Reviewed: 27th February 2017
For someone who has put their heart and soul into a venture, seeing it struggle is often a very stressful experience. No one sets out in business with the intention of failing, so if that does happen, it can be difficult to know what to do and where to turn. Burying your head in the sand will not make the problems go away, and quite often you will find ignoring them only serves to make them worse. If your business is facing financial problems, the most important piece of advice is to be proactive and seek the advice of a professional as soon as possible.
Real Business Rescue is the UK’s leading business recovery practice. We have a truly nationwide presence with Over 70 UK Offices up and down the country and over 100 licensed Insolvency Practitioners who draw on many years of experience of helping companies and individuals with their business.
We offer a same day meeting either at your nearest Real Business Rescue office or your own business premises where we will discuss all options available to you and your company. You can rest assured that anything discussed is treated with the strictest confidence. The initial consultation is free of any charge and completely without obligation to proceed any further, giving you valuable time to consider your next move.
We have experience of helping companies across a multitude of industries meaning we can apply high-level expertise in sector-specific cases. Regardless of how complex you feel your state of affairs might be, there is no company situation our experts haven't seen before and it’s important to know that there are options available even when the prospect of a positive resolution might seem impossible.
Put simply, an insolvent company is one which is unable to meet its financial obligations when they fall due. This could include being unable to meet payments such as rent, wages, supplier invoices, or utility bills.
There are three main tests which can determine whether your company is facing insolvency, or is already insolvent. All of these tests should be undertaken, as passing one test does not necessarily guarantee a successful result with the others. If any of these tests are failed, you should make it your priority to seek the advice of a licensed Insolvency Practitioner.
1. Cash flow test
The inability to pay bills when they fall due is a sure sign that your company is on an unstable financial footing. The cash flow test should take into account debts falling due both immediately, and in the reasonably near future. While late payments are commonplace in some industries, if you find yourself regularly missing payments to creditors due to a lack of funds, this should sound alarm bells.
2. Balance sheet test
A company will fail the balance sheet test if the value of a company's assets totals less than the amount of its liabilities (including its contingent and prospective liabilities). A ‘fair and accurate’ view of the company’s current and future financial position should be reflected in the balance sheet. This means items such as work-in-progress and levels of stock must not be exaggerated, nor should it include debts owed to the company that are unlikely, in reality, to be collectable (bad debt).
3. Legal action test
The legal action test considers whether a company has outstanding statutory demands, or any unanswered court orders or judgments. The existence of this sort of legal action confirms the company’s inability to meet its liabilities, and it is likely that the company will be forcibly wound up by one of its creditors in the near future if its debts are not paid. If your company fails the legal action test, trading should cease immediately, and creditor interests need to be prioritised. You must also seek the guidance of a licensed Insolvency Practitioner to ensure you are satisfying your legal duties as a company director.
Failing any of these three tests indicates that your company is insolvent. If this is the case, it is vital that you take action to remedy the problem. You have certain obligations as a director, and one of these is to maximise the interests of your creditors once you are aware of your company’s insolvent nature. If you fail to do this, you risk punishment for wrongful trading depending on the circumstances; directors can be held personally liable for debts accrued by the company from the time they knew it to be insolvent.
If your company is facing insolvency, you should be extremely careful not to make a preference payment to any of your creditors. ‘Preference’ occurs when a particular creditor is placed in a more beneficial position, to the detriment of the remaining creditors. For example, repaying a loan from someone connected to the company, such as a relative, or ensuring a creditor is paid to facilitate an ongoing business relationship. By making preference payments to creditors you are running the risk of being disqualified as a director and being held personally liable for the debt.
If your company is insolvent time is of the essence. Independent advice can help support the appropriate decision-making strategy. Begin by arranging an immediate and confidential consultation.
If your company is insolvent the main piece of advice is to take action as soon as possible by contacting a licensed Insolvency Practitioner.
The sooner action is taken the more options will be open to you and your business, thereby increasing the likelihood of a successful outcome.
If your company becomes insolvent, you must make it your primary concern to do something about it. You could find yourself in serious trouble if you continue to trade and ignore the problems your company faces. Maximising creditor interests is paramount at this stage and is one of your legal responsibilities as a director. Once your company is insolvent the interests of your creditors have to take priority over any company and shareholder interests.
Upon becoming aware of their company's insolvent circumstances, directors must seek the advice of a licensed Insolvency Practitioner at the earliest possible opportunity. Failure to do so could see you being made personally liable for the company’s debts, and you could even risk facing disqualification as a director in the future.
