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Few people who haven’t been through it, know what a stressful experience it is to be the director of a company that is heading towards insolvency. This website is here to help, and if you stay with it and read on, you’ll find there are more options available than you might realise. Expert help can put control back in your hands, even when you are feeling that “it’s all coming at you” and you are too anxious to be able to think logically.

When things start to go wrong, it’s natural to hope that they may get better and to try and continue trading, hoping for a better month, or for less pressure from your creditors. Many directors begin to worry not only about the business and the company but also about their personal position and whether they will end up in bankruptcy, losing the house and making the family homeless. At 2.30 in the morning, these thoughts chase themselves around your head, you don’t sleep and it makes the stress worse.

What you need at this time is clear-headed, calm and sensible advice from someone who knows how to guide you away from the rocks and towards calmer water. You yourself are unlikely to be able to think positively, let alone act quickly and decisively in this situation. But an expert who deals with these scenarios all the time isn’t flustered by them and will quickly get a good idea as to what the options and possibilities are for your company and for you personally.

Many directors are ashamed of the situation they find themselves in and feel guilty, blaming themselves for the company’s problems. This compounds the problem because they don’t want to discuss their business difficulties with anyone. Often, if they are the founder and only director of the company, there is no one to discuss the difficulties with. The good thing about an expert advisor is that they stand outside the situation and are not there to apportion blame. They know how difficult it can be to run a business and they are not judgmental.

Instead, they can take stock of the situation very rapidly and point the way forward. The sooner you talk to them, the more options they’ll be able to lay before you. So don’t delay because you hope things will somehow get better.

Let’s look at what the insolvency expert can do for you, and what to expect when you decide to work with one.

What is an Insolvency Practitioner?

The Insolvency Practitioner (IP) is authorised as a professional by the regulators, to work on behalf of companies or individuals who are facing possible insolvency and to try and rescue the situation wherever possible. They are licensed, and have a set of strict guidelines they have to work to which ensure that they give the best advice to their clients.

Before they can be licensed, they will have passed exams in insolvency; had experience at working with businesses; and satisfied the regulator that they are honest and competent. Many independent IPs are former accountants. Once they have qualified as IPs, they continue to be monitored by the regulator. They must also keep up with the latest legal and business developments, by undertaking professional development.

What can an Insolvency Practitioner do for me?

The IP’s primary aim when you contact them is to see whether they can rescue the business and your personal situation.

One of the main roles of the IP is to advise on all the options available: voluntary liquidation, a Company Voluntary Agreement (CVA), Administration and others. They have the expertise to know which of these are viable in the particular circumstances of your business.

If it isn’t possible to rescue the business, the IP will analyse the current situation and advise as to the best course of action. They can negotiate with creditors, for example the tax authorities, and they can collect money due to the business. They can also pay costs and share out any money left for the creditors. But they only agree to pay outs once they are sure that there will be money available in the business to make the payments.

Technically, the IP is allowed to be an “office holder” for a company or other business organisation while they sort out the problems and advise on a way forward.

Looking after your interests:

They’re also able to keep you safe while you go through the process, making sure that you and any other directors don’t accidentally infringe any technicalities in the Insolvency Act, or innocently do something that seems reasonable, but is actually illegal. They’ll tell you which meetings you need to have for shareholders and creditors, and how to meet your legal duties.

One of the key reasons to call in an IP early is that they’ll ensure that you stay in control as far as possible, rather than allowing events to spiral out of control.

For example, they’ll try as hard as possible to protect you from the situation where a creditor petitions for a winding-up order for the company. That’s a scenario that nobody wants because by then you’ve lost most of the choices you previously had that could remedy the situation. It might be the case that if you yourself wind the company up, you end up in a far better situation.

The IP will be working to keep you able to influence what happens next, by providing options. If a difficult situation is allowed to drift on, the chances for rescue dry up and the options available diminish. There are key decision points - critical moments - during the insolvency process. If the correct path isn’t taken, the consequences are further damage to the business and the individual. That’s why early action, in terms of consulting an IP, can pay dividends.

So now we know there are some remedies, let’s face facts. Is your company or business going to make it?

Is my company insolvent?

Start with the most obvious test: can it pay its debts? Now’s the time to make a rough estimate of rent, VAT, PAYE, National Insurance, corporation tax, loans and overdrafts, lease agreements and creditors.

At this point, many directors have their head in their hands and feel that it’s hopeless. But if the company can raise money, for example, then it can pay its debts. It may also be the case that the company can come to an agreement such as a Company Voluntary Arrangement (CVA) which allows it to restructure, carry on trading and gradually pay off its debts. So this is one of the pivot points where an IP may take a different view from the director and may be able to point out paths away from insolvency.

Am I under threat of legal action?

One form in which a legal threat may manifest is a warning by a creditor that a winding up petition is going to be issued. This means that they are intending to ask the Business Court to stop you trading. This is a pretty nuclear option, both for the company and the creditor because if the petition is granted, a liquidator is appointed. More than that, the bank will almost certainly immediately freeze the company’s bank account, making it almost impossible to keep trading.

Her Majesty’s Revenue and Customs (HMRC) is probably the most worrying creditor to have. They will charge interest on any PAYE, VAT or National Insurance that is due. However, dealing with HMRC is easier for insolvency experts, who have the skill and experience to interpret the real intention behind the various communications HMRC will be sending you.

So my company is insolvent - now what?

