How Directors of a Company Should Handle the Process of Insolvency

It has never been an easy task to run a business, and the global pandemic has made the process more difficult, especially for company directors.

Directors and business owners need to recognise some important challenges they will face and respond appropriately to these challenges as they may be forced to make certain decisions in difficult times.

If the business is insolvent (it can’t pay it’s bills as and when they fall due) then you will need to take action quickly as failure to act can lead to bigger problems down the line.

What you need to know – in brief

By having a brief knowledge of what to look out for, and what to do, you can start to make informed choices in what happens next. We’ve outlined where things usually start followed by some of the options that may be available.

1. Spot the early warning signs

Lower turnover, increase in customer complaints or returns, and declining margins are signs of financial stress. It would be best if you acted fast as a director to address any issue where necessary.

2. In difficult/controversial situations

A company director can survive a short difficult period once they are aware of the signs and prepared accordingly. A director could raised money or minimize costs to turn the tide if necessary.

However, the company’s survival might still be at stake if the company faces this crisis for a long time and encounter unexpected hazards. For example, a company may not be aware that its products are outdated or irrelevant due to embargos in the market, technological developments or competition. The possibilities of longer-term losses can be increased by any of these.

3. Statutory demands/winding-up petition

Creditors can take action (statutory demands) against a company, making the company vulnerable; thus, leading to a winding-up order. If this is the case, it’s still possible to prepare for difficult times and handle the situation or still find a way to keep the business stable, but doing this will require considerable skills. If you receive a winding up petition or statutory demand and have not sought after advice from an expert as a director, you need to do so now.

4. Opportunity to rest/think/plan

Companies can also have a moratorium against creditors, all thanks to the Corporate Insolvency and Governance Act 2020. This Moratorium is granted as a rescue option for a company that cannot pay its creditors; this gives the company breathing space to develop a restructuring plan and continue with its activities while seeking prospective buyers or realise the company assets for the benefits of its creditors. A moratorium is not a final solution and seeking one demands careful consideration.

Difficult choices and some solutions

Once you have seen there is a problem and have contacted an specialist you will probably have to make a decision: to abandon ship or battle on. Here are five available options depending on the state of the business:

1. Restructuring

If you decide to battle on, then you will have to seek professional advice to help find additional funding sources and also devise a means to source additional funds and minimize costs.

2. Formal Insolvency Processes

There are different challenges if the company is insolvent. Directors are to take actions that will benefit the creditors and not the shareholders; they can be personally liable for breaching their duties or insolvency law if they act otherwise. The consequence will be inevitable if you continue to trade at a loss and incur more debt. The question to ask is what can be saved, and how?

3. Administration

A company may be put into administration if it is no longer able to settle debts. The administrator (an Insolvency Practitioner) takes over the company’s affairs and is tasked to achieve specific statutory objectives like rescuing the company, if not possible, deliver better results for creditors in general than if the business were liquidated. Placing a company under administration prevents creditors from taking action against it (moratorium).

Possible outcomes from a company under administration include a company voluntary arrangement (CVA) or company voluntary liquidation (CVL). Selling all or part of the company to a third party is another common outcome, and the proceeds are used to settle creditors. This act may preserve the business and jobs, but some creditors and shareholders may suffer loss.

4. Compulsory liquidation

Compulsory liquidation (by court order) is likely inevitable if the directors of a company cannot change the fate of a failing company. Assets belonging to the company are liquidated in the event of a liquidation, and the proceeds are distributed to the creditors; the shareholders may get proceeds if it is sufficient.

5. Company voluntary arrangement

A company can still be saved through a company voluntary arrangement; this may allow a struggling company to avoid liquidation by reaching an agreement or compromise with the company creditors with minimal court involvement. A supervisor will be assigned control over assets belonging to the company instead of the company directors.

Get free advice today

If you business is struggling it’s important to seek professional help, so why not contact us today and take advantage of free advice from one of our insolvency specialists. You can call us on 0800 975 0380 (free form mobiles and landlines) or email [email protected]

We will be able to assess the situation and then offer advice on appropriate solutions depending on your specific situation and requirements. You can then decide whether you want us to help you with your problems. With offices across the UK, you’re never far away from expert and confidential advice.