Due to the current volatile market conditions and with lockdowns potentially becoming a feature of the foreseeable future, it is increasingly common for businesses to face financial difficulties and insolvency is something that directors may, unfortunately, have to consider.
While government support schemes have helped companies navigate this year’s uncertainty, resulting in fewer insolvencies than at this point in 2019, there were still 926 company insolvencies in England and Wales in September 2020. Unfortunately, as support eases and with hardships likely to continue into the New Year, this number is expected to rise.
If you have any concerns regarding your business’ financial health, it is vital that you seek insolvency advice as soon as possible. Failure to do so may result in further commercial difficulties and, can even lead to personal liability if you are not aware of your responsibilities and duties.
When should you seek advice?
It is very important to seek help and obtain advice as soon as the business begins to struggle to pay its debts, as this is one of the first signs that the company may become insolvent and that changes need to be implemented.
If professional insolvency law advice is obtained promptly, there may be a greater chance that the business will survive.
What options are available?
It is important to remember that a downturn in the business’ financial health should not be immediately taken as a signal of insolvency. Rather, a sign that something may need to change. Whether that be taking efforts to reduce your overheads for improved cash flow or minimising the number of liabilities on your balance sheet, for example.
Swift action in this instance can enable the business to free up enough resources to pay some of its debts. If, however, more is required, a formal insolvency process may have to be considered.
This can include placing the company into administration. This is when a licensed insolvency practitioner takes control of the company and becomes its administrator. The purpose of this process is to either rescue the business or to maximise the return to the company’s creditors.
Company Voluntary Arrangements (CVAs) are another option. This is where the company and its creditors reach a formal agreement for the repayment of the company’s debts over a fixed period. If an agreement is achieved, the company can continue to trade and the director(s) remain in place and in control of the business. However, in order for a CVA to be accepted, there are certain criteria that need to be met, which is why legal advice should be sought.
Alternatively, you may decide to place the company into creditors’ voluntary liquidation. This is where the directors recognise that the company is insolvent and can no longer trade. The company will be wound up and will cease to trade. A liquidator will be appointed to realise any assets and/or bring claims in order to pay the company’s creditors.
Your solicitor can explain all of the available options to you and advise you on which one presents the best way forward. Their guidance may also help to ensure that any actions you take do not leave you personally liable and at risk of a potential wrongful trading claim.
What about your staff?
Whether you are restructuring the company to reduce overheads or are entering into administration or liquidation, employees are likely to be impacted.
In the case of a CVA, the business will continue to operate and, therefore, there is a chance that the impact on employees will be minimal. However, in order to continue trading profitably, you may have to make some employees redundant and, therefore, it is important that you seek legal advice before you do so.
If the company enters into administration, there is a possibility that the business will be sold and the employees transferred to the new company. However, if you are considering any redundancies immediately prior to administration, it is important that you obtain legal advice.
Unfortunately, if the company enters into liquidation, it is likely that the employees will be made redundant by the liquidator. This will be a difficult time for all involved so seeking legal employment related advice at an early stage may help.
If wages are owed, employees should be entitled to make a claim through the Redundancy Payments Office.
What can you do next?
Once formal insolvency procedures have been taken, your role in the organisation may change and you may be wondering what your next move should be.
If you are thinking about starting up a new company, there may be restrictions. For example, you may wish to use a similar name in order to retain customers, however, in certain circumstances, it can be a criminal offence to use a similar name for five years and, therefore, it is imperative that you seek independent professional insolvency law advice.
Also, it is possible that the administrator or liquidator may have claims against you personally in relation to your conduct prior to the liquidation especially if you have transferred assets at an undervalue, made preference payments or been paid dividends (as a shareholder) in circumstances where there were no profits. If you receive notification of any potential claims against you, it is important that you seek advice in order to protect your position including your personal assets.