What can happen if you ignore your company’s insolvency

No director wants to find out their company is insolvent. The consequences can range from a damaged reputation and pressure from creditors to legal action and even the closure of your company. 

While it can seem scary, insolvency doesn’t always mean your company will have to close or that you won’t be able to run a business again. Insolvency solutions exist that can help alleviate your company’s troubles. For the best chances of achieving your desired outcome, you should keep a close eye on your company’s financial situation and take action as soon as you’re aware of any difficulty. Doing so will put you in a better position to achieve your desired outcome.

How do I know if my company is insolvent?

As a company director, you should always be aware of your company’s financial position, including whether it has any debts, and whether it is solvent.

You should monitor your company’s cash flow to determine whether it can pay its liabilities when they fall due, and your company’s balance sheet can indicate if its liabilities exceed the value of its assets, which is a telltale sign that your company is insolvent.

Legal action against your company, such as Statutory Demands and County Court Judgments (CCJs), and any resultant visits from bailiffs or debt collectors, are an indication of insolvency.

Whatever the reason for your company’s insolvency, it’s essential you act before the situation worsens. Failure to do so can lead to serious implications for your company, and depending on your conduct as director, affect your personal finances.

What can happen if your company becomes insolvent?

Once your company is insolvent, your creditors can start the process of recovering what you owe them. Depending on who the creditor is and the volume of the debts, the recovery action could include the following:

• Reminding your company to repay its debts through phone calls, email or post

• Filing Statutory Demands or CCJs for the amount owed

• Sending debt collectors and even County Court bailiffs and High Court Enforcement Officers (HCEOs)

If you ignore these warnings, your creditors could even issue a winding-up petition, forcing the company into compulsory liquidation and trading to cease.

Can your company’s insolvency affect you personally?

In most circumstances, if your company is insolvent, it won’t affect your personal finances. This is due to limited liability protection granted to all limited company directors, which separates their personal finances from the company’s and means its financial hardships won’t affect you personally.

However, there can be situations wherein the company’s insolvency could affect you personally. This can include, but is not limited to:

• You’ve signed personal guarantees to secure company funding 
• Having an overdrawn Directors Loan Account at the point of insolvency
• You’ve acted outside of the company’s best interests
• This can include engaging in wrongful or fraudulent trading, or trading whilst insolvent

It’s important to note that the above applies if you’re the director of a limited company. If you operate your business as a sole trader, you do not have this protection or separation, as you and your business are the same legal entity.

How to deal with company insolvency

While dealing with your company’s insolvency may seem like a daunting prospect, it’s important to address the problem as soon as possible. The sooner you act, the better your chances of securing the best possible outcome for your company.

Depending on your company’s circumstances, you could have several options by which to deal with its insolvency. These circumstances include the number of creditors and the volume of debt.

• Repay in affordable instalments through a Company Voluntary Arrangement (CVA)

If your company has a business model that would be viable and potentially profitable without the burden of its debt, it may be able to repay a portion of its unsecured debts at a rate tailored to what it can afford. A Company Voluntary Arrangement (CVA) is a formal insolvency procedure that would allow this. The company continues trading for the arrangement’s duration, preserving jobs and maintaining the company’s position in the market. Upon completion, the remaining unsecured debt is written off.

• Restructure the company through administration
  Administration is better suited to companies with deeper-rooted issues. An insolvency practitioner takes control of the company, investigates its financial situation, and if the company meets specific criteria, they will work to return the company to a profitable state and make it more appealing to potential buyers.
• Closure through a Creditors Voluntary Liquidation (CVL)
  If recovery isn’t feasible, or you don’t wish to continue trading following the company’s insolvency, you can close the company through a Creditors Voluntary Liquidation (CVL). Doing so writes off the company’s outstanding unsecured debts, with the company closing in an orderly manner. Afterwards, you can walk away and start afresh. 

Before you set your heart on any of these processes, you should contact a licensed and regulated insolvency practitioner. These highly trained professionals can give you free, impartial, confidential advice on your situation and help you decide the best way forward for your company.

To summarise

You should always be aware of your company’s solvent position, recognise the signs of insolvency, and take the necessary action to alleviate the issues before they escalate and the consequences become further reaching. By speaking to an insolvency practitioner, you’re ensuring you get impartial, confidential advice from a licensed and regulated source. They will determine your company’s position and guide you towards the best solution.