If you’re a director of a limited company and your business is struggling to pay its debts, you might find yourself dealing with the daunting prospect of insolvency. But what does insolvency actually mean, and what are your options if your company is in financial trouble?
We had a chat with Hayley Simmons, an Insolvency Practitioner (IP) from North Insolvency & Advisory to give us an insight on what the options are and what they involve…
What Does Insolvency Mean?
Insolvency can be defined in two main ways:
- Cash Flow Insolvency: When a company can’t pay its bills as they fall due. In other words, there’s not enough cash coming in to keep up with what needs to go out.
- Balance Sheet Insolvency: This happens when a company’s liabilities – the money it owes – exceed its assets – the amount of cash or things that can be turned into cash such as stock -, meaning that even if you sold everything, there still wouldn’t be enough to cover your debts.
Just because your business is insolvent, it doesn’t necessarily mean it’s the end. There are solutions, such as negotiating a ‘Time to Pay Arrangement’ with creditors or reviewing your cash flow to see if restructuring, resizing, or even merging your company could improve the situation. But if there’s no realistic chance of turning things around, it’s crucial to know your next steps and avoid continuing to trade. This could come back to haunt you.
Directors’ Responsibilities During Insolvency
As a director, your responsibilities shift when your company becomes insolvent. Normally, your duty is to act in the best interests of shareholders, but once insolvency hits, your primary duty is to act in the best interests of the company’s creditors– the people or businesses it owes money too. This is where things can get tricky. If you continue to trade while knowing your business has no realistic chance of recovering, you could be held personally liable for any increase in debt and might even face disqualification as a director.
It’s essential to understand two key risks at this stage:
- Breach of Fiduciary Duty: As a director, you have a legal duty to act in good faith and in the best interest of the company. If you knowingly allow the company to continue trading and worsen the financial position, or put the interests of shareholders above creditors, you could be in breach of your fiduciary duty. This could lead to personal liability, fines, or disqualification.
- Preference: Giving preference to certain creditors over others is a big no-no in insolvency. For example, if you pay off a debt to a friend, family member, or a creditor you have a personal relationship with before paying others, this could be deemed as giving a ‘preference’. If proven, the payment could be reversed, and you might be held personally liable. It’s best to seek professional advice if you’re unsure whether your actions could be considered preferential.
Exploring Your Options: CVA, Administration, or Liquidation?
If your business can’t be saved through restructuring or refinancing, you need to consider formal insolvency procedures. The right option will depend on whether you want to try and turn the company around or bring it to an end in the most orderly way possible.
- Company Voluntary Arrangement (CVA)
A CVA is a formal agreement with creditors to repay debts over a set period. If creditors agree, your company can continue trading, giving it a chance to get back on its feet. An insolvency practitioner (IP) will work with you to draft the proposal and act as a ‘supervisor’ throughout the process. This option is ideal if you believe your business is fundamentally sound but just needs some breathing space.
- Administration
When your company enters administration, an IP takes over the running of the business. This means you hand over control, but you gain protection from any legal action taken by creditors. The IP will either try to rescue the business, sell it, or, if necessary, close it down in a structured way.
- Creditors’ Voluntary Liquidation (CVL)
If there’s no hope of the business recovering, a CVL may be the best route. The company stops trading immediately, and an IP (acting as a liquidator) will sell any assets to repay creditors. As a director, you’re no longer responsible for day-to-day operations, but you must cooperate fully with the liquidator to ensure everything is handled properly.
Don't Wait Until It's Too Late!
If you’re concerned about your company’s financial health, don’t bury your head in the sand. Taking action early can make all the difference and could even protect you from personal liability. Reach out to Hayley Simmons at North Insolvency, Oxford [email protected]
For advice or support from Inca on your business or personal tax matters, call us on 01235 868888 or email us at [email protected].
