When a company becomes insolvent, it cannot repay its debts as and when they fall due, and its liabilities outweigh its assets. Finding that your company is insolvent can be a stressful situation for all involved, and it can be easy to make mistakes, potentially worsening the situation and long-term consequences.
Understanding some of the more common missteps and finding the best course of action is essential for you to stand a chance of saving the company or allowing you to walk away with fewer long-lasting consequences.
Ignoring repayment reminders and demands from creditors
One of the first indicators that your company could be insolvent is repayment reminders from your creditors. Creditors can send reminders via phone, email, or post to your company’s work premises during working hours.
While dealing with these reminders can be awkward and unpleasant, ignoring them will worsen the situation. Creditors can escalate their debt recovery action from informal requests to formal demands. These could include Statutory Demands or County Court Judgments (CCJs). A CCJ can have long-lasting consequences if not dealt with in a timely manner. They stay on the company’s credit file for six years, making it harder to take out credit in the future and potentially worsening the company’s financial position.
Ignoring formal repayment demands is ill-advised. Doing so could prompt creditors to issue a Winding-Up Petition, the most severe form of debt recovery. Creditors can file for this if your company owes more than £750. Once it is advertised in the London Gazette and it comes to the attention of the company’s bank, they’ll freeze the company’s account, and if you can’t obtain a validation order, the company will enter compulsory liquidation.
Paying one creditor before others
If your company lacks the funds to repay all its creditors, it can be tempting to pay one debt before the others: the largest outstanding or that with the most insistent creditors for example.
However, once your company is insolvent, paying any creditor before another would constitute creditor preference. Treating one creditor in preference over another means you’ve not been treating them fairly and risks worsening the other creditors’ position.
Once the company inevitably enters an insolvency arrangement, any preference payments made during the insolvent period could lead to you being held personally liable for your company’s debts or disqualified from being a director.
Trying to continue if surviving isn’t realistic
It makes sense that you’d do everything you can to keep your company alive. Being a director can be a significant financial and emotional commitment. However, if the company’s debts are mounting to a point where continuing to trade is becoming unfeasible, doing so in spite of this can worsen the company’s situation, and that of its creditors. This means your creditors could take further action to recover what you owe them, and in the worst-case scenario, it could threaten the company’s future.
Attempting to strike off with unpaid debts
With the added pressure of dealing with company debt, it can be tempting to close the company by striking it off the register at Companies House.
However, dissolving an insolvent company is ill-advised. Dissolution is meant for solvent companies with enough assets to cover their liabilities, not insolvent companies. While you can try to dissolve your company if it has outstanding debts, you must inform your creditors of your intent, and they are likely to object.
Creditors can also use a court order to reinstate your company for up to six years after you dissolve it.
Not taking licensed insolvency advice
Despite all this doom and gloom, there is some good news. Advice and help are available from firms of licensed insolvency practitioners (IP). These professionals are regulated by independent regulatory bodies and specialise in debt recovery and company closure, working with directors and creditors to reach the best outcome.
While approaching an IP can feel like an embarrassing admission of defeat, delaying in taking appropriate advice can leave you and your company vulnerable to the outcomes mentioned earlier.
If you act early enough, your company could have more options than if you tried to continue without doing so.
These options could include:
- Consolidating your company’s unsecured debts into a single, monthly repayment. This can be done through a Company Voluntary Arrangement (CVA), which allows the company to continue trading for the duration. The arrangement will usually last five years, and once it concludes any remaining unsecured debt is written off.
- Restructuring the company through administration. During this, an IP reviews the company’s affairs and makes the necessary changes to return it to a profitable state, which could involve selling off unprofitable parts of the company. Administration is a temporary process often followed by another insolvency procedure.
- Closing the company through a Creditors Voluntary Liquidation (CVL). Doing so draws a line under the insolvent company and its debts. If you’ve acted in the company’s best interests, you can walk away and start afresh.
Which of these procedures would be best for your company, or even viable, depends on its circumstances. Speaking to a licensed IP can help you make sense of its position and guide you towards the best possible solution.
To summarise
Your company becoming insolvent can be a stressful time, and it can be easy to make mistakes when trying to put things right. While repayment reminders and demands from creditors can be unpleasant, they should not be ignored. All creditors need to be treated equally, and attempting to strike off the company if it is insolvent can lead to further issues. The company should enter a formal insolvency arrangement if there’s little prospect that the company could survive, and a licensed insolvency practitioner will guide you towards the outcome best for your company’s situation.
