.
You may receive:
- Poor service
- A lack of experience
- Future liabilities
- Hidden costs
To avoid these, you should take advice from a licenced and regulated insolvency practitioner as soon as you become aware that your company has debts which it cannot repay. They will assess your situation and, depending on your provider and your company’s circumstances, could offer several services.
This could include a formal repayment arrangement while the company continues to trade, restructuring the company back to a profitable state if it would be beneficial to do so, or closing the company through a formal, voluntary liquidation procedure.
They will answer any questions you have regarding what you can and can’t do prior to entering the appropriate procedure, and potentially consider what you want for the company, if that’s achievable.
Conclusion
The right time to take insolvency advice is as soon as you suspect that your company is insolvent. Doing so is acting in the company’s best interest and puts you in a better position to achieve your desired outcome. Make sure you take advice from a licensed and regulated insolvency practitioner over an unlicensed adviser, as the former are qualified to put your company into the best-fitting, formal insolvency arrangement, and achieve the best possible outcome for you and the company.