If the company’s debts far outweigh its assets and cash, then the company is probably insolvent. Don't bury your head in the sand. Get an IP on your side, and face what has to be faced. Actually, you’ll feel an awful lot better once you’ve done this. Knowing the real score has a lot to be said for it because while you are avoiding the truth, you are stuck in the current situation. Once you’ve faced facts, particularly if you have your own IP at your side, you can move forward and get past this stage.

There are a lot of traps for the unwary and it is possible to dig yourself into a hole and break the law. The IP is there to make sure you don’t do any of that and to help you to move on with as little damage as possible to your life and your business. Because don’t forget that although the company may be dead, there may be plenty of life left in the business.

Be careful - there are things you must not do:

As the director of an insolvent company, you are under the spotlight and need to behave very carefully. You’ll need to show that you gave proper thought to the duty you owe the creditors. They have to be considered before the shareholders if the company is insolvent.

If you get this wrong, you can find that despite trading through a limited company, you have made yourself personally liable for some aspects of the company’s finances. Some examples of things you can’t do: you can’t choose to pay one creditor over another; you can’t sell assets belonging to the company; and there are many more such pitfalls.

Insolvency needn’t mean the end of the company:

Here’s the better news. Provided that you get expert advice early enough, there are options you can take that could mean both the company and the business survive, or that you close the company while protecting yourself.

Your IP will be able to run through the different ways of managing the company through this turbulent time. Let’s look at some.

Company Voluntary Arrangement (CVA):

This is the main alternative to formal company liquidation and it has the benefit that it can allow the company to continue trading. If you have a company, all the directors have to agree that this is what they want. Your IP will set up the CVA and will also administer it. The CVA consists of an agreement with the company’s creditors that if they allow the company to continue trading, it will use the new lease of life to pay them back.

It works like this. You appoint an IP. Within a month, they have to work out how much the company can pay, over what period. They’ll contact the creditors and invite them to a meeting to discuss the proposal and vote on it. Provided that creditors holding 75% of the company’s debt agree to the plan, the CVA can go ahead.

Your company is now solvent again and can trade. The company pays its debts to the IP, who runs the CVA on its behalf and pays the creditors. But just be aware that if you don’t meet your payment schedule, any of the creditors can apply to wind up the company.

There are many, many successful companies which have used this vehicle to get back on their feet after a bad patch.

Company Voluntary Liquidation (CVL)

But what do you do if the creditors won’t agree or if you feel there is no real prospect of the company returning to trading at a profit? The most common way to close a limited company that is not making a profit and is in financial distress, is Company Voluntary Liquidation.

The company ceases to operate and is struck off the register of companies at Companies House. Once you liquidate the company, its assets can be put to use to pay off its debts. Any money that is left after this goes to the shareholders. However, in practice, if the company has been having financial problems, HMRC is usually a major creditor and there is little left for distribution to the shareholders.

To carry out the CVL, the shareholders of the company need to meet and three quarters of them (by share value) have to agree to liquidate the company. The meeting passes this resolution and your IP becomes the liquidator of the company. You send the resolution to Companies House within the next 15 days and advertise it in the London Gazette. Your IP will help get all of that done.

Next you will need to have a creditors’ meeting and there are a number of hoops that must jumped be through in terms of who attends, what is discussed, forms that must be filled in and so on. Once again, your IP can advise on all of this.

Pre Pack Administration (PPA)

If this sounds like something from the supermarket shelf, it more or less is, in terms of insolvency anyway. It means that the directors sell the company and its assets to a third party or a trade buyer or, indeed, to themselves. This has the huge advantage that the business can continue trading and in many cases its customers or clients will have no idea that anything has been amiss. Suppliers can continue to be paid normally and this prevents a loss of confidence and allows business continuity.

However the process also allows the company to get rid of, or reschedule, any burdensome debts that are dragging it down and to renegotiate contracts that are too onerous to allow it to trade profitably. Prepack administration can therefore work well where a business is basically sound but some aspect of the business context has changed, making the business model unsustainable.

Sounds great, but you need to do this very early on in the insolvency process to take advantage of it. You can’t use the Prepack option if someone has issued a winding-up petition against the company. This is why IPs stress the absolute criticality of acting early.

There is a controversial aspect to this which is that since the directors have acted properly in putting the company into administration, there is nothing to stop them buying the assets of the company and continuing to trade. To some people this looks as though they have ditched the company’s liabilities and are carrying on regardless. However, Pre-pack can save employees’ jobs if the alternative is a company insolvency.

Furthermore, the government has somewhat tightened the rules where a company is being sold to the existing directors. There is now an independent opinion as to whether the sale is reasonable or not so that creditors have some transparency over what is happening.

Pre-pack administration is a rather more rapid and less costly option than some of the other company insolvency solutions. But it definitely isn’t simpler, so the IP will again earn their money in making sure that all the proper measures have been taken.

Summary:

Hopefully this explanation has helped to demonstrate that however hopeless you feel the situation is, there are ways to manage it with expert help that can offer some hope going forward. Appointing an IP is definitely the first step in getting on top of things, and moving forward to the point where you are able to look ahead and feel positive again.

You’ll have seen from some of the options discussed, that timely engagement with a professional is key to getting the best possible outcome. If you’re awake in the middle of the night tonight, get up and send an email to appoint your IP. Then go back to bed and look forward to a calmer tomorrow, knowing that you have someone to guide you through the process. They will try to rescue your business and deliver the best outcome for you