Once you are aware your company is insolvent, you have certain obligations as the director of that company. One of these is ensuring that you do not make the situation of your creditors worse. This means you should not take on additional debt that you know you are unlikely to be able to repay.
Something else you must ensure you’re not guilty of is assuming that the assets and any money in the company’s bank account belong to you. Any assets of the company belong to the company, regardless of whether you have put your own money into the business at any stage.
“Antecedent transactions” are transactions entered into by a company in the run-up to its insolvency which may be deemed inappropriate or unfair.
Antecedent transactions include wrongful trading, fraudulent trading, misfeasance, transactions at undervalue, preference payments and various fraud and misconduct related offences. If this type of behaviour is discovered by the Insolvency Practitioner, action may be taken to recover these funds.
One of the most common antecedent transactions is a PREFERENCE PAYMENT. Once a company becomes insolvent the directors have a legal duty to act in the best interests of their creditors by minimising their potential losses. All creditors must be treated equally, meaning no favouritism should be shown to any particular one. By actively choosing to pay one creditor over another would be seen as making a preference payment. Preference payments are commonly made in the following situations;
The rules are, however, not completely cut and dried. There may be some instances where making a payment to one company over another may not necessarily be frowned upon. This would be the case if there were a very strong commercial reason for making such a payment. An example of this would be if the payment of one creditor were integral to prolonging the life of the company as a whole, thereby increasing the likelihood of payment for the remaining creditors as a result. In this instance there would be no particular fondness felt for the company in question, merely a genuine desire on your part to extend the viability of your business.
Of vital significance is the dominant intention behind the payment being made. If the company is motivated by a desire to put the creditor in a better position, this will be seen as a preference payment. The rules surrounding this issue are, however, complex, and the ramifications of making an error are severe. Directors could face personal liability for some or all of the company’s debts if a preference payment is found to have been made. The insolvency practitioner will apply to the court for the transaction(s) to be set aside, and action may be taken against the director. If the preference payment was made when the company was insolvent, or caused it to become insolvent, the director could face disqualification.
As well as making preference payments, directors may also face further action if any of the following antecedent transactions can be proven to have occurred:
Directors must be aware of the danger of attempting to protect company assets during insolvency by selling or transferring them away from the business at a reduced rate. As creditor returns must be maximised during an insolvency procedure, the sale of assets at below market value could be construed as fraudulent trading should this be investigated. In this instance a liquidator has the power to apply for a court order to reverse any questionable transactions to restore the company to its previous state. If you are concerned about the sale or transfer of an asset you should seek professional advice.
There are several possible finance options which could be considered to help rescue your company. A licensed Insolvency Practitioner will be able to help you determine whether seeking additional funding is a viable course of action. You should bear in mind that the later you leave obtaining finance, the more expensive it will typically be. The most popular ways of obtaining additional financing are as follows:
Asset financing is one of the most common loans for businesses dealing with financial difficulties, and the premise behind it is fairly simple. With asset financing you use one or more of the company’s valuable items (e.g. vehicles or machinery) as security with which to obtain a loan. This loan would be secured on the asset in question; however, as long as you adhere to the terms of the loan you retain full use of the item it is secured against. Should you default on the loan, however, the asset could be seized by the lender, and sold to recoup the money you owe.
Factoring allows you to borrow money against outstanding invoices and accounts receivables. With factoring you are provided with credit totalling up to 90% of the money currently owed to the company. The line of credit available can increase if the amount owed to the company likewise goes up. Bear in mind that interest will be charged on the amount you borrow.
When entering into this type of arrangement, the responsibility for administrating and gathering invoice payments is passed over to the factoring company (the lender), as they take full control over the company’s sales ledger once the loan is agreed.
Invoice discounting works slightly differently. While the premise of receiving money from outstanding invoices is the same, the difference lies in the fact that you remain in control of your sales leger and are, therefore, responsible for collecting payment from your debtors. Due to there being no third party involved in actually collecting payments, your clients will be unaware you have entered into such an agreement.
A Personal Guarantee (PG) is an agreement in which a company director takes responsibility for some of the company’s debts. In the event the debts cannot be repaid by the business, a director who has entered into a PG will be responsible for paying back this money. In effect, a PG sees the director become a guarantor for the loan in the event of the company encountering financial difficulties.
