When a business faces financial difficulties, the decisions made by its directors can have significant consequences for the company, its creditors and its employees.
Understanding the options available and seeking advice early can help businesses make informed decisions about their future.
Keira Stone, CEO of Kingsley Bond Solicitors, said recognising financial difficulties can be one of the most challenging periods for any business. But understanding the options available and seeking advice can make a real difference.
She said: “Business insolvency presents significant challenges, but understanding your options can help you make informed decisions and provide the first step back towards a more positive position.”
Here, Keira answers some of the most common questions asked in this area:
- When is a company considered insolvent?
A company is generally insolvent when it cannot pay its debts as they fall due or when its liabilities exceed its assets, applying the relevant legal test.
Warning signs include overdue supplier invoices, unpaid taxes, cash-flow shortages and increasing creditor pressure. Identifying these problems early allows directors to explore potential solutions before the situation deteriorates.
- Can directors be personally liable for company debts?
Directors are not normally personally responsible for a limited company’s debts. However, personal liability may arise through personal guarantees, breaches of directors’ duties, wrongful trading or fraudulent trading.
Directors should seek legal advice if insolvency is approaching, particularly before transferring assets, making unusual payments or deciding whether to continue trading.
- What are directors’ responsibilities when a company becomes insolvent?
When a company is insolvent or approaching insolvency, directors must take proper account of creditors’ interests.
Responsibilities may include maintaining accurate records, assessing the company’s financial position and avoiding actions that improperly prejudice creditors. Directors should obtain professional advice to understand their obligations and minimise potential personal liability.
- Can an insolvent company continue trading?
Sometimes. A business experiencing temporary financial difficulties may recover through restructuring, additional funding or revised payment arrangements.
However, continuing to trade can create legal risks if it increases creditors’ losses. Directors should assess whether recovery is realistically achievable and seek advice before making decisions that could worsen the company’s financial position.
- What happens when a company enters administration?
Administration places the company under the control of an appointed administrator. The procedure aims to achieve a statutory objective, which may include rescuing the company or obtaining a better outcome for creditors than liquidation would provide.
Depending on the circumstances, administration can provide an opportunity to restructure operations, sell the business or preserve value.
- Can directors buy back their business through a pre-pack administration?
A pre-pack administration involves arranging a business or asset sale before an administrator is appointed, with completion shortly afterwards.
Such transactions can preserve jobs and business value. However, additional safeguards may apply when buyers are connected to the insolvent company. Directors considering this option should obtain specialist advice to ensure the transaction complies with applicable requirements.
- Can directors repay themselves before insolvency?
Directors should exercise caution when making payments while a company faces financial difficulties.
Certain transactions, including preferences and transactions at an undervalue, may be challenged by an administrator or liquidator. Payments involving directors or connected parties can attract particular scrutiny.
Taking advice before transferring assets or repaying director loans can help avoid unnecessary legal risks.
- What happens to employees and creditors?
Employees may face redundancy, although certain eligible claims for unpaid wages, holiday pay and other entitlements may be recoverable under applicable arrangements.
Creditors submit claims through the relevant insolvency procedure. The amount recovered depends on available assets, security interests and statutory creditor priorities. Unsecured creditors may recover only part, or none, of what they are owed.
- Can directors start another business after insolvency?
Yes, in many circumstances. However, restrictions apply to reusing the name of a company that has entered insolvent liquidation.
Under section 216 of the Insolvency Act 1986, restrictions generally apply for five years, subject to specific exceptions. Breaches can result in criminal consequences and personal liability for certain debts.
Directors should obtain advice before establishing a new business connected with their former company.
- What alternatives are available to liquidation?
Liquidation is not always the only option. Depending on the circumstances, businesses may consider:
- Company Voluntary Arrangements (CVAs): Formal agreements to repay creditors over an agreed period.
- Administration: A procedure that may facilitate rescue or a business sale.
- Restructuring: Renegotiating debts, securing investment or changing operations.
- Restructuring plans: Formal arrangements potentially available to eligible companies under the Companies Act 2006.
The appropriate solution depends on the company’s financial position, viability and creditor interests.
Kingsley Bond Solicitors can provide a point of contact for businesses seeking advice on financial distress, directors’ responsibilities and restructuring options, subject to confirmation of the firm’s services. Contact Kingsley Bond Solicitors to discuss your circumstances and explore the options available to your business.