By Alex Megaw, Managing Partner and Insolvency Solicitor

Financial difficulty. Corporate Insolvency. Liquidation. Words that company directors do not want to hear or read. Though, if you are a company director and you are reading this, then you have possibly already got some alarm bells ringing in your head.

A company is considered to be insolvent if it does not have enough assets to cover its debts (i.e. value of assets is less than amount of liabilities), or if it is unable to pay its debts as they fall due.

The law provides for two types of outcomes for an insolvent company. One is a ‘rescue’ mission or proceeding. The aim is simple – to enable all (or part of) the company’s business to continue trading. The other outcome is liquidation. This is the ‘end game’ in insolvency whereby the company ceases to trade and is wound up, either voluntarily, or by an order of the court.

Why do I need insolvency legal advice?

Directors have a legal responsibility to ensure that the finances of a company are properly handled and understood. It is also the responsibility of the company director to understand the issues of insolvency. That is not to say that as a director, you need to have a thorough understanding of the complexities of the law or indeed be able to apply it in all its glory! You do however need to know when your company is in potential difficulty and get advice as soon as possible to give the business the best chance of being rescued.

Liquidation – Don’t DIY

In the event that the company goes into liquidation, it is much wiser to have professional representation, as the process is time sensitive. It moves quickly, deadlines are imposed, opportunities for recovery are minimal and the penalties can be severe;

  1. If a creditor is unable to recover a debt of more than £750 then they may issue a statutory payment demand notice, which gives you 21 days to repay the requested amount.

On occasions the creditor will skip this step and go directly to sending a winding up petition to court.

  1. If you fail to make payment, the creditor is likely to send a winding up petition to the court, asking that the business be closed down and its assets sold to pay the debt. To make this application the creditor will have to pay a hefty deposit to the court alongside a court fee. Be under no illusion – the creditor wants the company to be wound up. Formalities are followed regarding service of the petition and advertising in local papers, and the bank can freeze the company’s assets.

There is a glimmer of hope here. If you’re quick enough, you may be able to come to an agreement through a creditors voluntary arrangement (CVA), which could renegotiate payment terms. You may even be able to convince the creditor to back out of the winding up process. These negotiations are most likely to succeed with the professional representation of an unemotional, third party who is much less likely to damage relationships that have, due to lack of payment, soured.

  1. The court will then make its decision. If a statutory payment demand was issued and no payment made, then the court is almost definitely going to rule in favour of winding up. Your opportunity to negotiate an agreement has gone.

What’s the risk to me as company director?

When the company’s finances are under stress and corporate insolvency proceedings are ongoing, it can easily become the case that the directors may face personal liability or disqualification for decisions they make without fully understanding their duties to creditors (including payment to creditors) and the legal consequences of their actions (or inactions).

When a company becomes insolvent, the directors’ primary duty shifts from the shareholders to the creditors. This includes ensuring the sale of as many of the company’s assets as possible so that the proceeds can be used to repay its creditors. The insolvent company must ensure that there is no further depletion of assets (or increase in liabilities). If directors knowingly cause or allow an insolvent company to trade, then they risk the prospect of a wrongful trading allegation, alongside serious personal and professional costs upon completion of the liquidator’s investigation.

What to do next?

If your business is in financial difficulty (or even if you suspect that it is) then you need sensible commercial and legal advice fast. The sooner a problem is identified and addressed, the sooner it can be rectified and the best outcome achieved. So, whether you are a company director seeking clarity on your duties, advice on your available options, or in receipt of a petition or order and need immediate legal representation, you should be looking for specialist advice without delay.