Updated: 28th March 2021
Even when your company is experiencing financial distress, it can be difficult to know when to seek professional help. It is a natural reaction to want to trade your way out of difficulty, but the sooner you benefit from an expert’s experience and industry knowledge, the better your chance of survival.
There is also the issue of wrongful trading to consider – your company must cease trade as soon as you are aware that it might be insolvent. Failing to do this leaves you and other directors open to allegations of wrongful trading if the company is later liquidated.
Begbies Traynor can advise on your company’s current financial position, and ensure you remain compliant with insolvency regulations.
Unexpected cash flow issues or the sudden loss of a customer are just two examples of warning signs that should not be ignored, and it is at this early stage that professional help should be sought to ensure your company is still solvent.
There are specific tests that can determine your financial situation, and the likelihood of litigation against you as a director in the future. Trading whilst insolvent is a serious issue for directors; it can lead to disqualification and personal liability for some or all of the company’s debts.
Cash flow insolvency can be described as the company’s inability to pay its bills on time - these bills might include staff wages, upcoming tax, or a supplier payment for example.
In addition to cash flow insolvency, the company may also be ‘balance sheet insolvent.’ This situation occurs when the company’s total liabilities (including contingent or prospective liabilities) exceed the value of its assets.
If you suspect that you are insolvent, or are likely to become insolvent, you must cease trading immediately and place the interests of your creditors first.
Initially, an IP will analyse your business affairs to determine the extent of the problem. The main aim will be to rescue the business, and it is possible that refinancing or restructuring could be appropriate.
The insolvency practitioner will explain each option to you, and offer guidance on the best route for your company. These might include formal negotiations for a Company Voluntary Arrangement (CVA) which would end creditor legal action against you, or the sale of underlying business assets via a pre pack administration process.
Even if your company is not insolvent at this stage but simply experiencing temporary cash flow issues, the input and guidance of an insolvency practitioner can be invaluable. They will advise on various matters including personal guarantees, improving cash flow, and alternative funding if your bank has turned you down.
If you leave it too long, the chances of your company being forced into liquidation increase considerably. Should you owe one of your creditors £5,000 or more, they may be entitled to issue a winding up petition against the company, which could quickly result in the liquidation and closure of your business.
An additional problem means that when one creditor takes action, others often follow suit, and the resulting pressure can feel overwhelming for directors. HMRC in particular are notorious for chasing late payments aggressively, and commonly use winding up petitions as a method of recovering tax.
Begbies Traynor is the UK’s largest independent professional services consultancy. We specialise in corporate rescue and recovery, and can quickly identify the best course of action for your company. Call one of our experts to arrange a same-day consultation in complete confidence.