Discovering your company is insolvent is a nightmare scenario for many company directors.
While insolvency doesn’t automatically mean the company’s closure is imminent, and there may be solutions to alleviate its issues, it’s important that you deal with the situation in a timely manner to avoid potentially serious consequences.
How does a company become insolvent?
A company can become insolvent in a multitude of circumstances: it may receive a sudden, bad debt, a change in the market, or damage to the company’s reputation, all of which could lead to a fall in revenue.
Regardless of the why, a company is insolvent if its liabilities outweigh its assets, and it cannot repay those liabilities when they fall due.
Failing to act when your company becomes insolvent can lead to serious consequences, including the potential forced closure of your company and, depending on your circumstances, consequences for you personally.
Potential consequences for your company
If your company becomes insolvent, you may face some of the following consequences:
- Creditors can pressure your company for what you owe them.
- Your creditors could force your company into compulsory liquidation via a winding-up petition.
- If evidence of wrongdoing is found, there may be an impact on your personal finances.
- Depending on your conduct as a director, you could face accusations of trading whilst insolvent, wrongful, or fraudulent trading.
Potential consequences for you, personally
If you’ve incorporated the business in a limited company, you’ll have limited liability protection, ringfencing your company’s difficulties from your own personal finances. This means that you won’t be personally liable or risk losing your home or other assets if the company begins to struggle financially.
If, however, you’ve signed personal guarantees, or you’ve acted outside of the company’s best interests, you could still find yourself personally liable for a portion of its debt. This could include when your company has traded whilst insolvent, or if you have an overdrawn Directors Loan Account at the point of insolvency.
Additionally, if you conduct your business as a sole trader, your personal and business finances are the same, and you do not have the same protection as a limited company.
How can you resolve the problem?
Fortunately, there are steps you can take to alleviate these issues before they threaten your business’s future. Which will be most suitable depends on your business’ circumstances, including the number of creditors, volume of debt, and how it is set up.
Contact a licensed insolvency practitioner who can assess your circumstances and advise you on the best solution for your business.
If you have a limited company whose business model would be viable if not for its burdensome debts, it may be possible to repay a portion of its unsecured debts in affordable instalments. You can do this through a Company Voluntary Arrangement (CVA). This process allows the company to continue trading while it repays what it can afford, preserving jobs and relationships with customers and creditors. Once the arrangement concludes, any remaining unsecured debt is written off.
A similar arrangement called an Individual Voluntary Arrangement (IVA) exists for sole traders.
If your company’s insolvency is indicative of deeper-rooted issues, then administration may be a more suitable solution. During this process, a licensed insolvency practitioner investigates the company’s financial situation and, if specific criteria are achievable, may propose administration to return the company to a profitable state.
If the company’s problems are of such a level that recovery isn’t feasible, your best option may be to close the company down via a Creditors Voluntary Liquidation (CVL). This writes off the company’s outstanding unsecured debts and sees the company close in an orderly manner, allowing you as director to walk away and start afresh.
If you’re a sole trader, and there is no feasible way to repay your business debts, bankruptcy may be a viable way to alleviate the problem. However, this may put your personal assets at risk of repossession, and certain professions won’t allow you to continue practising.
Summary
Regardless of how your company became insolvent, the consequences could be severe if you don’t address the problem quickly. Creditors will attempt to recover what you owe them and could even move to have your company closed. Depending on how you’ve set up the business and how you’ve acted while running it, you could face further repercussions. Contact a licensed insolvency practitioner who will assess your situation and advise you on the best solution.
