While you can meticulously plan and manage your company’s finances, you can’t always anticipate the unexpected. If your company hits hard financial times, you must act quickly and decisively to prevent the problem from escalating and threatening the company’s future.

Spot the issues before they become a major problem

If you’re fulfilling your directorial duties, you should be aware of your company’s financial position and, as such, spot the potential signs of insolvency before they lead to severe consequences.

These potential signs of trouble include:

• An imbalanced cash flow
• Liabilities outweighing assets on the company’s balance sheet
• Legal action from creditors for amounts owed

While these may be unpleasant to deal with in the moment, ignoring the problems will only worsen your company’s position and won’t make them go away.

Take professional advice as soon as possible

Once you’re aware of any of the issues listed above, it is part of your directorial duties to act in the company’s best interests. Burying your head in the sand or resigning from the company won’t make the problem go away. In fact, they’re more likely to worsen the situation.

Speaking to a licensed insolvency practitioner (IP) is your best option if you realise that your company is insolvent. They are licensed and regulated professionals who can carry out formal insolvency procedures by the rules detailed in the Insolvency Act 1986.

They should offer you free, confidential, impartial advice based on and tailored to your situation and advise you on the best course of action. They may even offer a no-obligation quote. If you choose to engage them, they will negotiate with your company’s creditors and prevent further creditor pressure from being applied.

While you can close a solvent company by dissolving it, that isn’t an option available to insolvent companies. Dissolutions are advertised in the Gazette, so any of your creditors are likely to object to any attempt to strike off a company that still owes them money.

What are your company’s options?

The IP should advise you which closure or recovery option is best for your company. Depending on your situation, this could be one of the following:

• If your company has a viable business model but is struggling to repay its unaffordable debts, then the IP may suggest putting the company into a Company Voluntary Arrangement (CVA). This is a formal, legally binding agreement wherein the company pays a portion of its unsecured debts at a rate tailored to what it can afford in monthly instalments. Entering a CVA allows the company to continue trading while it repays its debts, allowing retention of goodwill and brand recognition with customers. The process usually takes around five years, with any remaining unsecured debts written off upon its conclusion.
• Companies with more severe debts and that are under a lot of creditor pressure may not be suited to a CVA, but could benefit from entering administration. The IP may suggest administration if the company could be rescued as a going concern, if it has sufficient assets to make the process viable, and if it would achieve a better result than if the company entered liquidation without undergoing administration first. During administration, the IP will look into the company’s financial standing and history and create a plan to return it to a profitable state.
• Sometimes, recovery or rescue plans won’t be feasible for the company, either due to its levels of debt or if creditor pressure is becoming unmanageable. In this case, your best way forward may be to close the insolvent company and draw a line under its debts. Your IP may suggest the company enter a Creditors Voluntary Liquidation (CVL). This formal liquidation process would write off the company’s unsecured debts and allow you, as director, to move on to other ventures. 

Failing to act means your company’s creditors could file for a winding-up petition, forcing the company into compulsory liquidation and meaning you have less control over the process than if you entered it voluntarily.

Summary

As a company’s director, you should always be aware of your company’s solvent status and stay atop its finances. Doing so will help you identify any issues before they grow into problems which could threaten the company and allow you to act accordingly. By speaking to a licensed and regulated IP as soon as you become aware of any potential issues, you’re putting yourself in the best position to effectively tackle the issue and achieve the best outcome for your company.