How Insolvency Advice Can Reduce the Damage Caused by Company Debt

If your company gets into debt, it risks becoming insolvent, wherein it cannot afford to repay its liabilities as and when they fall due. Should this happen, your creditors can take action to recover what your company owes them. This action can start as reminders, but can quickly escalate to court orders and petitions to close your company.

Once you find your company is in this situation, you should take quick, decisive action to minimise the damage and preserve the company’s long-term prosperity.

Identify the issues as soon as possible

As a company director, you should always be aware of your company’s solvent position and whether it is insolvent. If you’ve done your due diligence, any signs of financial trouble should be obvious before they become a major issue.

Potential issues may include:

• Imbalanced cash flow and balance sheets
• An inability to repay the company’s debts as and when they fall due
• Creditors filing legal action against the company

If you don’t act on these and continue trading through the company despite it being insolvent, you run the risk of trading whilst insolvent, which could result in you losing your limited liability protection and potential disqualification from acting as a company director in the future.

Seek out professional advice immediately

You should act as soon as you’re aware that your company is struggling with these issues to keep the situation from worsening. Ignoring the problem will only worsen it and make creditors more likely to escalate their recovery efforts.

Your best option is to speak to a licensed and regulated insolvency practitioner (IP), who can carry out the formal insolvency processes designed to deal with the issues. You’ll receive free, impartial, confidential, non-obligatory advice tailored to your situation, and potentially, a no-obligation quote. IPs become the first point of contact for your company’s creditors, negotiating with them and preventing further action from taking place.

What are your company’s options?

Depending on your company’s circumstances, the IP may suggest one of the following procedures to help alleviate its issues:

• If your company has a viable business model but is struggling to repay its unaffordable debts, a Company Voluntary Arrangement (CVA) may be the best solution. A CVA is a formal, legally binding agreement wherein the company pays a portion of its unsecured debts in monthly instalments at a rate tailored to what it can afford.CVAs allow for continued trade through the company while it repays its debts. This continued presence allows goodwill and brand recognition to be retained while the company repays its debts. The process usually lasts five years, and upon its completion, any remaining unsecured debt is written off.
• Companies with more substantial debts or deeper-rooted issues may benefit more from restructuring. If this is the case, and there’s a possibility that the company could be rescued as a going concern, there’s a chance of a better return than if the company were liquidated, or if there are sufficient assets, the IP may put the company into administration. From there, the IP will investigate the company’s situation and attempt to return it to a more profitable state.
• If recovery and restructuring aren’t feasible due to an unprofitable business model or unmanageable levels of creditor pressure, the IP may suggest closing the company and drawing a line under its debts. The company would then close through a Creditors Voluntary Liquidation (CVL), a formal liquidation process that would end the company’s legal existence, write off the unsecured debts, and allow you, as the director, to move on.

Failing to seek professional advice means the company’s creditors can file a winding-up petition, forcing your company into compulsory liquidation.

To summarise

If your company is insolvent, you should act as soon as possible to minimise the longer-lasting effects. As the company’s director, you should always know if it’s solvent or insolvent, identify the problems, and take advice from a licensed and regulated insolvency practitioner (IP) before they become unmanageable. Depending on your company’s situation, the IP may suggest one of several formal insolvency procedures to either repay the debt, restructure the company, or close it through an orderly process, depending on what’s best for it.