How to spot if my company is insolvent

Sometimes companies encounter difficult periods where takings decrease, or unexpected bills come in. A company doesn’t become insolvent just because it isn’t making as much money as it did in the previous months, but it’s important to recognise the difference between when a company is just going through a difficult spell and when it is insolvent with its future at risk. It’s equally important to understand what action you, as director, should take to draw a line under the debts, whether that involves rescuing the company through a repayment arrangement, restructuring, or alternatively, voluntarily closing the company down. 

When is a company insolvent? 

A company is considered insolvent if it cannot repay its liabilities as and when they fall due. 

Occasionally, some companies could be what’s called ‘balance sheet insolvent’ as their incomings and outgoings affect their cash flow; the companies can still function and trade because they can repay what they owe. 

Directors should be aware if their company is solvent or insolvent, and, if the company is insolvent, they should take the steps necessary to minimise losses to the company’s creditors as soon as they know. 

What signs do you need to watch out for? 

If in doubt of a company’s solvent position, directors should check the company’s balance sheet and cash flow. An imbalance in these, or company liabilities exceeding the value of its assets is an early indicator that it could be insolvent. 

If your company is behind on repayments, creditors can send reminders prompting you to repay. 

These should be delivered during working hours and to a work address, phone, or email address and not the director’s personal contacts. Creditors could escalate their recovery action if you ignore these reminders and file County Court Judgements (CCJs) and statutory demands against the company. Ignoring these is ill-advised, as failure to challenge or pay a CCJ within the time specified in the judgement will damage the company’s credit file. This will make it harder for the company to obtain financial support and credit, and higher interest rates on anything it does secure. 

As the company’s director, you should never ignore these warning signs – the consequences of doing so could jeopardise the company’s future. 

What can you do if your company is insolvent? 

While this may sound scary, there are ways that you, as director, can limit the damage that insolvency could have on your company. 

As soon as you’re aware that your company is insolvent, you should speak to a licensed and regulated insolvency practitioner. They can offer business owners and individuals advice on tackling their debts and the appropriate course of action. 

Depending on your circumstances, you could have several options available, including formal repayment arrangements, administration, or liquidation. The first option is meant for limited companies where the core business within would be viable were it not for its burdensome debts. It involves the company repaying a portion of its debt, often over five years, and is managed by a licensed and regulated insolvency practitioner. Administration involves bringing in an insolvency practitioner to act as administrator, helping to manage the company and make the changes necessary to return it to a profitable state. Finally, liquidation involves closing the company in an orderly manner, drawing a line under the debts, and allowing the directors to start afresh.  

Not taking the appropriate action as soon as you find out your company is insolvent can, in the worst case, lead to creditors winding up the company through compulsory liquidation. 

Summary 

Although companies can go through turbulent periods, directors should know when their company has gone beyond being in a period of difficulty and into insolvency – when it cannot repay its liabilities as and when they fall due. Directors should look out for the signs of insolvency and take the steps necessary to minimise losses to creditors, which could involve one of several formal insolvency procedures. These are provided by licensed and regulated insolvency practitioners and could involve repaying the company’s debts in affordable instalments, restructuring the company to make it profitable again, or closing it in an orderly manner to draw a line under the debts. 

Full Editorial