Options for Businesses Struggling to Pay Creditors
If you’ve reached a stage where you can’t pay creditors or the pressure is becoming overwhelming, my advice is to seek advice from a licensed insolvency practitioner as soon as possible.
Many directors don’t realise that when a company becomes insolvent, directors have a legal obligation to prioritise the interests of creditors[1]Trusted Source – GOV.UK – Director information hub: Director duties upon insolvency. This means avoiding actions that could worsen their position. Failing to do so could result in serious consequences further down the line, including being made personal liability for some of the losses if it’s found you acted irresponsibly (wrongful trading).
Contacting an insolvency practitioner will give you a clearer sense of the options available to you, which include the following:
Company Voluntary Arrangement (CVA)
Company Voluntary Arrangement (CVA) is a powerful tool for directors of companies struggling with debt[2]Trusted Source – GOV.UK – Company Voluntary Arrangements. It provides a legally binding agreement between the company and its creditors, allowing the business to repay a portion of its debts over an extended period, usually lasting between 3 to 5 years. One of the key benefits of a CVA is that it offers protection against legal action from creditors, as long as the company adheres to the terms of the arrangement.
For directors, a CVA can be a valuable lifeline, providing the breathing space needed to restructure the business and return to profitability. By entering into a CVA, directors can demonstrate to creditors that they are committed to repaying debts and turning the company around. This can help to preserve important business relationships and maintain the confidence of suppliers, customers, and other stakeholders.
Another advantage of a CVA for directors is that they can retain control of the company throughout the process. Unlike administration or liquidation, where an insolvency practitioner takes over the management of the business, directors remain in charge during a CVA. This allows them to implement the necessary changes and restructuring measures to improve the company’s financial position.
Administration
When a company enters administration, a licensed insolvency practitioner (IP) takes control of the business with the primary goal of rescuing it as a going concern.
One key benefit of administration[3]Trusted Source – GOV.UK – Put your company into administration for directors is the moratorium it provides against legal actions by creditors. Once the company is in administration, creditors cannot take any further legal steps to recover their debts without the permission of the court or the administrator. This protection gives the IP and directors valuable time to assess the company’s situation, explore potential rescue options, and develop a plan to restructure the business and repay creditors.
If rescuing the company as a going concern is not possible, the IP will focus on achieving the best possible outcome for creditors. This may involve selling the company’s assets to repay debts or, if necessary, winding down the business in an orderly manner.
Pre-pack Administration
Pre-pack administration is a powerful tool for directors looking to preserve the value of their struggling company and achieve the best possible outcome for creditors. As a subset of the administration process, pre-pack administration involves arranging the sale of a company’s business and assets prior to the appointment of administrators. This unique approach offers several key benefits for directors navigating the challenges of insolvency.
One of the main advantages of pre-pack administration is the speed and confidentiality with which it can be executed. By arranging the sale of the company’s assets behind closed doors, directors can avoid the negative publicity and uncertainty that often accompany a traditional administration process.
For directors, pre-pack administration can also provide a pathway to continued involvement in the business. In many cases, the sale of the company’s assets is made to a new company, often owned by the same directors or management team.
Creditors’ Voluntary Liquidation (CVL)
In a CVL, directors voluntarily decide to bring the business to an end, acknowledging that the company is insolvent and has no viable future[4]Trusted Source – GOV.UK – Liquidate your limited company. While this decision can be difficult, it can also provide a structured and transparent way for directors to fulfill their legal duties and minimise the risk of personal liability.
In a CVL, directors appoint a licensed insolvency practitioner (IP) to act as the liquidator. The liquidator’s role is to take control of the company’s assets, sell them off, and distribute the proceeds among the creditors in a fair and transparent manner. By working closely with the liquidator, directors can ensure that the process is carried out efficiently and in accordance with all relevant laws and regulations.
Another benefit of a CVL for directors is that it can provide a degree of closure and finality to the company’s financial difficulties. Once the liquidation process is complete and the company is dissolved, directors can move on from the stressful and time-consuming process of trying to rescue an insolvent business. This can allow them to focus on new opportunities or personal matters, knowing that they have done their best to address the company’s debts and obligations.
What Happens if a Limited Company Can’t Afford to Pay its Debts?
When a limited company is unable to pay its debts as they fall due, it is important to understand the potential consequences and the steps that creditors, including HMRC, may take to recover the money owed.
Statutory Demand – If your company owes a creditor £750 or more, they can serve a statutory demand for payment. This is a formal, written demand that requires your company to pay the debt within 21 days. If the debt is not paid or disputed within this timeframe, it can be used as evidence that your company is insolvent, and the creditor may proceed with further action.
County Court Judgment (CCJ) Creditors may also seek a County Court Judgment (CCJ) against your company. If granted, a CCJ orders your company to repay the debt according to the terms set by the court. Failure to comply with a CCJ can result in enforcement action, such as bailiffs seizing company assets.
Bailiff Action – If your company fails to pay a debt after a CCJ or statutory demand, creditors may instruct bailiffs to seize company assets to recover the money owed. Bailiffs have the legal authority to enter your company’s premises and take possession of goods, equipment, or vehicles to sell at auction to repay the debt.
Winding-up Petition – For debts exceeding £750, a creditor may petition the court to wind up your company on the grounds of insolvency. If the court grants the petition, your company will be forced into compulsory liquidation. The Official Receiver or an appointed insolvency practitioner will liquidate the company’s assets to repay creditors as much as possible before dissolving the company.
How Long can a Company Continue to Operate if it can’t pay its Debts?
The length of time a company can continue to operate when it can’t pay its debts depends on various factors, including the severity of its financial situation, the actions of its creditors, and the decisions made by its directors.
However, it’s important to note that allowing a company to continue trading while insolvent is a serious matter that can have legal consequences for directors.
In the UK, there are two main tests for corporate insolvency:
The Cash Flow Test: A company is insolvent if it cannot pay its debts as they fall due.
The Balance Sheet Test: A company is insolvent if its liabilities exceed its assets.
If a company fails either of these tests, its directors have a legal duty to prioritise creditors’ interests and take action to minimise further losses.
