When Should a Company Director Take Insolvency Advice?

As a company director, admitting you need to take insolvency advice can feel like you’ve failed at your job. However, not taking insolvency advice when you should is a greater dereliction of your directorial duties than admitting that you need to take it.

So, when should a company director take insolvency advice?

The Company’s Finances Have Deteriorated

Though this may sound obvious, directors may just ignore this warning with a look to trade on out of a ‘rough patch’. While companies can go through a drop in revenue, a substantial one could indicate deeper-rooted issues, and potentially, insolvency.

As director, you should be on the lookout for the following:

• A drop in revenue
• Imbalanced cash flow
• The company cannot pay its liabilities as and when they fall due

These could be a temporary blip, with the books rebalancing once payment for a completed project, or one from a regularly paying client, drops into the bank account. However, it could be an early warning sign that the company could be entering choppier waters, and a precursor to further financial issues.

If a Time to Pay Arrangement Has Failed

A Time to Pay Arrangement is an informal repayment arrangement between a company and HM Revenue & Customs (HMRC), allowing the company longer to pay its outstanding tax liabilities, including VAT, PAYE, Corporation Tax, and National Insurance.

Typically lasting between six and 12 months, these can provide breathing space for companies struggling to repay their tax bills. However, the payments must be maintained. If not, the arrangement could fail. Should this happen, the company should explore other insolvency options to alleviate its debts. Directors should do so as a priority. HMRC won’t hesitate to pursue companies who owe them monies.

The Company Has Legal Action Against It

Creditors can issue repayment reminders to a company that owes them money. These reminders can come as emails, letters, or telephone calls to the place of work during working hours. All of these are legal and don’t constitute harassment. If these reminders go unanswered, creditors can file legal action against the company.

• Statutory Demands can act as a precursor to more severe debt recovery action, such as County Court Judgements (CCJs), which can negatively impact a company’s credit file if not repaid or challenged within the allotted time.
• If the company owes more than £750, creditors can even file a winding-up petition, resulting in the company’s bank accounts freezing and forcing it into compulsory liquidation, ending its existence.

What if a Company Continues Trading Despite It Being Insolvent?

If directors continue trading through the company while knowing it is insolvent, it can lead to allegations of trading whilst insolvent, and even wrongful trading. In the worst-case scenario, this can end with a director being held personally liable for the company’s debts later.

Taking Insolvency Advice

Take advice from a licensed insolvency practitioner before the debts reach this level, and you’ll stand a much better chance of rescuing the company and avoiding compulsory liquidation. Depending on your circumstances, the company could repay its unsecured debts in affordable instalments while continuing to trade through a formally managed Company Voluntary Arrangement (CVA). If more substantial action is required, restructuring the company through administration could be a more viable option.

If the debts are of such a level that recovery would be unfeasible, closing the company might be more beneficial. Entering a Creditors Voluntary Liquidation (CVL) closes the company through a more controlled process than compulsory liquidation. Doing so also draws a line under the insolvency and allows the directors to walk away.

To Summarise

You haven’t failed in your duties as a company director if your company is in financial trouble and you need to take company insolvency advice. In fact, taking advice when you spot possible signs of insolvency puts you in a better position to alleviate the problems before they threaten the company’s future.

These possible signs of insolvency could include:

• Declining revenue
• Imbalanced cash flow
• Inability to repay company liabilities as and when they fall due
• Creditors have filed legal action against the company
• An informal repayment arrangement (like a Time to Pay Arrangement) has failed

If, as director, you spot these in your company, don’t ignore the problem in hope of it going away. Doing so can exacerbate problems, and potentially leave you worse off in the long run. Instead, take insolvency advice from a licensed and regulated insolvency practitioner to find the best route forward for your company.