
No company director wants to find their company in a position where it can’t pay its liabilities as and when they fall due. However, if your company has reached that stage, it is part of your directorial duties to act in its best interests, and that involves addressing the insolvency before its effects risk the company’s future.
So, what should you watch out for as signs that your company could be insolvent? What can insolvency mean for your company? And how can you address the problem and achieve the best outcome possible?
Spotting the signs of company insolvency
Part of your directorial duties is knowing whether your company is solvent or insolvent. Any of the following signs could indicate insolvency and should be tackled before it threatens your company’s future.
- The company’s cash flow is negative
The company can’t pay its bills when they are due, it can’t keep to creditor repayment terms, or it is in arrears.
- An unbalanced balance sheet
The company’s liabilities should not exceed the value of its assets, including the funds in its bank account. If they do, then the company could be insolvent.
- Legal action
If your company has either of the above, creditors could file legal action against the company to recover what they’re owed.
Any of these could indicate your company is insolvent and lead to further issues later.
What can happen if your company becomes insolvent
If your company is insolvent, daily operations can suffer, especially if you have to deal with these creditors on a day-to-day basis. On top of this awkwardness, creditors can file legal action to recover what your company owes them.
- Reminders
These recovery attempts can start as repayment reminders via phone, email, or post. If these go unacknowledged, creditors can escalate to Statutory Demands and County Court Judgments (CCJs). The latter of these can damage the company’s credit rating if you don’t address them in the time specified in the paperwork, making it harder to obtain credit in the future.
- Debt collectors and bailiffs
Leaving these charges unaddressed can lead to visits from debt collectors and even bailiffs, who can attempt to recover funds and even assets equivalent to the debts’ value.
- Compulsory liquidation
Continue to ignore your unpaid bills, and creditors that you owe more than £750 to can file for a winding-up petition. Once advertised in the London Gazette and the company’s bank becomes aware, they will freeze the company’s account, making trading impossible and forcing the company into compulsory liquidation.
How to deal with company insolvency
Fortunately, a company becoming insolvent doesn’t automatically mean it is destined for compulsory liquidation or that it will cease to exist. Licensed and regulated insolvency practitioners can carry out one of several insolvency arrangements to try and help alleviate your company’s debts. Which of these is best for your company depends on its circumstances, including its level of debt and, to an extent, how you wish to proceed as its director.
- Repaying through a formal repayment arrangement.
Depending on your company’s situation, it may have a strong central business model but not be able to cope with its volume of debt. This means the company could benefit from entering a Company Voluntary Arrangement (CVA). CVAs are formal repayment arrangements managed and overseen by a licensed insolvency practitioner. They involve the company repaying its unsecured debts at a rate tailored to what it can afford on a monthly basis. The company continues trading whilst in this arrangement, allowing you to retain goodwill with customers. Once the CVA concludes, any remaining unsecured debt is written off.
- Restructuring through administration
If the company’s debts indicate a more fundamental problem with its core structure, it could benefit from entering administration. Administration is a temporary state wherein a licensed insolvency practitioner attempts to restructure it with a view to allowing the business to continue and make it more appealing to potential buyers. Creditor pressure is paused for the duration of the process.
- Closing through a liquidation
While you might want to save your company, its financial standing, including the amount of creditor pressure, may not justify continued trading.
If your company needs to close due to unaffordable debts, you can put it into a Creditors Voluntary Liquidation (CVL). A CVL is a formal closure process managed and overseen by a licensed and regulated insolvency practitioner. The process allows the insolvent company to close in an orderly manner, writing off unaffordable unsecured debts, and allowing you to walk away from the company if you’ve acted in its best interests and fulfilled your directorial duties.
To summarise
As a company director, you should be aware of your company’s solvent position and watch out for potential signs of insolvency. If you become aware of any of these indicators, don’t wait until they escalate to the point where they threaten the company’s future. Acting sooner rather than later increases the chances of achieving your desired outcome for your company. Solutions could involve repaying the debt in affordable instalments, restructuring the company back to a profitable state, or closing the company, drawing a line under its debts, and allowing you and the other directors to walk away.