Failing to monitor your company’s financial position can lead to debts going uncontrolled, spiralling creditor pressure, and potential damage to your company’s credit rating if it’s not addressed as soon as possible.
Insolvency doesn’t automatically mean your company will have to close, and if you act early enough, you’ll have more control over the company’s trajectory than if you try to ignore the problem in the hope that it’ll go away.
Recognise the signs before they become a problem
You should always be aware of whether your company is solvent or insolvent, so company debt shouldn’t come as a surprise. There will be several warning signs that, while they may not necessarily indicate insolvency, could signal financial difficulties within the company. These shouldn’t be ignored, as they can escalate and lead to further consequences.
These could include:
- Imbalanced cash flow and balance sheet
You may have one of these if the company can’t repay its liabilities, such as National Insurance, Value Added Tax, and Pay As You Earn. Additionally, the company’s liabilities may exceed the value of its assets, including the amount of cash it has at the bank. - Legal action against the company
Creditors can take legal action against your company if you fail to pay on time. This can start as repayment reminders, but can escalate to formal Statutory Demands and County Court Judgments (CCJs). The latter of these can negatively affect your company’s credit rating if not addressed within the time specified in the judgment, making it harder to obtain credit arrangements in the future. Continuing to ignore these recovery efforts could even lead to creditors attempting to wind up the company and have it closed through compulsory liquidation.
Take advice early, and from a credible source
If you’re aware of any of the potential warning signs listed above, you should seek advice from a licensed, credible source. While you can speak to your accountant or debt relief charities, the best and only way to ensure you’re getting the right service is to speak to a licensed insolvency practitioner.
These highly trained and experienced professionals are regulated by regulatory bodies and are qualified to enact one of several formal insolvency procedures, depending on what is best for your company. They will assess your company’s situation, consider any specifics or extra considerations, and advise you on the best route forward.
Some may even offer free initial advice and a no-obligation quote before instruction.
Choose the right way forward
Speaking to a licensed insolvency practitioner should help you better understand your company’s position and how best to proceed.
The options available will depend on your situation, but they could include the following:
- Repaying in monthly instalments
Repaying in instalments tailored to what your company can afford could be an option if there is a viable business model in a company that’s encumbered with unmanageable debts. In which case, the insolvency practitioner may suggest the company enter a Company Voluntary Arrangement (CVA). This arrangement usually lasts around five years and allows the company to consolidate and repay its unsecured debts on a monthly basis at a tailored, affordable rate. It allows the company to continue trading, and once the arrangement is complete, the remaining unsecured debt is written off. - Restructuring the company
If the debts are at a point where repayment on its own won’t solve the issues, your company may benefit more from restructuring through administration. This would protect the company from further creditor pressure and allow the insolvency practitioner to investigate its situation and propose a longer-term solution.
- Voluntarily closing the company
If there is no feasible way for the company to recover and continue trading after being insolvent, the insolvency practitioner will recommend closing it through a Creditors Voluntary Liquidation (CVL). Closing the company in this way draws a line under the company’s debts and allows you, as a director, to walk away. The company ceases to exist thereafter.
To conclude
To prevent your company from closing due to insolvency, you should act as soon as you’re aware of the potential indicators of debt. As the company’s director, you should be aware of whether these are present and have a grasp of whether your company is solvent or insolvent. Speak to a licensed and regulated insolvency practitioner if you notice any of those signs in your company. They will explain your options and guide you towards the most suitable solution.