What are the options if my company is insolvent?

What should I do if my company is insolvent?

As a company director, the way you act when you know, or ought to know, that the company is insolvent is very important. 

When a company is insolvent, you have a legal duty to act in the best interests of the company’s creditors. That means protecting the business’s remaining assets and avoiding actions that would worsen your creditors’ positions. Not taking these duties seriously could lead to severe financial and legal consequences.

Exactly what acting in the best interests of the company’s creditors looks like in practice depends on the particular circumstances you find yourself in. For some businesses, ceasing to trade may be the best way to avoid incurring further debts they cannot repay. On the other hand, continuing to trade could lead to the completion of an order or contract that brings in vital funds and increases your creditors’ return.

Seek professional advice

Deciding how best to proceed is not a decision you should make alone. Seeking professional advice from a licensed Insolvency Practitioner as soon as you suspect your company is insolvent is strongly recommended. 

We will review your financial position, assess the situation objectively and talk you through your insolvency options. We’ll also help you understand your legal duties as a director and advise you on the most appropriate route forward, including whether you can continue to trade.

What are my company’s insolvency options?

Broadly speaking, you have six options when your company is insolvent. These range from debt repayment plans and company rescue procedures to formal closure routes. The financial position of your business, its future viability and your appetite to continue running it will determine the best option for you. 

1. Secure new funding

If your business has relatively low levels of debt and is otherwise viable, seeking additional funding could provide the cash flow you need to get back on track. However, you must be extremely careful not to breach your legal duties by creating new debts you cannot repay. That’s why you should only take this approach after receiving professional advice. 

There are several options here. The shareholders or directors could invest personal funds in the business to cover the bad patch. Alternatively, you could sell a non-essential asset or explore alternative forms of finance, such as invoice finance or asset-based lending.

Pros

• There are lots of finance options available - far more than just traditional bank loans
• You can improve the position of creditors and potentially help the business avoid liquidation
• It can create the breathing space to put a recovery plan in place

Cons

• You could be made personally liable if you take on new credit that the company cannot repay
• This type of borrowing can attract high interest charges and fees
• You may have to provide a personal guarantee, security over a company asset or both to secure finance

2. Negotiate an informal repayment plan with your creditors

If you have a small number of debts that are pushing you into insolvency but a profitable core business, it might be possible to restructure those debts to give you more time to pay what you owe.

Contacting your creditors, being honest about your situation and explaining your plans to get back on track can carry a lot of weight. And from a creditor’s perspective, arranging a payment plan that allows you to clear the debt in instalments will usually be preferable to pursuing you through the courts.

If you have unpaid tax, HMRC offers tax repayment plans, known as Time to Pay Arrangements, that allow you to clear VAT, PAYE, NIC and Company Tax liabilities over a typical period of three to 12 months. These arrangements have some in-built flexibility, so you may be able to extend them if your circumstances change.  

Pros

• Informal payment plans are flexible and can be easy to set up
• There’s no requirement to appoint or pay an Insolvency Practitioner
• They are not made public, so they will not tarnish your relationships with customers, suppliers or lenders who are not directly involved

Cons

• Informal agreements are not legally binding - your creditors can change their minds at any time
• They’re usually short-term arrangements and may not be suitable if you have long-term insolvency issues
• Other creditors can still pressure you for payments and take legal action

3. Propose a Company Voluntary Arrangement

If your company has multiple creditors but a viable underlying business model, a Company Voluntary Arrangement or CVA can be a very effective way to restructure your debts. Unlike the other options we’ve discussed so far, a CVA is a formal insolvency procedure. That means you’ll need a licensed Insolvency Practitioner (IP) to help you put it in place and supervise it going forward.

With the Insolvency Practitioner’s help, you will create a repayment proposal to present to your creditors. If 75% of them (by value of debt) accept your proposals, you will be able to repay what you owe in monthly instalments, typically over three to five years. 

Pros

• The company can continue trading while it recovers
• The debts are frozen and no further interest or penalties will be added
• A proportion of the debt may be written off

Cons

• A CVA stays on your company’s credit file for six years
• Suppliers in a CVA may want cash on delivery in the future
• The creditors may reject your proposal

4. Enter Company Administration

If your company has significant debt and is under severe creditor pressure, but still has a realistic chance of recovery, Administration could be an option. This procedure is usually best suited to medium-sized or larger businesses due to the costs involved. 

In Administration, you appoint an Insolvency Practitioner to take control of the company and assess the best course of action. Their primary goal is to rescue the business as a going concern. If that's not possible, they may propose a restructuring plan, such as a Company Voluntary Arrangement (CVA), or sell the business through a Pre-Pack Administration. If neither option is viable, they will aim to realise assets in a way that provides a better return to creditors than immediate liquidation.

Pros

• Administration provides immediate legal protection from creditors, giving the IP time to put a plan in place
• Essential operations can continue, ensuring continuity for customers and suppliers
• Even if the business cannot be saved in its current form, it may still be possible to preserve jobs and contracts

Cons

• Company directors lose day-to-day control of the business - in many ways, the company’s future is out of their hands
• It’s a complex process involving significant professional fees
• Administration can lead directly to liquidation if the company cannot be saved

5. Liquidate the company voluntarily

Another option for an insolvent company is to close it down. If the business has no realistic prospect of recovering or you no longer want to run it, you can close it voluntarily by putting it into a Creditors’ Voluntary Liquidation (CVL).

You will need to appoint an Insolvency Practitioner to liquidate it on your behalf. They will take control of the company, sell any assets and use the proceeds to repay the creditors as much as possible. They will then close the company and, as long as you have met your legal duties as a company director and have not signed a personal guarantee, any remaining debts will be written off. 

Pros

• Liquidating the company voluntarily can show that you are acting in the best interests of your creditors, thereby reducing the risk of penalties
• A CVL deals with the debts properly and closes the company in a legally compliant way
• The directors can move on and start afresh - and potentially claim redundancy pay

Cons

• The liquidator investigates the conduct of the directors, potentially leading to fines, director disqualification or personal liability for company debts
• Lenders can pursue you even after liquidation if you have signed a personal guarantee
• Liquidation can damage your professional reputation, and suppliers and customers may be reluctant to work with you in the future

6. Compulsory Liquidation

If you do not act quickly, a creditor owed more than £750 can petition the court to wind up your company. If they’re successful, the company will be forced into Compulsory Liquidation. In this case, a liquidator will sell the company’s assets to repay the creditors before removing it from the official register.

Pros

• Compulsory Liquidation brings the company to a definitive end when the directors are slow or unwilling to act
• It can relieve the pressure of running an unviable and insolvent business

Cons

• You have no control over the timing of the process - you can be forced into liquidation when you are trying to rescue or restructure the company
• It can be a stressful and adversarial process, and your conduct as a director will be under close scrutiny
• It increases the risk of penalties, including director disqualification and personal liability

Explore your company’s insolvency options

If you’re worried that your company is insolvent, we’re here to help. At Real Business Rescue, we offer free initial insolvency advice to help you make informed decisions. Please get in touch or arrange a meeting at your nearest office.