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Insolvency

Insolvency

What is Insolvency?

Insolvency occurs when a company is unable to pay its debts.

An easy way to check is to see whether your company can meet all of its liability payments when they are due to be paid. Your company is insolvent if you cannot meet those payments. At this point, a company director’s legal duty is to put the interests of the company’s creditors above all else. A limited company status protects its directors from personal liability, however, this protection is compromised when the company becomes insolvent if it continues to trade. That will worsen the position of the company’s creditors.

Key directors should work out if there is a viable strategy for turning the ship around. If there isn’t, the company may have to be formally liquidated. If you wish to go down this path then you have to get in contact with a licensed insolvency practitioner. They will analyse your situation and give you a way of moving forward.

What do I do if my company is insolvent?

A company has a greater chance of survival if its directors act quickly to fix a mounting problem.

In our experience, however, directors can neglect the problem and that can cause it to exacerbate. Saving a business from the brink requires some honest thinking and some decisive action from an early stage.

If you feel your company is insolvent then it’s vital you get some expert advice.

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What happens if my company becomes insolvent?

If your company experiences financial hardship and becomes insolvent, there are severe consequences for having an overdrawn Directors Loan Account. You will be expected to repay the money that is owed to the business, effectively becoming a debtor of the company.

This might not be too much of an issue with a small loan but you could face personal bankruptcy if you are unable to pay it off. There will be investigations that take place to uncover the reason behind your company’s insolvency and this could lead to disciplinary or legal action.

How do I turn my company around?

Reacting early allows more possibilities for the future of your business. A licensed insolvency practitioner will be able to decipher whether an organisation could be benefited with a careful restructuring. A Company Voluntary Arrangement (CVA) is a possible solution. It protects an insolvent company from its creditors, giving it the breathing space required to try and resolve its situation whilst consistently making monthly repayments to the money that is owed.

Alternatively, administration is a different insolvency procedure that could prevent any action from being taken against a company in debt. If you are pressured by creditors, you can threaten legal action or a winding-up petition. Another strategy for turning a business around would be financed, especially if the problems are related to poor cash flow or liquation.

    How much money does your company owe?

    Less than £20,000

    £20,000 to £50,000

    £50,000 to £100,000

    More than £100,000

    How many creditors are there?

    5 or more

    less than 5

    Can your company currently pay its debts, commitments and suppliers?

    Yes

    No

    Types of debt outstanding

    Bounce Back Loan

    HMRC

    Suppliers

    Bank Borrowing

    Staff Wages

    Other Liabilities

    Would you like to check if you can claim redundancy?

    Yes

    No

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    How do I close my company down?

    Directors should be desperately trying to reverse a company’s decline when it is in insolvency. This is not always possible, though, and that opens up the possibility of closure, ordinarily through liquidation.

    There are two ways to push through with insolvency:

    ▪️ A creditor forces you into liquidation but this is a long process, including a court case. This is the most serious action that a creditor can take against a company. The creditor probably feels like they are unlikely to get their payments through any other capacity. You need to respond to the court within seven days or they can issue a winding-up order to shut your company down.

    ▪️ Directors can push through the liquidation of the company themselves. This is known as a Creditors Voluntary Liquidation (CVL). A licensed insolvency practitioner will go through the entire process. This means that they will identify company assets, sell off those assets for the benefit of creditors, and they will organise the whole procedure on your behalf.

    The protection of limited incorporation cannot keep a director safe forever.
    These actions include:

    ▪️ Taking dividends after the company became insolvent

    ▪️ Fraudulently raising the funds to repay creditors

    ▪️ Taking funds out of the business for personal reasons is called misfeasance

    ▪️ Breaching the terms of a personal guarantee that you had agreed to

    ▪️ Entering into a personal guarantee and then breaching its terms

    ▪️ Getting rid of the company’s assets at undervalue or no value at all

    ▪️ Giving yourself an overpayment from the funds of your business

    ▪️ Forming a large overdrawn director’s loan account (any money will be repayable over an insolvency process because that money will be classed as a company asset)

    A company will become insolvent because its debts and creditors are greater than the sum of its assets. At this point, the directors have to act in the best interests of the company’s creditors. Directors must be able to show that they have done everything possible to ensure that payments are met. If a director does not follow their intuition then they are likely to face personal liabilities and they might be unable to act as a director of a limited company.

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    What is a personal guarantee?

    Signing a personal guarantee brings several concerns to the door of a director. Before making the decision, consider that:

    ▪️ You should always get professional advice to ensure that you fully understand the potential consequences of agreeing to a personal guarantee.

    ▪️ The main consequence is that you are likely to be held personally responsible for the repayment of the loan.

    ▪️ It could lead to the loss of your home and you might be pushed into personal bankruptcy.

    It is clear that signing a personal guarantee comes with its own risks. Still, you can dilute that level of risk by taking the right precautions.

    Get in touch

    If you are unsure whether refinancing this pathway will be right for you, don’t hesitate in contacting us.

    Call one of our compassionate experts at 0800 088 2142.

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      Insolvency FAQs

      Why sign a personal guarantee?

      ▪️ Company directors are often expected to develop the business quickly and that often needs a big injection of finance.

      ▪️ Banks and other lenders want to limit the risk on their end when it comes to giving out money; a personal guarantee is a big risk from the individual but it shows that they must have confidence in making the repayments.

      ▪️ Personal guarantee insurance can cover a percentage of your total liability and, therefore, an atrocious financial situation can become slightly easier to get on top of.

      ▪️ You might be able to negotiate a cap on your personal guarantee, but this will depend on the lender.

      ▪️ You can get legal and professional financial advice before you sign up to any guarantee.

      Although there is protection that is provided by incorporation, company directors will still be cautious about providing a personal guarantee because personal liability can get quite ugly.

      Who gets paid what in an insolvency procedure?

      Each class of creditor gets paid in full when the company goes bankrupt. Funds are then allocated to the next level of creditor. This means that unsecured creditors often don’t benefit during liquidation procedures. The hierarchy, from most important to least important, is structured as follows:

      ▪️ Liquidator fees and expenses

      ▪️ Secured creditors having a fixed charge

      ▪️ A preferential creditor

      ▪️ Secured creditors with floating charges

      ▪️ Unsecured creditors

      ▪️ Associate Creditors

      ▪️ Shareholders in the business

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