While company debts don’t always lead to a company’s closure, it needs addressing so it doesn’t trigger longer-lasting issues. Creditors are unlikely to forget you owe them money, and you could lose any established goodwill. They may send you repayment reminders or even more extensive debt recovery action such as County Court Judgements (CCJs). At worst, they may try and force your company into compulsory liquidation.
So, if you’re a UK-based limited company, how can you combat your company’s debts, giving it the best chance of having a future?
Cut your company’s outgoings.
If your company’s cash flow is imbalanced but not to the point where it’s amassed severe debts, adjusting its outgoings may be a feasible way to rebalance the books.
It sounds obvious, but checking for cheaper deals on insurance or utilities, hire purchasing for machinery or vehicles etc., can help reduce your outgoings. Equally, re-evaluate services that are more of a luxury than a necessity – these will be more specific to your line of work as some industries need certain services more than others. Consider what’s necessary for your company and what luxuries could be trimmed off the balance sheet until it’s healthier.
Repay what your company can afford.
The company may have a viable business model and could be profitable if not for the debts. If that’s the case, the company could explore repaying what it can afford through a voluntary repayment arrangement. A Company Voluntary Arrangement (CVA) is a popular way of doing such, allowing insolvent companies to make monthly contributions towards their unsecured debts at a rate tailored to what the company can afford. Once the arrangement finishes, the remaining unsecured debt is written off (usually after repaying for five years). Doing so demonstrates a willingness to repay and means creditors may receive a better return than they would from the company liquidating. These are formal repayment arrangements and must be carried out by licensed and regulated insolvency practitioners.
Important to remember: if the company is insolvent and unable to pay its liabilities as and when they fall due, you should refrain from paying your creditors outside of the strict payment hierarchy. Doing so indicates creditor preference and can lead to further trouble later.
If the debts threaten the company’s future.
If repayment alone won’t alleviate the problems, you should consider more substantial action to address the insolvency. Administration could be one of your options, wherein a licensed insolvency practitioner takes control of the company, acting as a median between it and the creditors while making the changes to return the company to a profitable state, thus making it more appealing to potential buyers. Administration may lead to a subsequent insolvency process, such as the previously mentioned CVA, or a Creditors Voluntary Liquidation (CVL).
A CVL can be utilised when a company’s debts are of such a level that continuing to trade isn’t feasible, and the company would be better off closing voluntarily. The process draws a line under the company’s unsecured debts, writing off what it can’t afford to repay and stopping all legal action. Staff are made redundant, and the company is closed, allowing the directors to walk away to pursue further employment or start again in a new limited company, circumstances permitting.
Liquidating the company voluntarily is often better for both directors and creditors than if they were to force it into compulsory liquidation.
If you find your company is struggling to repay its debts as they fall due, you should consider your options to alleviate the debt before it becomes a serious problem. Cutting costs through switching suppliers or cutting unnecessary expenses can help if the company’s balance sheet is slightly imbalanced. For larger amounts of debt, you should speak to a licensed insolvency practitioner for more specialist advice. They may advise you to enter a formal repayment plan with your creditors to repay what you can afford, or administration to restructure the company back to a profitable state, and thus more appealing to potential buyers. Alternatively, they may recommend closing the company voluntarily rather than waiting for the creditors to wind it up through compulsory liquidation.