If your company is insolvent, the worst thing you can do is bury your head in the sand in the hope that the problem will sort itself out and just go away. Doing so will lead to the situation worsening and can potentially threaten the company’s future.
As soon as you’re aware of the situation, you should seek advice from a licensed and regulated insolvency practitioner, who can assess your situation and outline the options appropriate for your company.
By taking advice from a licensed insolvency practitioner, you’re acting in the company’s best interests. This guide is not intended as a substitute for professional advice, but it will outline what may be helpful for you to consider before doing so.
The company has unaffordable debts, but also a potentially viable business model
If the company has debts that it can’t afford and creditor pressure is one of its main problems, it may be possible to repay a portion of those debts by paying a tailored, affordable amount on a monthly basis through a formal repayment arrangement.
In which case, the best solution may be a Company Voluntary Arrangement (CVA).
This generally lasts around five years and allows the company to continue trading while it repays what it can afford, retaining relationships with customers and suppliers, and demonstrating a willingness to repay.
The company is struggling to make a profit, or the issues run deeper
If your company is struggling with deeper-rooted issues that would make repayment impractical on its own, then more substantial action may be required.
Company administration may be a suitable solution if the company faces severe levels of creditor pressure that conflict with its daily operations. It can also be useful in giving the company time for the insolvency practitioner to formulate a more detailed plan on how to return to a profitable state.
It can also be suitable if the company has enough assets that could be used to make distributions to creditors and would achieve a better result than if the company were to be liquidated outright, or if the company could be rescued as a going concern.
Recovery is unlikely, and creditor pressure is increasing
When it might not be possible to save the company, it may be a better option to put the company to bed and draw a line under its debts. Your company’s cash flow may be under immense pressure, or your creditors could be taking legal action to the point where trading is unavoidably impacted, and recovery or restructuring alone won’t be enough to alleviate the problems.
Dissolution isn’t a feasible option if the company has outstanding debts, as your creditors are likely to object to the closure, which they can do for up to six years after the company is dissolved. This will see the company restored.
In these situations, voluntarily closing the company through a Creditors Voluntary Liquidation (CVL) may be its best option. A CVL is a formal, legally binding closure process carried out by a licensed insolvency practitioner and will see the company close in an orderly manner. All debts are written off during the liquidation, with leases cancelled, and staff made redundant, with the liquidators taking responsibility for dealing with creditors.
Depending on the company’s circumstances, it might be possible to create a new limited company and continue the business through a pre-pack sale, though whether this is possible depends on the company’s specific circumstances. Your insolvency practitioner can discuss pre-pack if they feel it would be a worthwhile pursuit.
To conclude
If your company is insolvent, you should act as soon as possible to ensure you achieve the most suitable outcome. Your company may be eligible to repay a portion of its debts in affordable instalments if it has a viable business model. Restructuring through administration may be more suitable if the company has deeper-rooted issues, or it could be rescued as a going concern. If recovery looks unlikely, you could place the company into a voluntary liquidation and close it in an orderly manner.
Speaking to a licensed insolvency practitioner will give you a better understanding of the options available for your company, and it ensures that you’re acting in the company’s best interests.
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