A PG can be a benefit for both borrower and lender alike. For the borrower it may mean they can access vital credit they would otherwise be rejected for; while in the eyes of the lender, a personal guarantee can provide some security as the responsibility for repayment of the loan falls not just to the borrowing company but to the individual directors.
One of the benefits of operating under a Limited Liability Company structure is that you as an individual remain a separate entity from your company. In that respect, business debts belong to your company, not to you. However, a personal guarantee removes this protection. Careful consideration should be given by a director before a personal guarantee is signed as it can impact their personal finances.
If the business enters a corporate insolvency procedure, directors can find themselves facing the prospect of having to satisfy creditors using their own resources. This could involve directors having their property and personal assets seized, should they not be able to settle the debt.
To protect yourself as much as possible in the event that you do provide PGs on behalf of your company, it always helps to take legal and personal financial advice beforehand.
If you have given a PG and this is subsequently called upon, there are options open to you if you cannot afford to pay what is due. You may be able to enter an Individual Voluntary Arrangement (IVA) which will allow you to pay the debt over a period of time. You will need to discuss your options with an expert who will be able to guide you in the correct direction.
A director’s loan is when you take money from your company which is not a salary, dividend, or money you’ve previously loaned to the company. Having an overdrawn director’s loan account (that is taking more money than you have put in) is not necessarily a problem in itself, so long as you can afford to repay it. It's important to understand the differences between you and 'the company'; the company is a separate legal entity and, therefore, whatever you put in or take out needs to be documented and accounted for.
An overdrawn directors’ loan can become extremely problematic, however, when a company finds itself facing insolvency. Around 75-80% of business insolvency cases will feature a director with an overdrawn DLA. Left unpaid, an overdrawn director’s loan account would be considered a company asset by the liquidator and, therefore, the company director would be asked to repay the money in order to satisfy creditors. Unless they can repay the loan out of their own pocket, the director may find that they have to enter into a personal insolvency procedure themselves - such as bankruptcy.
I have an overdrawn director's loan account and my company is insolvent - what now?
There are several options open to you, including:
RECOVERY OPTIONS – For any business in trouble, a key test is to determine its long-term viability as a going concern. If your business is viable in the long-term and is simply experiencing short-term problems, there are a number of potential rescue options to consider. The two main ones are as follows:
Company Voluntary Arrangement (CVA) - Company Voluntary Arrangements are essentially formal payment plans which are agreed between the insolvent company and its creditors. Entering into a CVA can halt creditor pressure and can also stop legal actions such as winding up petitions. This arrangement places a legal ring fence, known as a moratorium, around the company which stops creditors attacking it. This gives a struggling company breathing space to repay its debts over a set period of time.
A CVA is only an option if the business in question is viable in the long-term and if the directors are committed to carrying on with the running of the company.
Pre-pack administration – A pre-pack administration is an insolvency procedure which involves the sale of the company and its assets. The business can be sold to a third party or to the existing directors of the company, so long as they are operating under a new company (also known as a ‘newco’). A pre-pack administration allows for continuity of business.
The crucial difference between a conventional administration and a pre-pack is that with a pre-pack, the sale of assets is pre-negotiated before an administrator is appointed. This differs from a traditional administration where the administrator markets the business only after being appointed.
1. New company is debt free
As a brand new company will have been formed as part of the process, it will begin trading with a completely clean slate financially. The company will not have to repay any of the debts owed by the old business; likewise the company’s credit rating will not be adversely affected by previous financial difficulties.
2. Client goodwill maintained
The pre-pack process allows for a seamless transition to take place between the original company and the newco. This ensures that the goods or services clients receive, along with their main point of contact, can remain the same as before. Suppliers also benefit from the continuity that pre-pack administration offers because under the new company, with better cash flow, invoices should be paid in a timely manner.
3. Better return for creditors
Usually all the assets of the old company will be required for the new company to start trading. This should mean that the maximum amount is generated from the sale for creditors. If the company was simply liquidated and assets sold off in a distressed nature, the amount generated would almost certainly be less.
4. Reputation Management
Directors sometimes feel that putting a company into a pre-pack administration process appears more favourable to the outside world and generally more like a business restructure.
1. Financing the process
Directors usually have to provide the funds upfront to purchase the assets of the old company. In some cases, however, an agreement may be reached which will allow for an element of the payment of the assets to be made from the future revenue of the new company.
