Whether it’s a sudden, bad debt, a combination of conspiring circumstances, or a change in market or customer habits, as a company director, finding out your company is insolvent is seldom a pleasant experience.
So naturally, you’d want to do all you can to try and save it, but whether an insolvent company can be saved or would be better off closing will often depend on its circumstances.
By identifying the tell-tale signs of insolvency before they become a threat to your company’s future, you may stand a better chance of saving it.
How to determine if your company is insolvent?
There are ways that business owners can determine whether their company is insolvent.
The definition of company insolvency is a situation where a company’s liabilities outweigh its assets. A significant factor in determining your company’s solvent position is whether it can afford to repay its unlimited liabilities when they fall due. There are different types of insolvencies.
As the director, you should also check whether you’re behind with your payments to HMRC and other creditors.
In addition to checking the company’s balance sheet for cash flow issues, you should check for any legal action that might have been filed against the company. Creditors can send repayment reminders to encourage companies that owe them money to repay.
Ignoring these can lead to additional actions such as Statutory Demands and County Court Judgements (CCJ).These severely impact your company’s credit rating if not dealt with immediately. Debt collectors and even bailiffs may have visited to reclaim what the company owes the creditors.
If you haven’t acted by such a point, you should pay the charges if you can, and contact a licensed insolvency practitioner as soon as possible if not. Doing so can prevent the situation from worsening further.
What can you do to save the company?
Even if your company is insolvent, that doesn’t automatically mean it’s the end of the line. Some options allow you to repay what’s affordable and write off the company’s unaffordable debts, but the most suitable option depends on your company’s circumstances.
If your company could repay a portion of its debts, it can do so via a formal repayment arrangement. Company Voluntary Arrangements (CVAs) are an example of these, wherein a company repays an affordable, tailored portion of its debts every month, usually over five years.
At the arrangement’s end, any remaining, unsecured debt is written off. Additionally, the arrangement allows the company to continue trading whilst free from creditor pressure for the arrangement’s duration.
Sometimes, more substantial action could be required to keep the company afloat.
In this case, administration may be more beneficial. If the company faces severe creditor action, or the debts are so severe that repaying them in instalments won’t be a viable solution, a licensed insolvency practitioner (IP) can take control of the company as Administrator.
Doing so pauses creditor pressure, giving the IP time to formulate a longer-term solution.
Will the company have to close?
If the company’s debts are of such a level that repayment won’t be a viable solution, you can choose to close the company through a voluntary liquidation process; a Creditors Voluntary Liquidation (CVL).
This type of liquidation is often preferable to having creditors force the limited company to close through compulsory liquidation, which leaves the company with far fewer options.
While it might be tempting to try and dissolve an insolvent company, the notice for dissolution is published in the appropriate Gazette, so your creditors can object to it and try to reclaim payments for what you owe them.
As a company director, you should take immediate action as soon as you suspect your company is insolvent. First, check whether the company has enough to cover its outgoings as and when they fall due or whether any legal action has been filed against the company.
If your company has outstanding liabilities which it cannot pay when they fall due, you should take advice from a licensed and regulated insolvency practitioner. They can assess your circumstances and advise you on the best way forward for your company.
Taking decisive action is always preferable to burying your head in the sand and hoping the problem will disappear.