If left unchecked, a company’s debts can have severe consequences, potentially damaging its credit file and even leading to the company closing down if they’re not dealt with early. Fortunately, by taking decisive action before the situation becomes unmanageable, you stand a better chance of rescuing the company or closing it in a more controlled manner than if creditors were to force it to do so.
The following advice is tailored to companies based in the UK.
Spot the signs early.
As a company director, you should always be aware of your company’s solvent position. As such, there are warning signs you can look out for which could indicate the company is experiencing financial issues. If these aren’t dealt with in a timely manner, they could threaten its survival.
These indicators include:
- Unbalanced cash flow – The company cannot pay its liabilities as and when they fall due. These liabilities include National Insurance, VAT, and PAYE.
- Imbalanced balance sheet – The company’s liabilities shouldn’t exceed the value of its assets, including cash in its bank account.
- Legal action – If the company is unable to repay its debts, creditors that have already sent reminders may file legal action to recover what they’re owed. County Court Judgments (CCJs) are one of these, and can negatively impact the company’s credit file if not challenged or set aside within the specified time. Ignoring these can lead to creditors taking more severe action that can threaten the company’s future. At worst, creditors could file for a winding-up petition, which freezes the company’s bank accounts and forces the company into compulsory liquidation.
Take the right advice.
As soon as you realise your company can’t pay its liabilities or legal action is piling up, take advice from a licensed and regulated insolvency practitioner.
While it might be tempting to go for the lowest-costing option, especially if the company is struggling to cover its existing liabilities, those offering discounted insolvency services may not have the required qualifications to offer formal insolvency solutions.
Make sure the insolvency practitioner is licensed and regulated by a regulatory body. This gives you peace of mind that they’re complying with the relevant regulations, and performing their duties with due diligence and to a professional standard.
While the cost of a formal insolvency process might seem prohibitive, licensed firms may offer free initial advice, and potentially a no-obligation quote.
Find the right solution.
Once you’ve spoken to a licensed insolvency practitioner, they will try to guide you toward the best option for the company.
Depending on its situation, the company may be eligible for one of several formal insolvency solutions.
Repaying the debt in affordable instalments could be a viable option if the company’s business model would be viable were it not for said debts. This could be achievable through a Company Voluntary Arrangement (CVA). These formal repayment plans usually last five years, with the company’s unsecured debts consolidated and the company paying a tailored, affordable amount on a monthly basis. The company continues trading for the arrangement’s duration, allowing it to maintain its brand and relationships with customers. Once the arrangement concludes, the company’s remaining unsecured debt is written off.
If the debts are more severe, and intense creditor pressure is causing the company issues, it may benefit from more substantial restructuring. In this case, the insolvency practitioner may suggest the company enter administration. Doing so allows the insolvency practitioner a deeper look into the company’s situation while it is protected from creditor pressure, and provides time to formulate a more permanent solution.
If the debts are at such a level that the company’s recovery isn’t feasible, then closing through an insolvent Creditors Voluntary Liquidation (CVL) may be necessary. Entering a CVL draws a line under the company’s debts and allows the directors to walk away and start again should they wish to.
In conclusion.
Debts can destroy your company if they’re left unchecked or ignored. As the company’s director, you should always be aware of its solvent position, ensure its cash flow and balance sheet are stable, and check that the company doesn’t have any outstanding legal action against it. If you spot any of these signs, take advice from a licensed and regulated insolvency practitioner who can guide you towards the best option for your company. Depending on your circumstances, your company could repay its debts in affordable instalments, through restructuring the company, or by closing it and allowing the directors to start again.
