When a company is insolvent, the stressful situation affects company directors and the staff. Find out your options and your responsibilities as a director of an insolvent company here.

Events leading to a company’s insolvency are unpleasant. Poor cash flow and unsustainable loses often lead to frequent pressure from unpaid creditors, causing company owners and staff much stress.

As a company owner, it is natural for you to feel emotional and maybe even confused. Can your company still trade if it is insolvent? What are your duties as a director of an insolvent company? What are the consequences of insolvency to the business, as well as to you and your family? Can you be disqualified from running a company again? Questions like these are valid and we encourage you to discuss your situations with a qualified insolvency practitioner as early as possible. This is because early intervention may put a stop to creditors pestering you, as well as increasing the likelihood of the company surviving.

At Berley Chartered Accountants, we are London-based insolvency experts. We help many worried and stressed out small business owners who are fearful of the future when the company can’t pay its financial obligations. To help alleviate the fears and uncertainties surrounding insolvency, we aim to discuss the consequences of insolvency and what business owners should expect in this article.

What is insolvency?

Insolvency happens when a company either doesn’t have the money to meet its financial obligations, or its liabilities are greater than its assets. In most cases, the signs of a company approaching insolvency can be spotted many months or weeks before, as this informative article How to tell if your business is in trouble and what can you do about it explains in great detail.

Options when a company is insolvent

If your company is insolvent, you have three options to keep your company in business. They are:

1. Reaching an informal agreement with creditors

A sensible option when your company is experiencing short-term financial difficulties is to contact your creditors and make arrangements to repay the debts on different terms. However, as these arrangements are informal, creditors can withdraw them at any time if they don’t think that you are able to manage your debts.

2. Entering into a formal agreement

This takes the form of a Company Voluntary Agreement (CVA), a binding agreement between your company and its creditors. A CVA allows your company to pay its debts, often at reduced amounts and over a longer period, while the company continues to operate as normal. This process must involve an insolvency practitioner who will:

• Work out an arrangement on how your company is going to pay and when. The insolvency practitioner must do this within a month of being appointed.
• The practitioner will write to creditors about the arrangement and invite them to vote on it. If 75% (by debt value) of the creditors agree, then the CVA is approved. Otherwise, your company could face voluntary liquidation.

Once the CVA is approved, the practitioner will then become the middleman who will receive the scheduled payments from you and pass them to the creditors. Their role will continue until the debts are paid off. As long as you stick to the terms stated in the CVA, you will be safe from any legal action and pressure from your creditor.

3. Administration

This process involves handling your company to an insolvency practitioner who acts as the administrator. Once the administrator is in charge, your creditors cannot take legal action against your company to recover their debts or start compulsory liquidation without the permission of the court. In the meantime, the administrator aims to:

• Restore the company’s viability
• Work out a CVA and seek approval from your creditors
• See if it feasible to sell the business
• Sell assets to pay preferential or secured creditors

If none of these options is tenable, then liquidation may be the only option – which will see your business struck off from the Companies House register, and the company’s assets will be sold and distributed to the creditors.

It is worth noting that you need to act quickly because your impatient (secured) creditors can appoint an administrative receiver to sell the company’s assets to pay off the secured debt. This option removes all choices from you and it can only be avoided if you contact an insolvency practitioner as early as possible.

Company liquidation

When all options are exhausted, liquidation brings an end to the long process of fighting for the survival of the company. Liquidation is a process that involves an independent insolvency practitioner (who becomes the liquidator in this case) taking control of the company, overseeing the wound-up, and making arrangements to settle debts in an orderly manner.

There are two ways in which an insolvent company can be liquidated:

• A creditors’ voluntary liquidation which will see a company’s creditors pick a liquidator to take over the company
• A compulsory liquidation where company directors agree to wind up the business themselves

Liquidation ensures that company contracts are transferred or completed, legal disputes are settled, and the business is no longer making transactions. Assets are then sold and any outstanding debts are collected on behalf of the company. This money will then be used to pay creditors and any remaining amounts will be paid to the company’s shareholders.

What are the consequences of insolvency for a company director?

Business owners whose company faces insolvency know first-hand the stress from events leading to this point. When you are stressed and worried, it is best to avoid making impulsive decisions that will put your personal wealth at risk.

As a director of an insolvent company, your duties include:

• Do not allow the company to incur further debt
• Do not continue to trade
• You must protect the interests of all creditors (debtors, employees and other stakeholders)
• You must safeguard all company assets (do not sell them below their market value)
• If a liquidator is appointed, you must hand over the company’s records, paperwork and assets to the liquidator

The best approach is to contact a qualified insolvency practitioner as early as possible so they can conduct a solvency review of your company and discuss available options with you before liquidation.

One of the questions we get from company directors is what will happen to them personally. The answers depend upon your past actions prior to the company becoming insolvent and what you do during the insolvency process. For example:

• If you have provided personal guarantees to any loans obtained by the company, you will be liable.
• If you have overdrawn the director’s loan account, you will be liable to pay back.
• If you have not exercised your duties as a director, like if you have been using company funds for your personal purposes or engaging in wrongful trading while the company is insolvent, you could be disqualified as a director for 2 to 15 years.

Being personally liable or disqualification has serious consequences, which is why we encourage company directors to speak to a qualified insolvency practitioner first.

If you have been acting in good faith and have carried out your duties as a director diligently, then there is nothing to stop you from launching another company even if your current company is insolvent. However, your new company cannot have the same or similar name to the old company. If you want to read more about this, check out Section 216 of the Insolvency Act.

Will I go bankrupt?

One of the main worries for directors of insolvent companies is personal bankruptcy. Companies can’t go bankrupt – they become insolvent – but individuals can.

If you are a company director and you have carried out your duties diligently, your liability is limited to the number of shares held when your company fails. However, if you have not acted in good faith, like you have continued to rack up debts knowing that the company cannot possibly repay them, then you are at risk of being held responsible personally and/or being disqualified as a director.

Your personal wealth is at risk if you have provided personal guarantees to any loans obtained by the company. For instance, you have used your personal possessions and assets (property, cars, etc) as collateral for a loan, then you may well lose these assets. The loss of these items of value, as well as any other debt to which you may be liable, could well cause you to go bankrupt.

How Berley can help directors of an insolvent company

The stress of having a business become insolvent is undeniable; however, it isn’t the end of the world. Your best way out of the situation is to seek help from a qualified insolvency practitioner as early as possible.

Insolvency practitioners like our team here at Berley can conduct a solvency review of your company and discuss available options with you. Highly discreet and ethical, we do not judge your circumstances or focus on past mistakes. Our aim is to make sure that you are in a position to continue the company or start afresh.

Quite a few directors prefer to put an insolvent company into administration to alleviate or stop pressure from creditors. This process allows the appointed administrator to restore the company’s viability, create a CVA and see if it is feasible to sell the business. Regardless of what your choice is, you can be certain that we are here to support you throughout the process and ensure that there is a positive outcome in place for all parties involved.

Call our experienced London insolvency practitioners today on 020 7636 9094. We encourage you to act fast and avoid receivership – this means your impatient creditors appoint a receiver to one or more of your company’s assets in order to recover the debts owed – as it leaves little options for you.

You can also email us on info@berley.co.uk or use our contact form to leave a message.

If you liked this article, you might also like:

• Everything you need to know about insolvency
• How to tell if your business is in trouble and what you can do about it
• How to generate more sales for your small business
• How business mentors can help small business owners

This post is intended to provide information of general interest about current business/ accounting issues. It should not replace professional advice tailored to your specific circumstances.