For indebted company directors, whether that debt could close their company can be one of their biggest worries. Knowing you’re unable to repay what you owe is one thing, but you should also understand what your creditors can and can’t do, and how to deal with that debt before it leads to a company’s closure. So, while a high level of debt can lead a company to close, it’s essential to know how and where you stand.
How do I know if my company’s in debt?
Company debt can be more than just a lack of money in the bank. The situation seldom arises overnight, with issues often accumulating over time. That said, some of the tell-tale signs of an insolvent business include cash flow issues, where a business has insufficient funds to pay bills and suppliers. The company could be behind on its HMRC contributions, as well as paying staff. Looking at your cash flow and balance sheets should help indicate whether you’re insolvent. If your company’s debts and liabilities exceed the value of its assets, including cash in its bank account, your company may be insolvent.
What can my creditors do?
Another way to determine a company’s solvency is to check for legal action—specifically, county court judgements (CCJs), statutory demands, or winding-up petitions (WUP).
If you owe your creditors money, they may contact you via phone, post, or email to remind or encourage you to repay. They could even send debt collectors. Additionally, if you ignore reminders, your creditors are within their right to take legal action to recover what you owe.
There are rules and restrictions regarding what kind of debts these legal procedures can be used for, and the amounts owed. For example, a creditor can file a winding-up petition—which freezes a company’s bank accounts and often means an immediate cease in trading—but only if they can prove that company owes more than £750.
Can anything stop my company closing?
While the burden of these debts can be stressful, especially if there’s no realistic prospect of repaying them, they don’t automatically mean your company has to close. Several arrangements and processes exist to help keep companies trading and recover from insolvency. For example, a Company Voluntary Arrangement (CVA) can help your company repay what it can afford at a tailored rate over five years. The company continues trading with protection from creditors for the arrangement’s duration. This process won’t necessarily work for every company; other processes are available and may be more suitable depending on your company’s circumstances.
Going into insolvency is rarely, if ever, a pleasant experience. The worst thing you can do if your company becomes indebted is to bury your head in the sand. If you want to stop your debts closing your company, you must act sooner rather than later. Looking at your company’s balance sheet can identify the source of your financial problems, and help you decide the course of action best for your circumstances. You should understand that without the protection offered by recovery or closure arrangements, your creditors can either remind you to repay or take legal action. The severity of said legal action may depend on the type and amount of debt and could ultimately lead to the company being forced into compulsory liquidation.