JoshClosing your limited company can be a complicated process involving many steps and factors to consider. If that company is insolvent, there will be even more considerations and potential complications. These can ultimately affect your potential options to alleviate the debts and either rescue or close the company.
How do I know if my company is insolvent?
Whether a company is solvent is often defined by its ability to repay its liabilities as and when they fall due. An insolvent company may not be able to repay what it owes, or its debts may exceed the value of its assets on its balance sheet.
Additionally, the company’s creditors may have filed legal action against it to recover what they’re owed.
Have you given some creditors preference over others?
If you notice an unpaid company bill, it might be tempting to pay it off immediately, possibly to the detriment of its other creditors.
While doing so might feel like a way to pay off your most severe debts first, all your company’s creditors need to be treated equally if that company is insolvent. Making any repayments outside of the established repayment hierarchy risks worsening the company’s position and could lead to accusations of creditor preference.
Will the company’s creditors do anything?
If your company has an outstanding amount, the creditor it’s owed to can pressure the company and encourage you to repay.
Creditors are within their rights to do this, so long as it doesn’t become harassment.
Reasonable creditor pressure includes:
- Telephone calls, emails, or postal reminders to repay your debts.
- Sending debt collectors to your company.
- Legal threats, including County Court Judgments (CCJs) or Statutory Demands.
If your creditors issue these, don’t ignore them. Your creditors could escalate their recovery attempts, and in the worst-case scenario, they could file a winding-up petition if your company owes more than £750. If unchallenged, this will lead to the company’s bank accounts freezing, which makes trading impossible and forces the company into compulsory liquidation.
Have you taken dividends?
As a company director, you can take dividends out of the company if it is solvent. Taking these out if the company is insolvent could be unlawful.
Taking dividends when circumstances don’t permit it doesn’t always happen out of malice. It can happen if the company has miscalculated its profits or if records have not been kept or properly maintained.
If you’ve taken out an unlawful dividend and you’re found to have breached your duties as the company’s director, you could be held personally liable for the company’s debts.
What can you do to help your insolvent company?
As soon as you become aware that your company is insolvent, you should speak to a licensed insolvency practitioner. They are highly trained and regulated professionals who can guide you towards the best solution for your company based on its situation.
If the company’s business model would be viable if not for its unpayable debts, it might be possible to rescue the company by repaying what it can afford from its unsecured debts in monthly instalments. In this case, the insolvency practitioner might recommend that the company enters a Company Voluntary Arrangement (CVA). The process generally lasts five years and allows the company to continue trading for the duration, maintaining its market presence.
Repaying is not always suitable, and more substantial restructuring may be required to return your company to a profitable state. The insolvency practitioner may recommend administration, providing protection from creditor pressure while they work to either rescue the company as a going concern, realise company assets to distribute to creditors, or achieve a better result than going straight into liquidation.
If none of those options are feasible, and creditor pressure is negatively impacting trading, the insolvency practitioner might recommend closing the company and drawing a line under its debts. This can be done by putting the company into a Creditors Voluntary Liquidation (CVL).
Summary
A company is insolvent if it can’t repay its liabilities as and when they fall due. Closing an insolvent company can, therefore, be a complicated process. Factors such as dividends, creditor preference, and what action creditors can take as they attempt to recover what they’re owed.
If you’re struggling to repay your company’s liabilities as and when they fall due, discuss your options with a licensed and regulated insolvency practitioner. They will assess your company’s circumstances and advise the best action for your situation.