Company debt becomes a problem when the affected company can’t repay its bills when they fall due. Failing to repay the company’s debt can lead to creditors pursuing what they’re owed and threatening the company’s future in the worst-case scenario.
If you’re a limited company director and you find that the company’s debts and liabilities outweigh its assets, you should take immediate action. Doing so allows a greater chance of saving the company and achieving the best outcome for you and the creditors.
How is company debt amassed?
Companies can fall into debt in multiple ways. In the current economic climate, prices have increased for utilities and raw materials, among other resources that many companies need to operate, offer their service, or produce their products.
This same economic climate can affect customer spending habits, with many shopping around for cheaper essentials and some cutting non-essentials.
Unexpected expenses, such as having to replace broken machinery or train new employees to replace departing staff can also have an impact.
Company debt can be amassed by having too many outgoings, splashing out for non-essential services and resources without regard as to how much they cost in the long run, especially if takings drop to the point where they become unaffordable.
Too many of these can overbalance the company’s books, leading them into insolvency.
What is insolvency?
A company is insolvent when it cannot repay its liabilities when they fall due, or if the liabilities on the company’s balance sheet outweigh its assets. If you’re a director of a limited company, you should be aware of your company’s solvent position and take immediate action if you discover either of the above are true. The consequences of not doing so can be severe and long-lasting.
What are the consequences of company insolvency?
In an ideal world, a company’s debts would be paid as and when they fall due. Sadly, that isn’t always the case, and failing to repay company debts when they’re due can lead to creditors taking action to recover what they’re owed. This action can start with repayment reminders delivered to the company via phone, letter, or email.
While ignoring these reminders may sound tempting, doing so will only lead to the action escalating. Creditors can pursue formal debt recovery action, including County Court Judgements (CCJs) and Statutory Demands. If left unaddressed, these can negatively affect your company’s credit file and make it harder to take out any more lines of credit. If you still don’t act, creditors can pursue the severest debt recovery option: a winding-up petition.
Once advertised, the company’s bank accounts froze, making it impossible to continue trading and forcing the company into compulsory liquidation, ultimately closing it.
Stopping company debt from closing the company.
The good news is, getting into company debt doesn’t automatically mean the company is on a one-way trip to financial ruin or that a winding-up petition is on its way.
Help is available; however, time is of the essence. Company directors should be aware of their company’s solvent position, and action should be taken as soon as they become aware that the company cannot repay what it owes. Doing so reduces the risk of longer-lasting consequences and means you’re more likely to achieve your desired outcome, though the company’s standing will also have a bearing on this.
If the company would be viable without the debt.
If the company and its core business could be profitable if not for the debts, it might be possible to repay what the company can afford through a formal repayment arrangement. Contact a licensed and regulated insolvency practitioner about a Company Voluntary Arrangement (CVA). This process usually lasts five years, wherein the company repays a portion of the debt tailored to what it can afford. The insolvency practitioner acts as a median between your company and its creditors, and once the arrangement concludes, all remaining unsecured company debt is written off.
Restructuring and closure options.
When repayment alone won’t solve the company’s problems, you can explore administration, wherein a licensed insolvency practitioner investigates the company’s finances while overseeing the changes necessary to return it to a profitable state. The company is protected from creditor action for the administration’s duration, providing valuable breathing space for the insolvency practitioner to formulate a rescue plan.
Where the company’s debt is of such a level that recovery isn’t feasible and its debts are unmanageable, closing the company and drawing a line under the debts may be the better way forward. Closing the company voluntarily through a Creditors Voluntary Liquidation (CVL) ends the company’s operations and writes off the unsecured debts. It also means directors have more control over the entrance into liquidation than if the company’s creditors forced it into compulsory liquidation via a winding-up petition.
Company debt can become a problem if the company cannot repay it on time. Ignoring reminders and any subsequent action from your creditors will only make things worse. It could even see the company wound up through compulsory liquidation if you don’t act immediately. As the director, you should always be aware of your company’s solvent position. Take decisive action before the debt escalates to the point that it threatens the company’s future by contacting a licensed insolvency practitioner. They can advise you on the best route forward, whether that involves repaying the debts in affordable instalments, restructuring the company, or closing it to draw a line under the debts.