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If you are under increasing pressure from trade suppliers and creditors such as HMRC, you need to act quickly. When you’re suffering from cash flow problems and struggling to make payments on time, it could be a temporary problem. Cash flow shortfalls are common for all types of businesses. You may be waiting for a large customer payment to clear your debts or have overspent on stock and drained your working capital. In that case, short-term funding options such as an overdraft, invoice finance or asset-based lending could provide a cash flow injection to bridge the gap.
However, your financial struggles could be a sign of something more serious. If your company cannot pay its debts when they’re due, or the value of its liabilities outweighs its assets, it is technically insolvent. At that point, you should cease trading and seek professional advice from an Insolvency Practitioner.
The situation can escalate quickly if you do not pay supplier invoices when they are due. This is how it can develop:
If the company enters Compulsory Liquidation, an Official Receiver will be appointed to wind it up and investigate your conduct as a director. You could face serious legal and financial consequences if they find examples of improper or unlawful conduct.
If you cannot pay your suppliers, it’s not a situation that will simply go away. Ignoring their emails and calls will only make the situation worse and will likely lead to its escalation. Instead, you should keep the lines of communication open and be honest about your position. You may be surprised by their willingness to give you more time to pay.
A good starting point is to try to make an informal payment agreement by preparing a letter outlining your position and explaining how much you can afford to pay over a specific period. Alternatively, you can explore the various funding methods available to raise the capital to pay them in full. Regularly updating your suppliers on your situation will help to keep the relationship amicable, minimise the pressure and slow the escalation.
If a supplier will not accept an informal payment plan and you cannot find suitable funding, contacting a licensed Insolvency Practitioner is a sensible next step. They will assess the business’s financial position, discuss your options and guide you on the most appropriate path.
Engaging an Insolvency Practitioner will also help to protect your position personally. If you’re unable to pay your debts, you may be tempted to trade your way out of trouble. However, in doing so, you could accrue further debts that worsen the position of your creditors. Alternatively, you may prioritise certain creditors or suppliers ahead of others to keep the business operating.
Both of these courses of action can create legal risks if your company is insolvent. An Insolvency Practitioner will explain your legal duties and advise you on the risks that could lead to adverse consequences like director disqualifications and personal liability issues.
If you have significant debts with multiple creditors, including suppliers, and cannot pay what you owe, the company is likely to be insolvent. In that case, an Insolvency Practitioner can implement various formal insolvency procedures to rescue, sell or close your business. The best option for you will depend on the extent of the business’s debt problems, its future viability and your appetite to continue trading.
If the company cannot pay its debts but its underlying business model is sound and it has a good prospect of making a recovery, you may be able to make a Company Voluntary Arrangement (CVA) with your creditors.
A CVA is a legally binding agreement that allows you to repay your debts over a typical period of three to five years in monthly instalments while you continue to trade. An Insolvency Practitioner will create an affordable repayment plan for your creditors. If 75% (by value of debt) of your creditors agree to your proposals, all interest and charges on the debts will be frozen and your creditors will no longer be able to contact you or take legal action.
If you are facing severe pressure from suppliers and other creditors, Company Administration could be the best option. It protects the company from legal action while the administrator (an Insolvency Practitioner) explores ways to rescue and restructure the company.
If the creditors agree to the administrator’s proposals, the administrator will take control of the company’s business and assets. Depending on the situation, they will try to recover the business and return it to the directors. If that’s not possible, they will sell all or part of the company or work to achieve a better result for the creditors than if the business had been put straight into Liquidation.
Pre-Pack Administration could be an option if the business is struggling but has valuable assets and a strong customer base. In a pre-pack sale, the business or its assets are sold to a new buyer and the proceeds are used to repay the creditors.
The buyers are often connected to the original company. For example, they may be the company’s shareholders or directors. They use their personal funds to buy the original business’s assets so they can continue trading under a new name.
Pre-Pack Administration saves jobs and allows for the quick and smooth transfer of business, which is vital in some industries. However, it is only an option if it is in the best interests of the creditors.
If the company has no realistic prospect of a recovery or the directors no longer want to run it, an insolvent liquidation procedure called a Creditors’ Voluntary Liquidation (CVL) is usually the best way to close it down.
You initiate the process by appointing an Insolvency Practitioner to act on your behalf. They will wind down the business’s affairs and sell its assets to repay the creditors as far as possible. Any outstanding debts will be written off, and all pressure from suppliers and other creditors will cease. Finally, the Insolvency Practitioner will strike the company from the official register at Companies House and it will cease to exist.
The benefit of a CVL is that by closing the company voluntarily, you show that you are taking your obligations to your creditors seriously and doing what you can to minimise debts and protect their interests. That reduces the risks of adverse consequences, and you may also be entitled to director redundancy pay.
If supplier pressure is becoming too much or you are worried your company is insolvent, please contact our team of Insolvency Practitioners immediately. We will assess your circumstances, explain your options and provide reassuring advice. We can also implement formal insolvency procedures such as Administration and Liquidation and manage the process from start to finish. Get in touch for a free consultation or arrange a meeting at one of our offices throughout the UK.
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If you are considering liquidation for your company, taking expert advice at an early stage is crucial. At UK Liquidators, our team of licensed insolvency practitioners are committed to providing limited company directors with the help and advice they need to make an informed decision.
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