Finding out that your company is in debt and unable to repay its liabilities when they fall due can be an extremely stressful experience for any director. If you find yourself in such a situation, it might be tempting to bury your head in the sand and hope that the problem will go away. However, if you want to stand the best chance of surviving insolvency, you should take decisive action to alleviate the company’s debts, or, if the company hasn’t a feasible chance of recovering, it might be best to close it in an orderly manner, draw a line under the insolvency and allow you to move on.

What can happen if I don’t pay my company’s debts?

If you don’t pay your company’s debts as and when they fall due, your creditors can take action to recover what you owe them. Depending on your relationship with the creditor, they may not resort to formal channels immediately. You may receive repayment reminders by phone, post, or email to your business address.

If you ignore these reminders, your creditors could escalate their recovery action to formal demands, like Statutory Demands and County Court Judgments (CCJs). The latter of these can cause significant harm to your company’s reputation if not dealt with immediately. It will stay on your company’s credit file for six years if you don’t deal with it in the time specified in the judgment’s paperwork. Visits from debt collection agencies and even bailiffs may follow.

If you continue to ignore these demands for repayment, your creditors can further escalate their recovery efforts. They can resort to the most extreme form of debt recovery: a winding-up petition. They can file these if your company owes more than £750. If the petition goes unchallenged, it becomes a winding-up order, which forces the company into compulsory liquidation and freezes its bank accounts, making trading impossible.

Fortunately for directors of limited companies, that incorporation provides limited liability protection. This means that any debt will stay confined to the company and prevent personal financial losses as long as you’ve acted in the company’s best interests.

What can I do about my company’s debts?

While the above may sound scary, the good news is it may be possible to alleviate your company’s debts if you act fast enough. Naturally, you might want to save the company, but it’s important that, during these potentially difficult times, you step back and consider whether trying to prop up a struggling company is feasible.

Depending on your company’s situation, you could have several options.

Repay the company’s unsecured debts in affordable instalments
If your company has a viable business model with the potential to be profitable if not for its burdensome debts, it may be possible to repay those unsecured debts in instalments tailored to its affordability. The company continues trading for the arrangement’s duration, helping it maintain its position in the market and goodwill with customers. The arrangement generally lasts five years, and once it concludes, any of the company’s remaining unsecured debt is written off.

Restructure the company
If the debts are more substantial, or the company has deeper-rooted problems that repayment alone won’t fix, the company may benefit more from administration. During this process, a licensed and regulated insolvency practitioner (IP) investigates the company’s affairs while making the changes necessary to return it to a profitable state. The IP must be convinced:

- The company could be rescued as a going concern.

- Administration would achieve a better result for creditors than if the company was liquidated.

- The company has sufficient assets to distribute to the creditors.

Close the company
If creditor pressure is of such a level that recovery isn’t feasible, or if you no longer want to run the company, you could explore liquidation. The most common form of liquidation is a Creditors Voluntary Liquidation (CVL), and it is often preferable to having creditors force the company into compulsory liquidation. During the process, an IP closes the company in an orderly manner, writing off its unsecured debts and putting a stop to all legal action and creditor pressure. Employees can claim what they’re entitled to, and the process draws a line under the company’s insolvency once it is closed.

What happens after liquidation?

Once your company is liquidated, a line is drawn under the debts, which die with that company’s closure. What happens next depends on what you want for the future and your conduct while acting as a company director.

As you and your limited company are separate legal entities, in most circumstances, you won’t be held personally liable for its debts. However, that could change if you’ve committed wrongful trading. Wrongful trading covers a range of activities, including taking deposits while knowing that the company couldn’t provide what it was promising, or if you’re found to have traded whilst insolvent.

The same could apply if the company has an outstanding Directors Loan Account at the time it became insolvent, or if you signed personal guarantees to secure finance for the business.

If you’ve fulfilled your duties as a director and acted in the best interests of your company and its creditors, you could be free to move on once the company closes. From there, you could pursue employment or start a new business.

To summarise

Realising that your company is insolvent is a challenging ordeal, but by taking the right steps forward, you can work towards either saving the company or closing it in an orderly manner before the creditors force your hand. Ignoring the problem only exacerbates it, potentially leading to greater creditor pressure, including CCJs, visits from bailiffs, and even compulsory liquidation.

Tackle your company’s issues as soon as possible and contact a licensed IP, who can guide you towards the right option for your company. This could be through repaying in affordable amounts, restructuring the company, or through a voluntary liquidation.

By acting responsibly and in your company’s and its creditors’ best interests, you can limit the consequences for you personally and move on.