What-happens-if-a-limited-company-goes-bust

Advice for directors of companies heading into liquidation

When a company faces difficulty in settling suppliers and regular bills or carries disproportionate liabilities compared to asset value, it may be deemed insolvent.

In the event of your limited company’s insolvency, your priorities as a director shift, necessitating a focus on the interests of creditors. This involves refraining from obtaining additional credit from suppliers and preventing further financial losses for customers and other creditors.

 

How to check if your company has gone bust

Three distinct tests for insolvency can elucidate the financial standing of your company:

I. Cash flow test

If cash flow is inadequate, and you struggle to meet supplier payments or pay your employees, your company is probably insolvent.

II. Balance sheet test

Balance sheet insolvency arises when a company’s overall liabilities, encompassing contingent liabilities, surpass the total value of its assets.

III. Legal action test

This test considers legal actions taken against the company, such as statutory demands or a winding-up petition. If there is ongoing legal action, it serves as a clear indication that the company is insolvent.

 

Your duties as director of an insolvent company 

Ceasing trading is crucial if your company fails an insolvency test. This action minimises additional losses for your creditors and helps you steer clear of accusations of wrongful trading if the company undergoes liquidation.

However, corporate insolvency doesn’t automatically imply liquidation. Consult with a licensed insolvency practitioner (IP) for guidance on the next steps. Numerous official rescue and recovery options exist for insolvent companies, along with informal measures to enhance business cash flow and restore profitability.

 

Rescuing your company if it’s gone bust

I. Company Voluntary Arrangement (CVA)

If a licensed insolvency practitioner deems the company viable for the long term, a Company Voluntary Arrangement (CVA) could be a viable option. In this scenario, the IP negotiates with creditors to establish a legally binding instalment plan. This safeguards the business from closure, allowing it to trade its way out of financial difficulty.

II. Time to Pay (TTP) arrangement

Tax debts often contribute to companies facing financial difficulties, but it’s crucial to understand that you might have the option to repay arrears gradually. HMRC operates a Time to Pay scheme and can provide eligible businesses with additional time to settle payments without incurring financial penalties, usually extending up to 12 months.

III. Alternative funding

Securing ‘traditional’ bank loans becomes challenging for financially struggling companies. However, alternative lenders might offer assistance. For instance, if you own valuable assets but lack cash, a sale and leaseback arrangement could enhance your working capital by providing a cash lump sum.

These are three potential avenues to explore if you think your company is facing financial distress. In dire situations where rescue isn’t feasible, voluntarily placing your business into liquidation becomes the optimal choice.

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Liquidating an insolvent company

When a company faces a decline and necessitates liquidation, an inquiry delves into the causes of its failure. As a company director, it’s crucial to cease trading and prioritise creditors to evade allegations of wrongful trading.

Voluntarily initiating liquidation underscores your commitment to fulfilling legal duties to creditors, potentially reducing the risk of disqualification or personal liability for business debts.

Opting for a Creditors’ Voluntary Liquidation (CVL) also grants some control over the process, particularly when compared to compulsory liquidation. Moreover, if your business undergoes liquidation, you might qualify for director redundancy pay if you’ve received a regular salary under PAYE.

If you suspect your company is facing financial distress, consider the following steps:

  • Confirm the company’s official insolvency status by seeking urgent professional insolvency help to explore your best options.
  • Cease trading to avoid complications with strict UK insolvency laws.
  • Assemble all relevant documentation and management information to present a clear picture of the situation.

 

Vanguard Insolvency, as insolvency experts, can offer trustworthy professional guidance if your business is declining. Feel free to contact us to arrange a same-day, free-of-charge consultation.

David Jackson MD
Senior Partner at Vanguard Insolvency Practitioners | Website

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.