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What to do when you are facing creditor pressure

Affected by Covid-19? Immediate Rescue Or Closure Options Available

FAST Free Director Advice & Support, With 78 offices Nationwide our Licensed Insolvency Practitioners can Help Today.

Updated: 5th February 2020

On 28 March 2020, the Government announced new insolvency measures to support businesses under pressure as a result of the coronavirus outbreak. The Government will amend insolvency law to give companies breathing space and keep trading while they explore options for rescue and temporarily suspending wrongful trading provisions retrospectively from 1 March 2020 for three months. You can find out more here. Directors must still be mindful of their fiduciary duty to creditors and shareholders and early advice is always the best protection against any criticism.

My company cannot afford to pay its creditors

If your company cannot afford to pay its creditors and there is no prospect of recovery, it’s important that you cease trading straight away and seek assistance from a licensed insolvency practitioner (IP).

As a director you have a statutory obligation to safeguard your creditors’ interests by minimising their losses. Transferring focus from your own and the company’s interests not only optimises their chance of receiving a higher return should the company need to be liquidated, it also protects you from allegations of wrongful trading.

Is there a chance of company rescue?

Some businesses experience temporary cash flow issues but are deemed viable for the future by insolvency experts. Maybe a key customer has been lost, for example, or a specific event has caused a short-term financial problem within the business, but essentially it has the potential to be profitable again.

But what if your company cannot afford to pay invoices when they fall due and there’s no hope of recovery?

Pre pack administration

Pre pack administration is a process whereby the underlying assets of your business are sold. You may be in a position to purchase them with personal funds and start a new company without the attached debt, but it’s a procedure that’s strictly controlled and must be proven by licensed insolvency practitioners to provide the best return for creditors.

When company liquidation is unavoidable

It may be in your interests as a director to voluntarily enter liquidation. Creditors’ Voluntary Liquidation, or CVL, entails selling all business assets and closing down the company, but in a situation where there’s no chance of recovery and a creditor could enforce liquidation at any time, it can be the better option.

Creditors only need to be owed a debt of £750 before they can instigate winding up procedures against you, and although compulsory liquidation is a cheaper alternative, directors face stringent scrutiny from the Insolvency Service.

Director actions are also investigated during a CVL but you’ve placed your creditors’ interests first by voluntarily liquidating the company. So what does this mean in practice?

My company cannot afford to pay its creditors

Creditors’ Voluntary Liquidation (CVL)

A licensed insolvency practitioner is appointed to control the CVL process, and once in place will prepare a report and a statement of affairs for creditors, explaining the extent of debt involved and how the company has reached this position.

The liquidator realises the company’s assets and distributes the proceeds to creditors in the prescribed order, but unfortunately unsecured creditors rarely receive a high return, if any, in this situation.

Any debts remaining are written off unless you’ve provided a personal guarantee for business borrowing, in which case you’re likely to be held personally liable for the outstanding amount. The company is then struck off the register at Companies House.

What are the advantages of CVL?

Allegations of wrongful trading are less likely given the voluntary nature of the process and the fact that you’ve maximised creditor interests. Additionally, claiming director redundancy may be possible if you’ve worked as an employee for the company for at least two years, as well as being a director.

So how does a CVL compare with the enforced liquidation by a creditor?

Compulsory liquidation

Although it’s a cheaper option to be forcibly liquidated by a creditor, it’s not usually the best route to take as a director. You may face accusations of wrongful trading or misconduct following the liquidator’s investigation, and if proven, could be disqualified for up to 15 years.

You may also be held personally liable for some or all of the company’s debts depending on the results of the investigation, which are sent to the Secretary of State. If a creditor is owed an undisputed debt of £750 or more, which remains unpaid after a formal demand for payment, they can petition the court to wind up the company.

The Official Receiver (OR) acts as office-holder, and you won’t be able to appoint your own choice of liquidator. As with a Creditors’ Voluntary Liquidation, assets are realised on a ‘forced sale’ basis, which also means much of their true value may be lost. 

If your company cannot afford to pay its creditors you must cease trading immediately and seek professional insolvency help. Real Business Rescue are insolvency specialists and can provide the professional assistance you need when your company is declining in this way.

We offer free same-day consultations to quickly establish your position and the best way forward. Please contact one of the team for more information – we work from an extensive network of offices around the UK.

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