2. Directors’ conduct will be investigated
As part of the administration process which takes place after the sale is finalised, the administrator is required to submit a report on the conduct of the directors of the original company. If any misconduct is identified then the director may be subjected to further investigation and possible disqualification.
3. HMRC VAT deposit may be required
HMRC may not allow for VAT registration if the director-turned-new-owner has a history of non-payment of taxes. In this instance a large security bond may be necessary before the new company can do business.
4. The position of your creditors
It is likely that the creditors of the old company will be left with unpaid debts following completion of the pre-pack process. However, if a standard liquidation were opted for instead of a pre-pack, the creditors would almost certainly stand to recoup even less of what they were owed.
A granite and stone business was placed into administration following a change in its business model which brought a host of problems to its operations and, coupled with poor trading conditions, resulted in a massive downturn in sales. Our team of specialists were able to broker a pre-pack sale to the existing management.
Without this deal the financial situation of the business was such that it would have ceased trading due to the lack of new orders and liquidity problems. The deal saved 21 jobs and maintained a flow of business throughout the supply chain.
LIQUIDATION OPTIONS – Liquidation brings about the end of a company. Operations are brought to an end and if there are outstanding creditors its assets are sold to help repay the debts. It may be the case that the company’s problems have taken it beyond the possibility of rescue, or maybe the business has simply served its purpose and you are no longer interesting in continuing with it.
If your company is no longer viable, or simply has no future, liquidation may be the best course of action for you. Liquidation can be done on a voluntary basis, or it may be forced upon you by disgruntled creditors.
Compulsory liquidation - A compulsory liquidation occurs when one or more of your creditors petitions the court to force your company into liquidation; this is known as a winding up petition.
A winding up petition (WUP) is a legal notice issued by HM Revenue & Customs or another creditor following the insolvent company failing to repay a debt which exceeds £5,000. If the winding up petition is successful, a winding up order will then be issued which forces the insolvent company into compulsory liquidation. Once the court has issued a winding up order there is nothing that can be done to stop the company from being completely liquidated. However, there is a short period of time in which you can take action to prevent the order from being issued. When a creditor or HMRC issues a winding up petition to the court it is reviewed and, if approved, will then be issued to the insolvent company. After receiving the petition the insolvent company then has until the hearing to do one of the following:
The end result of compulsory liquidation will be the dissolution of your business - the company will cease to exist, any assets will be sold to repay outstanding debts, and the company will be struck off the register.
The main routes into voluntary liquidation are as follows:
Creditors’ Voluntary Liquidation (CVL) - As the name suggests, a Creditors’ Voluntary Liquidation is when the liquidation process is initiated voluntarily by the directors of an insolvent company. While the process is technically done on a voluntary basis, it is instigated as a result of mounting pressure from creditors which consequently leaves the director with little other option than to close the company. This is the most common form of liquidation in the UK. Once it is decided that CVL is the most suitable route to take, the company will usually cease trading immediately.
It is vitally important at this stage that the company does not seek to take on any additional credit or financial responsibilities and should safeguard any assets. Taking on additional borrowing or selling off assets could be seen as deliberately making their creditors’ position worse and this would be deemed unfit conduct. In a CVL the insolvent company would appoint an Insolvency Practitioner who would then call a meeting of the company's creditors and facilitate the process of closing down the company and selling any assets to repay the creditors. The conduct of the directors during the time leading up to, and including, the business becoming insolvent will be scrutinised as part of the process.
Members’ Voluntary Liquidation (MVL) – A Members’ Voluntary Liquidation is only an option if your company is solvent. A company is considered legally solvent when it is able to meet its financial obligations within 12 months of liquidation, and the value of its assets such as equipment, inventory, contracts, invoices, bank account funds, and property, exceeds the total sum of all its debts and liabilities. A MVL is often the best option when a company director wants to close down their company and extract the profits in a cost-effective way.
As previously stated, a MVL is only for solvent companies and, therefore, if you decide to go down this route, you must sign a declaration of solvency detailing the company’s assets and liabilities. This declaration is made before a solicitor/commissioner of oaths and subsequently filed at Companies House. If the directors of a company swear to a false declaration of solvency when entering into a MVL then they could face fines and penalties, and even imprisonment in serious cases.
Dissolution – Dissolving a company, which is also known as ‘dissolution’ or ‘striking off’, is a more informal way of closing down a limited company by removing its name from the official register at Companies House. Once the name is removed from the register, the company no longer legally exists. As with a MVL, opting to dissolve your company is only available to you if your company is solvent.
