Updated: 2nd December 2021
When a company is insolvent there are a variety of consequences both to the company itself, and the director(s). These can not only be destructive to the business, but can also be detrimental to company directors who are struggling to keep their company afloat.
The consequences of business insolvency can manifest themselves in various ways, and these can be grouped into two main categories – hard consequences and soft consequences.
Soft consequences are those which are not particularly tangible and instead are a series of human reactions to the situation a director finds him or herself in. Examples of this include trouble sleeping, refusing to answer the phone or communicate with creditors, and growing tensions between stakeholders. Dealing with insolvency can be extremely stressful on a personal level and can have a negative impact not only company directors when they are at work but can also spill over into their home life and relationships.
Hard consequences on the other hand are those which are tangible and therefore difficult for the director to cover-up or deny. These tend to be financial in nature and include actions such as: being issued with a CCJ, a statutory demand or a creditor petitioning to close your company through a WUP; banks recalling overdrafts or other finance providers restricting your borrowing terms; or falling behind on payments to suppliers, employees, and HMRC.
Once key clients get wind of your company’s financial issues, you may notice them begin to distance themselves to protect their own interests. This could mean you see a reduction in orders from key customers, or orders made with modifications to payment terms. Suppliers are also likely to insist on reduced invoice payment terms, or ask for a substantial deposit before supplying goods.
Despite what their names may suggest, soft consequences are no less serious than hard consequences; both can have a serious impact on the director personally, and also on the viability of the company itself. If any of these symptoms present themselves, it is vital that expert insolvency advice from a licensed insolvency is sought as a priority. Ignoring the signs will not make the problem disappear; in actual fact it is likely to make it much worse.
If left too long, the company could find itself in a position which is impossible to come back from. Disgruntled creditors are within their right to petition for the compulsory closure of your business if you owe them at least £750 and have continually failed to make payment. This figure has increased to £10,000 as per the Government's temporary measures which will apply for the period 1 October 2021 to 31 March 2022.
Furthermore continuing to trade while knowingly insolvent comes with extremely serious consequences for you on a personal level. Failure to put the interests of your creditors first during this time (e.g. by continuing to trade and accept orders you know you are unlikely to be able to fulfil) is a breach of your duties as a company director and could see you being disqualified from acting in this role for up to 15 years.
Just because your company is currently insolvent does not mean there isn’t a chance of your business bouncing back. By enlisting the help of a licensed insolvency practitioner, you can learn about the various business rescue and recovery options which are available and determine whether any of these are appropriate for your company to pursue. This could include looking at various finance options which may help to increase your cash flow and keep the business running smoothly. Alternatively, if you are finding your company’s debts difficult to manage, you may wish to consider entering into a time to pay (TTP) arrangement with HMRC, or setting up a formal debt restructuring plan by way of a Company Voluntary Arrangement (CVA).
Should rescuing the business not be possible, or if this is not something you wish to attempt, then we can look at the best way of closing down the company, ensuring business is brought to a close and allowing creditors receive as much money as possible. This is achieved through a director-initiated process known as a Creditors’ Voluntary Liquidation (CVL).
If your business is insolvent and you are worried about the consequences of this, you should make it a priority to seek expert advice. Begbies Traynor can advise you on the whole range of recovery and closure options out there, and our licensed insolvency practitioners can put the most appropriate method in place for you. To find out more call us today on 0800 063 9221.