While finding out your company is insolvent is seldom a pleasant experience, it rarely happens overnight. Warning signs will usually present themselves before creditors resort to drastic action to reclaim their money. Knowing what to look out for and how to act can help you better navigate a period of company insolvency and increase your company’s chances of surviving.
So, what are some of the warning signs of company insolvency?
Your company’s finances are in a poor state
As a company’s director, you should always know whether that company is solvent or insolvent. The most telltale sign of insolvency is if the company’s finances are in a poor state.
Looking at the company’s cash flow can outline when that company has more liabilities than assets and if it’s falling behind on payments of PAYE, National Insurance, and VAT. The same could be said for the company’s balance sheet, where its incomings and outgoings should be listed. If those outgoings outweigh the company’s income, the company could be insolvent.
You should also check for legal action from your company’s creditors.
Creditors are asking for their money back
Any creditor your company owes can issue a repayment reminder for that amount. These reminders could start with telephone calls, letters and emails to your company’s workplace during working hours.
While creditors are well within their rights to issue such reminders, they shouldn’t try contacting you while you’re not at work, at your home address, via social media, or imply they’ll use powers beyond their means to recover the debt.
What if you ignore these indicators?
If you ignore repayment reminders, creditors can escalate their debt recovery efforts, and if not dealt with in a timely manner, these can cause long-lasting harm to your company.
Statutory Demands & County Court Judgments (CCJs)
Statutory Demands are a more formal method of debt recovery and could be a precursor to CCJs. These are issued by a court against the indebted company and, if not dealt with in the time specified in the judgment, remain on its credit file for six years. This will negatively impact the company and make it harder to secure lines of credit in the future.
Winding-up petitions
If your company’s debts exceed £750, your creditors can opt for the most severe form of debt recovery: a winding-up petition. If not challenged, this can lead to the company’s bank accounts being frozen, forcing trading to cease as it enters compulsory liquidation.
What you can do if your company is insolvent
Fortunately, if you act early enough, you can help reduce the impact of your company’s debts and potentially save it. Speak to a licensed and regulated insolvency practitioner (IP) who can assess your company’s situation and advise you on the best route forward.
If your company’s business model could be viable and profitable, were it not for its outstanding debts or a single outstanding amount, and you act early enough, you could repay a portion of its unsecured debts in affordable, monthly instalments. This can be achieved through a Company Voluntary Arrangement (CVA), which allows the company to continue trading, maintaining its position with customers while repaying an affordable proportion of its debts. These arrangements usually last around five years, and once concluded, any unsecured debt remaining in the arrangement is written off.
If the company would benefit from more substantial restructuring, then administration could be a viable option. During this time, a licensed IP investigates the company’s affairs and may propose changes needed to return it to a profitable state.
If recovery isn’t an option or creditor pressure is reaching a point where trading is becoming difficult or impossible, then closing the company may be your best option. Dissolving the company is ill-advised if your company is insolvent, so you’d be better off closing it through a Creditors Voluntary Liquidation (CVL). A CVL closes your company in an orderly manner, writing off the company’s unsecured debts, stopping the associated creditor pressure, and allowing you, as director, to walk away and start afresh.
To summarise
Recognising the warning signs of insolvency early can better navigate them and increase the chances of your company surviving. Negative cash flow and an imbalanced balance sheet can act as early indicators of insolvency. Creditors demanding their money back through informal reminders can be a precursor to more damaging court orders and judgments and even petitions to force the company into liquidation.
Acting promptly and taking advice from a licensed insolvency practitioner can clarify the best way forward and better mitigate the longer-lasting impact on your company.
