Advice for businesses facing insolvency

Insolvency is something that no business owner or company director ever wants to face.  Unfortunately, Covid-19 has forced previously viable businesses to face that reality.

The worst thing you can do as a director is bury your head in the sand and let manageable issues become unmanageable.  There are always options available if you start to feel debts mounting up.

1. Set up an informal agreement with your creditors

This is the best way to prevent issues from escalating and is usually the right recourse when you are experiencing minor or temporary difficulties, or when there are no imminent threats of legal action from your creditors.  Businesses understand that it is a tough trading environment in many sectors at the moment.  If you show willingness to work with a creditor, they will be likely to work with you.  Offers for payment should be fair, but realistic.  All goodwill you have built up will evaporate if you breach your own proposed payment plan.

2. Seek Independent Legal Advice

If you are unable to set up informal arrangements, or one or more of your creditors is unwilling to accept your payment proposals, you should contact a solicitor to get legal advice on the options available.  They may be able to negotiate more strongly on your behalf, or, if Court Action were to commence, find legal defences and make representations to the Court to allow you to spread the payments over more time.

If this does not work, your solicitor will be able to assist and advise you on formal insolvency tools, including entering a Company Voluntary Arrangement, which, would prevent any hold out creditors from refusing your proposal if a 75% majority approve, or providing legal advice on placing your company into administration.  They can also direct you to an Insolvency Practitioner who can assist.

3. Closing the company

Ultimately, if none of these options are feasible, the last resort is to liquidate your company.  A liquidator would be appointed to deal with the affairs of the company, realise value for creditors and undertake investigations before closing down the company.

As directors, you must be mindful of avoiding personal liability.  While the limited company structure does insulate you to a degree, personal liability is still possible.

• Protect Creditor Interests

It is key to protect creditor interests, especially if you have sought insolvency advice.  This shift in focus is required to avoid personal liability for company debts, and potential accusations of unlawful trading.

Also, you should not look to obtain further credit without carefully considering your position.  Attempting to trade out of the financial hardship may seem the best course of action, but obtaining further credit when it appears your company is entering insolvency can lead to accusations of impropriety.  Seek professional advice from an accountant and/or insolvency practitioner, to justify your decisions and keep notes of why they were made.

The ultimate aim is to minimise creditor losses. Engage with creditors in an open manner to gain their trust, provide accurate information, when reasonably requested, and keep the lines of communication open.

• Don’t put your own money in

You may feel a moral responsibility to do so, but there is no legal requirement to put your personal funds into the company.  You would only become liable for company debts if you have offered personal guarantees or conducted the business in an improper manner.

• Keep clear meeting minutes and accounts

Hold frequent board meetings to review the changing situation and keep a written note of all discussions, to record the steps you are taking to recover and control the situation.

Keep detailed and accurate financial records and make them readily available to the Insolvency Practitioner so that a clear route into insolvency can be seen from company financial records.

• Protect company assets

The value of company assets must be protected, so make sure they are insured and secure. Directors who try to sell company assets, or otherwise dispose of them can face allegations of misconduct.

Ben Jenkins is head of dispute resolution at Harding Evans Solicitors. If your business is facing insolvency and you require legal advice, contact Ben on 01633 244233 or email at jenkinsb@hevans.com for a confidential discussion about your options.