Updated: 15th April 2020
For the past 4 months we have had problems paying our bills and as a result we are experiencing ongoing creditor pressure which is becoming more and more serious. We have recently received an increasing number of calls from one supplier in particular who has threatened to shut us down if they don’t receive payment.
Our operating costs are currently greater than the amount of money we’re able to bring in due to a slump in sales. We have therefore had no choice but to neglect paying some bills temporarily until we get back on our feet. We were planning on catching up on them, but now they are demanding lump sums and we’re not sure if we’ll be able to come up the funds in time to prevent them winding up the business.
Should we stop doing trading because we can't pay our bills or is there another way which will allow us to save the business?
If a creditor does not feel as though they’ll be able to recuperate the debt through conventional means they may petition the court to wind up the company by forcing it into compulsory liquidation, administration, or receivership. Once they demands payment from you and threatens compulsory liquidation, bankruptcy, or any other legal action, your first response should be to contact an insolvency practitioner.
As the director of a limited company which is likely to be insolvent, you have certain legal duties as well as obligations to your creditors. One of these is not to partake in any action which could worsen their position - that is by increasing the debt you owe to them, or further running down the reserves left in the company. In some cases this will indeed mean that the company will need to cease trading in order to protect the interests of its creditors.
However, this does not necessarily mean that you have to stop doing business. As long as you are operating with the primary goal of acting in the best interest of your creditors as a whole, then you may be allowed to continue trading. In other words, the company does not have to stop trading as long as it can show that it is attempting to repay creditors and that there is a realistic prospect of being able to repay the debt in full in the future.
With this said, trading while knowingly insolvent is an extremely complex area and action can be taken against the director if he or she breaches their responsibilities to creditors at this time. It is always advised that directors enlist the help of a licensed insolvency practitioner in order to ensure they are adhering to the rules and acting in an appropriate manner.
Sometimes, the best course of action is to enter into an administration procedure should the company be deemed to have a viable future. This can only be done under the guidance of a licensed insolvency practitioner who will act as the company's administrator. Upon entering administration, the company will be protected by a moratorium which will postpone any legal actions being taken against the company for a period of 8 weeks. During that time the appointed administrator will work towards rescuing the company - often through a process of restructuring and streamlining - should this be possible.
Alternatively you may be able to consider proposing a Company Voluntary Arrangement (CVA) to your creditors. In simple terms, a CVA is a formal payment plan entered into by a company with the support of its creditors. New payment terms are negotiated which results in reduced monthly outgoings for the struggling business. Depending on what the company can afford to pay, some debt will typically be written off with the rest restructured into affordable monthly payments over an agreed period of time of anywhere between 3-5 years.
CVAs are a mutually beneficial agreement that give creditors the opportunity to recover funds while also saving the indebted company from a more terminal insolvency procedure such as company liquidation. With a CVA the company is allowed to continue to trade and essentially pay it's current debts using future profits.
If your company is experiencing financial difficulties and you fear it is about to become insolvent, you need to take professional advice as a matter of urgency. By discussing the situation with an insolvency practitioner in detail, you can decide how to respond to such pressures in the most effective way possible while giving your company the best chance possible of survival. Call the experts at Real Business Rescue today to arrange a free no-obligation consultation.
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