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When a limited company has multiple debts and cannot pay them on time, what actions should be taken?

When a limited company is unable to meet its liabilities as they fall due, it may be insolvent, but there is a range of options that could save the company from closure. Which option is taken depends on whether the underlying business can be made profitable again by restructuring or selling off some of the assets.

Once a company is known to be insolvent, trading must cease, otherwise directors could be held personally liable for company debts, and leave themselves open to accusations of fraudulent trading. Begbies Traynor is the largest UK business recovery practice – our people are experts in corporate recovery, and can offer guidance in this respect.

If you can demonstrate responsibility as far as your creditors are concerned and act with their best interests in mind at every stage, you may avert allegations of wrongful trading should there be an investigation.

In summary, these are the initial actions that should be taken if your company is struggling to pay multiple debts

  • Cease trading immediately
  • Seek the advice of a licensed Insolvency Practitioner (IP)
  • Base future actions on creditor interests, rather than those of the company or shareholders
  • Consider the following formal insolvency procedures and instalment arrangements – they might provide the time needed to improve cash flow and recover the business.

Company Voluntary Arrangement

This involves negotiating extended payment terms with creditors. Your appointed Insolvency Practitioner (IP) will analyse the company’s finances and put together a plan for repayment, which is then presented to creditors.

If the proposal is agreed, there are several benefits for both company and creditors. As far as your company is concerned, you should see an immediate increase in cash flow thanks to the consolidation of multiple debt repayments into a single monthly payment.

Trade will carry on under the same directorship, offering continuity of business. Creditors generally receive a higher return by agreeing a CVA, when compared with company liquidation. They continue to trade with a company they know, but without the stresses of unpaid debts.

Time to Pay arrangement

If one of the bad debts in question concerns Corporation Tax, VAT or PAYE, you will need to contact HMRC immediately.

HMRC debts can be particularly problematic for directors, as the system is set up to spot late payers very quickly. This often results in HMRC taking action to liquidate a company if it believes that company may be approaching insolvency.

The good news is that HMRC offers an instalment plan called a Time to Pay arrangement. This gives companies experiencing a temporary debt problem an extended period of time to pay their tax liabilities – commonly between 3 and 12 months.

It is fair to say that negotiating with HMRC is a daunting prospect, particularly under these circumstances. That is why some directors choose to appoint a licensed practitioner to put together and present their case to HMRC.

HMRC needs to trust your judgement regarding the company’s ability to pay future instalments and adhere to the terms of the agreement, and the case is strengthened by using professional insolvency experts to guide you.

As we have said previously, speed is of the essence when your ability to pay HMRC is in doubt. You may be able to limit or avoid penalties for late payment, and reduce the chances of your company’s financial position deteriorating further, if you take action right away.

Pre-pack administration

Pre-pack administration may be a possibility if there is no other viable option for recovery in its original form. In this instance, the business is sold as a going concern, often to one or more existing directors, who go on to form a new company, or ‘newco’.

The decision as to who is the most appropriate buyer for the underlying business lies with the IP, who may decide that a trade buyer or other third party is more suitable than existing directors.

One of the requirements of pre-pack administration is that the assets are purchased using the buyer’s personal funds at a fair market price, which may limit the directors’ ability to proceed.

The advantage of using pre-pack administration for a company in debt is the speed of sale. Negotiations for the sale of assets take place before administrators are officially appointed, with the actual sale taking place shortly after. Not only does this help to preserve the value of business assets, there is unlikely to be adverse publicity about the administration process when it is carried out so quickly.

It is incumbent on the IP to prove that no better options exist as far as creditors are concerned, which helps to alleviate some of the ethical issues surrounding pre-pack administration and ensures that the best deal is obtained for creditors.

Begbies Traynor is the largest UK business recovery practice. We offer a free initial consultation, and operate from numerous offices across the country.

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Advice You Can Trust

Insolvency Practitioners Association Institute of Chartered Accountants in England and Wales R3: Association of Business Recovery Professionals ICAEW Business Advice Service Turnaround Management Association ACCA (the Association of Chartered Certified Accountants) ICAS | The Institute of Chartered Accountants of Scotland