What can you do if your company is in financial trouble?

While it’s not something many directors want to think about, planning for the possibility of your company facing financial trouble can be beneficial. Ignoring the problem in the hope it will go away will only worsen the situation, adding to any creditor pressure and driving the company deeper into debt. If you ignore the issue for too long, it could even lead to your creditors forcing your company to close through compulsory liquidation.

Fortunately, once you find out that your company is in financial trouble, you can take the necessary steps to tackle it, potentially returning your company to a stable, profitable state.

Warning signs of company insolvency

As a company’s director, you should always be aware of its financial position and whether it is insolvent. Signs that it is, or could soon be, insolvent, can include:

• A cash flow imbalance occurs when expenses exceed income.
• A sudden rise in spending
• An inability to repay debts as and when they fall due, especially those to the tax office
• Legal action from creditors is piling up

While having debts doesn’t automatically mean your company is insolvent, if it ever reaches a point where it is struggling to meet its liabilities, you should start looking into ways to resolve the issue before it starts threatening your company’s future.

How can insolvency affect your company?

As previously mentioned, creditors can initiate legal action to recover what your company owes them. These often start with repayment reminders, which can be sent via post, email, or telephone. Ignore these, and creditors can escalate to issuing Statutory Demands and County Court Judgements (CCJs). These can have long-lasting damage to the company’s credit rating, making it harder to take out credit in the future if you don’t deal with them promptly.

In the worst-case scenario, your creditors could even serve you with a winding-up petition, which, if not contested, can force your company into compulsory liquidation.

How to deal with your company’s insolvency

While the stress involved means you might not want to continue the company, you’re still better off trying to address the insolvency than having the creditors force your company into closure. Choosing to enter a formal insolvency process means you’ll have more control over the process than if you leave the company to be wound up.

Contact a licensed and regulated insolvency practitioner as soon as you notice any potential signs of insolvency. They can provide you with free, confidential advice and guide you towards the option best for your company.

Depending on the volume of debt and whether your company has a viable business model, you may be able to pay off a tailored portion of the debts while continuing to trade and retaining your place in the market and potentially, goodwill. This can be accomplished through a Company Voluntary Arrangement (CVA). This is a formal insolvency process managed by a licensed and regulated insolvency practitioner and usually lasts around five years. Any remaining unsecured debt is written off once the arrangement concludes, allowing your company to move on.

If the company would benefit more from restructuring, you could apply for administration. This involves a licensed insolvency practitioner examining the company’s operations and implementing necessary changes to make it profitable again, thereby increasing its appeal to potential buyers.

Sometimes, your company’s debts can reach a level where continuing to trade is no longer feasible. In which case, you would be better off closing the company through a formal liquidation process. You can do this via a Creditors Voluntary Liquidation (CVL), wherein the company stops trading and legally ceases to exist, drawing a line under its unsecured debts.

Will there be any consequences afterwards?

If your company is liquidated, the insolvency practitioner will review your conduct as a director. If you acted in the best interest of the company during that time, you should be able to walk away from the insolvent company free from its debts and even start a new one should you wish.

While the company’s limited liability protection shields you from personal liability in most situations, there are times when that protection could be bypassed. If you’ve acted outside of the company’s best interests, i.e., you continued to trade while knowing that the company was insolvent, or you’ve continued to take on work while knowing that the company couldn’t deliver on its promises, you could be found guilty of trading whilst insolvent or wrongful trading. Should this happen, you could be held personally liable for the company’s debts.

Summary

Suppose your company is in financial trouble and finds itself insolvent. In that case, you must act quickly once you notice the potential warning signs, ideally before your creditors pursue further action such as CCJs, and especially before they threaten to file a winding-up petition. Take decisive action as soon as you become aware that your company is insolvent. Speak to a licensed and regulated insolvency practitioner who will point you in the direction best for your company.