Anyone can object to the proposed dissolution of your company. If your company owes money, then you should expect your creditors to submit an objection to your application. If an objection is upheld by the Registrar then the dissolution will not be allowed to go ahead. You should be aware that a creditor can apply for a court order to restore your company to the register even after dissolution if you have evaded paying them. This is why it is crucial that you to inform all interested parties of your intention to dissolve the company and ensure all creditors are fully paid.
While dissolving your company may seem like a straightforward process, caution must be exercised. If you provide false information in your application, deliberately or otherwise, or fail to notify an interested party, the consequences can be severe. You can face disqualification as a director, be handed a considerable fine, or even face imprisonment in extreme cases. If you are in any doubt as to whether you qualify for dissolution, how to go about completing the necessary paperwork, or even whether it is the best option for you, you should contact a professional who can talk you through the whole process and discuss the best option for you and your business. A formal liquidation process is the only sure-fire way of ensuring a company is unconditionally closed.
Following a restructure, a national building maintenance group, with over 550 staff over five sites, suffered from delayed payments from key customers and suppliers’ refusal to go on trading after credit insurance was removed on key trade creditors.
Once appointed, we worked closely with customers and former employees to ensure continuity of employment, where possible. Transfer of the contract to new service providers secured new jobs for employees, reduced employee claims, enhanced dividend prospects for remaining creditors and lessened disruption for customers, improving results from outstanding contractual debtors.
The very nature of a company being insolvent means that there is not enough money in the pot to ensure all creditors are paid what they are owed in full. Unfortunately this means that some inevitably miss out.
There is a defined hierarchy which determines the order in which creditors are paid:
It is important to understand the differences between secured creditors and unsecured creditors.
Secured creditors rank highly when it comes to receiving payment as they have a charge over company assets. These assets can include property, as well as vehicles, machinery and fixtures and fittings. A secured creditor stands a higher chance than most of receiving payment following liquidation. Examples of secured creditors are banks, asset-based lenders, and finance agreement providers.
Unsecured creditors rank below secured creditors when it comes to receiving payment following the liquidation of a company. Unsecured creditors do not have the benefit of having a claim over a particular asset, and can include suppliers, contractors, landlords and customers. Perhaps surprisingly, HMRC is also treated as an unsecured creditor.
As they do not have a hold over any particular asset it is much harder for unsecured creditors to recover the cash they are owed. Instead they have to hold tight and hope there is enough money left to go around after the secured creditors have been paid. Unfortunately, the reality is that unsecured creditors typically receive very little, if anything, following the liquidation of a company.
Anyone can call themselves an insolvency adviser; only those who have undergone a stringent training programme and passed the relevant exams can call themselves a licensed Insolvency Practitioner. All of Real Business Rescue’s Insolvency Practitioners are fully regulated and licensed.
A common problem is that unregulated advisers tell a director what they want to hear, not necessarily what is best for them or their company. While this may satisfy your peace of mind in the short-term, if you do not adequately deal with the problems of your company they will come back to haunt you in the long term.
Unqualified advice is rife in the corporate insolvency industry which is why company directors must be on-guard and seek qualified and reputable advice from licensed Insolvency Practitioners.
There are certain warning signs to be on the look-out for in order to protect yourself from falling victim to a rogue, unlicensed or untrustworthy corporate insolvency firm. If you notice any of the following, you may be dealing with an unscrupulous firm:
Insolvency can seem daunting; however at Real Business Rescue we have years of experience in helping people just like you and will strive to make the process as painless as possible. There is no situation that is unsolvable, yet time is very much of the essence when it comes to dealing with an insolvent business. The earlier you enlist the help of a licensed Insolvency Practitioner, the more options will be open to you. Whether you want to throw everything at getting your company’s finances back on track, or if you want to begin the process of closing it down, we can provide you with the expert help and guidance to achieve this. We understand that all businesses face their own challenges, and we are committed to providing you with tailored advice to help you resolve the issues you are currently facing.
Real Business Rescue have more than 50 offices right across the country staffed with licensed Insolvency Practitioners who can draw on years of experience to offer an unparalleled director support service.
For confidential advice, or to arrange a free initial consultation with one of our licensed Insolvency Practitioners please call 0800 644 6080.
Real Business Rescue provide director advice online, over the phone, or in-person at one of our 75 UK offices or a place of your convenience.
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