Minimising Damage From Debt: How Taking Insolvency Advice Can Help Your Company

Managing a company’s finances is crucial for its continued health and survival. If the company’s finances deteriorate, directors must take the steps necessary to minimise any potential damage. However, the signs of financial instability aren’t always easy to identify, and allowing the situation to deteriorate could shorten the company’s life. 

So, what can you do once you realise the company is in debt, and how can you minimise any potential damage? 

Identify the problem early

As a company’s director, you should always be aware of your company’s solvent position. The following scenarios are indicative of insolvency: 

• Either the company’s cash flow or balance sheet is imbalanced, with its liabilities outweighing its assets. 

• Creditors have filed legal action, such as County Court Judgments (CCJs) and Statutory Demands against the company. 

The worst thing you can do if you notice these warning signs is ignore the problem in the hope that it will go away. Doing so will only worsen the company’s financial standing. 

Assess your situation and take professional advice

As soon as you’ve identified the problem, you should take professional advice to try and alleviate it.  

Simply resigning from the company won’t clear your responsibilities from your time as director, and could worsen the situation.  

Similarly, if the company is insolvent with unsettled liabilities, dissolution isn’t suitable. Dissolutions are advertised in the London Gazette, and your company’s creditors are likely to object, potentially reinstating a dissolved company if they have reason to. 

If your company is insolvent, your first port of call should be a licensed and regulated insolvency practitioner. These professionals comply with the regulations specified in the Insolvency Act 1986, allowing them to carry out formal insolvency procedures. They can offer you advice tailored to your situation, negotiate with the creditors, protect the company from creditor pressure, and guide directors towards the solution best for their company’s situation. 

Consider your company’s options 

While you may have an idea of the outcome you’d prefer for your company, the insolvency practitioner will advise you whether that path is suitable or achievable in your circumstances.  

• A Company Voluntary Arrangement (CVA) may be suitable if the company has a viable business model, but burdensome debts and creditor pressure are threatening its future. A CVA involves the insolvent company repaying a portion of its unsecured debts in monthly instalments at a rate tailored to what it can afford. The arrangement usually lasts around five years, and once it concludes, any remaining unsecured debt is written off. This process allows the company to continue trading for the duration and maintain goodwill with customers. 

• If the company’s debts are more severe, creditor pressure is continuing to mount, and repayment won’t be suitable, then the IP may suggest the company enter administration. The IP investigates the company’s financial situation while they formulate a plan to return it to a profitable state. The process works best if the company can be rescued as a going concern, has the assets that would make the process viable, and would achieve a better result than if the company was liquidated without undergoing administration first. 

• If the company’s debts are of such a level that recovery is unfeasible, and creditors are on the verge of winding the company up, it may be better to close it in an orderly manner. Doing so will close the insolvent company, drawing a line under its debts and allowing the directors to move on. The directors can do this by entering a Creditors Voluntary Liquidation (CVL). 

Any of these processes is generally preferable to the creditors winding the company up through a compulsory liquidation. If this happens, the directors have less control over the entrance to liquidation, with trading being forced to stop. 

To summarise 

There are steps that company directors can take to minimise the damage from insolvency. Identifying the problem early and taking advice from a licensed and regulated insolvency practitioner should be your first step. Ignoring the issues and hoping they’ll go away will only worsen them, and the later you act, the fewer options you’ll have available. Taking professional advice early on helps you tackle the problem before it grows to the point where it threatens the company’s survival. Depending on your company’s circumstances, one of several solutions might be viable.  

Repaying the debt in affordable instalments can be viable if the business model would be viable if not for the debts. Administration might be more suitable if the company would benefit from restructuring, has the assets to make the process viable, and it would benefit creditors more than liquidation. If the company has no viable future and creditor pressure is becoming unbearable, then it might be best to liquidate. Whatever process is best for the company, it is generally preferable to having creditors force it into compulsory liquidation.