Insolvency can lead to severe issues for a company if the problem isn’t immediately dealt with. If left unaddressed, it can lead to legal action from creditors, damage to the company’s credit rating, and potentially lead to the end of the company.
So, how can you deal with your company’s debts in insolvency?
When is my company insolvent?
A company is insolvent when it cannot pay its liabilities when they fall due.
As a company’s director, you should always know whether it is solvent or insolvent. Warning signs that your company may be insolvent could include the following:
- The company has an imbalanced cash flow and cannot pay its bills when they fall due.
- Its liabilities exceed the value of its assets.
- The company’s creditors have filed legal action, which could include a County Court Judgment or a Statutory Demand.
What can happen to an insolvent company?
If your company is insolvent as described above, several things can happen as a result. Unless you act quickly and decisively, insolvency can have severe consequences for your company.
Creditors can send repayment reminders via phone, mail, or email. If you ignore these, they can enact more measures to recover what your company owes. They may issue a Statutory Demand or a County Court Judgment (CCJ), which will negatively impact your company’s credit score and make it harder to obtain credit in the future.
With a CCJ, debt collectors and even bailiffs may visit your company to recover funds or assets equal to the debt’s value.
If you continue to ignore these debt recovery measures, your creditors may even petition to wind the company up via a winding-up petition. This forces the company into compulsory liquidation, ending trading and its existence.
How to deal with your company’s insolvency
If you want to avoid the situations listed above, you should know what your options are and take the action necessary to alleviate the debts.
Depending on your company’s circumstances, there could be several ways forward. To find out which is best for your situation, speak to a licensed and regulated insolvency practitioner. Once they know your company’s circumstances and take into account what you want for its future and whether it is affordable, they will advise you of the most suitable option.
Repaying in affordable instalments
Depending on the soundness of your company’s business model, it might be possible to repay a portion of your company’s unsecured debts in instalments at a rate tailored to what you can afford. This could be achieved by entering a Company Voluntary Arrangement (CVA). As a bonus, this allows the company to continue trading for the arrangement’s duration while the debt is repaid, helping your brand maintain presence in the market. A CVA usually lasts five years, and once it concludes, the remaining unsecured debt is written off. As stated earlier, this will only be feasible if the company has a viable business model. If it has deeper-rooted issues, an alternative solution might be required.
Restructuring the company
If the company has more substantial issues that repayments alone won’t fix, then the insolvency practitioner might suggest it undergo more substantial restructuring. This can be achieved by putting that company into administration. This involves an insolvency practitioner looking into the company’s internal workings and making the changes necessary to return it to a profitable state. This may include selling off unprofitable parts of the business. Administration may only be suitable if the insolvency practitioner believes your company could be rescued as a going concern, if there are sufficient assets to distribute to creditors, or if the administration would achieve a better result than through liquidation.
Closing the company
Despite your best efforts and intentions, the company’s debts may be of such a level that recovery isn’t feasible. In these instances, you can close the company by placing it into a Creditors Voluntary Liquidation (CVL). This will close the company and write off its unsecured debts. If you’ve acted in the company’s best interests leading up to and during the liquidation, you can walk away from the insolvent company and start a new business should you wish to. A CVL will often return a better result for the creditors than if they wound the company up through compulsory liquidation.
Conclusion
Not addressing insolvency as soon as you’re aware of it can lead to serious issues for your company. Creditors may send threats of legal action, which could affect the company’s credit rating and even lead to the company’s closure. As a company director, it’s your duty to recognise the signs of insolvency and take appropriate action by contacting a licensed and regulated insolvency practitioner, who can assess your company’s circumstances and advise you of the best route forward.
