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Understanding limited company debts, director liabilities and insolvency

As the director of a limited company, you have some protection from personal liability if the company becomes insolvent. Although treated as a separate legal entity, under certain conditions the ‘veil of incorporation’ can be lifted, and you may become liable for business debts.

It is advisable to seek company debt advice as soon as possible, as once cash flow is compromised the business can very quickly begin to decline. The obligations of a company in serious debt focus squarely on creditors, making sure that their interests are prioritised.

A range of business rescue solutions are available, but it can be difficult to identify the best course of action. Begbies Traynor is the leading business recovery firm in the UK, and can offer advice on company tax debt and other director liabilities.

What are common company debts?

Company tax debts are among the most worrying for directors. They could include PAYE, VAT, and corporation tax liabilities, as well as other general company HMRC debts. The Pay As You Earn scheme requires you to deduct tax and National Insurance contributions on behalf of your employees, and remit regular payments to HMRC, usually on a monthly basis.

Failure to do so makes the company liable for the arrears rather than your employee, and PAYE debts are a common issue for directors. If the company becomes delinquent on PAYE, VAT, or has corporation tax debts, it is likely that HMRC will chase payment very quickly.

Obtaining help and support to deal with company tax debt is vital, as HMRC are known to aggressively pursue arrears and could swiftly close your company down.

Understanding limited company debts

As we have already mentioned, seeking limited company debt advice should be a priority, even if you feel that it is only a temporary issue. It only takes a lull in your market or the loss of a key customer to have a serious impact on cash flow, which is often the precursor to insolvency.

Your limited company’s debts might include unpaid supplier invoices as well as tax debt, and you may even be worried that you won’t be able to pay your staff in the near future. These concerns, even if they have not actually crystallised, should be a warning that you need to find an appropriate debt solution. 

What happens to the debts of a company during an insolvency procedure?

If your company is facing liquidation, whether voluntary or compulsory, it may be possible to pay a proportion of the debts from the sale of company assets.

Only when those higher up the creditor hierarchy have been paid do unsecured creditors such as HMRC and your suppliers receive a dividend. It is likely that, as a group, most unsecured creditors will receive very little in the way of a dividend. In these instances the remaining debts will be written off.

What happens to the debts during a Company Voluntary Arrangement is very different. CVAs are seen as a business rescue option, and although not all debts will be paid in full, unsecured creditors included in the CVA will receive at least some repayment.

The pre pack administration process has received criticism in the past from creditors whose debts have been written off. Directors have then gone on to form a new company using the old business’ assets.

What happens to the debts in this instance may not seem fair, but the insolvency practitioner’s obligation to ensure creditor interests are placed first, is at the forefront of this procedure.

Business debt management

With the thought of insolvency and liquidation in mind, you should consider developing a business debt management plan to help you control debt, and prevent a slide into insolvency.

Being proactive about controlling company cash flow, and putting a firm plan in place to cover several months ahead, is a good first step. We offer company debt management services from our offices around the country, and can identify the danger areas within your business where money is being wasted.

A good debt management company will identify various strategies and tips to maximise your success in dealing with debt. You will be able to put different strategies into play, and see which brings the best results.

Business debt financing and consolidation

So what strategies might be suitable for a business with debts? Debt refinancing and consolidation are generally the most successful strategies for struggling companies. This could involve taking out a consolidation loan that amalgamates several debts into one repayment, or simply extending your overdraft facilities at the bank.

Restructuring business debts can provide the working capital you need to thrive and become profitable again. It is a stressful time when you do not know how you are going to pay your business debts, and if you have provided a director’s guarantee, thoughts of personal liability will spring to mind.

We have developed strong business relationships with more than 50 lenders nationwide, and can advise you on the most suitable options, whether that is factoring and invoice discounting, or a debt consolidation loan.

Dissolving a company with debts

Closing a limited company in debt introduces various issues for directors. If the company enters compulsory liquidation you will face investigation into your conduct as a director, and a report is sent to the Secretary of State.

The liquidator will investigate whether or not you have traded whilst insolvent, and to what extent creditor interests have been taken into account. If you are found to have traded wrongfully or unlawfully, you could face disqualification as a director, a fine, or even imprisonment.

Closing down a company with debts is always stressful, which is why you should seek professional advice before it is too late.

Begbies Traynor is the market leader in business rescue and recovery. Our team of professionals is on hand to advise and support you as a director, and can arrange an immediate consultation in complete confidence.   

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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
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