When creditors are threatening to put you out of business, and your company appears to be on the verge of insolvency, there are relatively few recovery options, and some of these options will only be feasible if you act with urgency.
As a director of a limited company, you have the responsibility to fulfil certain duties during the time the company is considered to be insolvent (unable to meet its financial obligations and with debts and liabilities that exceed the combined value of all the company’s assets). If you want to avoid accusations of wrongful or fraudulent trading and keep your business from going under, consider the following key action points for directors facing company closure.
Cease trading immediately
According to UK insolvency law, it is illegal for a company director to continue trading (accepting new contracts, taking out additional loans or lines of credit, taking payments from clients for products or services that have not yet been rendered, etc.) once they’re aware of the fact that the company is insolvent. Unfortunately, claiming ignorance will usually not be enough to satisfy the Court in a formal insolvency proceeding, and if your company is eventually liquidated keep in mind that the liquidator will be conducting an investigation to ascertain whether the directors of your company committed any misconduct during or leading up to the time the business was known to be insolvent (ideally you also have a D&O insurance policy in place to help protect against any legal action brought personally against directors).
Contact HMRC and creditors
After you’ve ceased trading the first thing you’ll want to do is notify HMRC via phone or email and discuss your case with them. Let them know that you have ceased trading and that steps are being taken to either facilitate a recovery or wind up the business voluntarily (whichever course of action you choose to pursue). You should also send out an email to all of your creditors notifying them of the situation and how you intend to proceed.
Speak with your accountant
If an investigation is conducted during insolvency one of the most important issues will be whether or not you have your books in order. One of your most effective defences against accusations of misconduct will be the ability to furnish the necessary documentation to prove that your business operated in an upstanding manner before and during insolvency. You’ll also want to make sure all HMRC filing and reporting duties have been fulfilled, and if not that should be handled with the utmost urgency. If you don’t have a professional accountant, now would be a good time to contract the services of one.
Discuss your options with an insolvency practitioner
Last but most certainly not least you should discuss your recovery or winding up options with a licensed insolvency practitioner. Depending on the circumstances of your case the IP may recommend a variety of solutions, including but not limited to:
Company Voluntary Arrangement (CVA)
A CVA is usually the first course of action attempted when creditors are threatening to put a company out of business. It is a formal agreement that, if agreed upon by creditors, would allow you the leniency of revised repayment terms and lower minimum monthly payment requirements. This solution is particularly useful when a creditor is demanding a lump sum of cash but the business cannot afford to comply. In addition to negotiating new terms with creditors, a CVA can also revise or eliminate employee or supplier contracts, thereby reducing payroll and overhead expenditure.
Company administration is a formal procedure in which the directors of a business would appoint a licensed insolvency practitioner to act as the administrator of their company. The administrator would have the same privileges as a CEO and would, therefore, be in complete control of business operations with the goal of bringing about a recovery. This is sometimes executed as a last resort when a business is on the verge of being brought to Court.
Creditors’ Voluntary Liquidation (CVL)
Finally, if the end of the business seems inevitable, then the insolvency practitioner may recommend entering into a CVL to dissolve the company and its debts in an effective and safe manner. The main advantages of a CVA are that it eliminates creditor and HMRC pressures, dissolves debts, and reduces the risk of being accused of wrongful or fraudulent trading during a post-liquidation investigation. If you’re facing the threat of company closure, the above tips can certainly help, but only if you heed them and take action expeditiously. Don’t be afraid to consult with a professional about your case and take advantage of a free consultation.