The pitfalls of insolvent trading

Trading while insolvent can be a grave concern for directors in the current financial climate; there are many dangers that can affect directors of insolvent companies, some of which can lead to very serious and life altering consequences. It is important to be able to recognise the signs of insolvency and act upon them immediately in order to limit any damage to the business and director.

Firstly let’s explore exactly what being insolvent means for a business.

It can be established whether a business is insolvent or not by answering three simple questions.

1. Can the company pay its debts as and when they fall due?
2. Does the company owe to its creditors more than the worth of its assets?
3. Has the company had any CCJ’s or statutory demands made against it?

If the criteria of these questions cannot be satisfied then the business is more than likely insolvent and urgent advice should be sought from a licensed insolvency professional. Even if just one of the criteria cannot be met it still indicates insolvency.

When an insolvent state is determined it is important to act quickly as it immediately opens directors up to a numbers of dangers.

Personal Guarantees

A creditor with a personal guarantee will pursue the guarantee should a limited company find itself in financial difficulties. Whilst the life of a company might come to an end by way of formal insolvency procedures such as Creditors Voluntary Liquidation or being subject to a Winding-Up order, the creditor can still rely on the Personal Guarantee to look to recover any sums still outstanding from the person that gave that guarantee.

Disqualification

Directors may be prevented from holding a responsible post for up to 15 years if the Insolvency Service deems them unfit to be concerned in running a limited liability company.

Personal Liability for Wrongful Trading

Failure to take advice and implement appropriate procedures can make the directors potentially personally liable for the company debts as a result of the wrongful trading provisions in the Insolvency Act 1986. The amount the directors are likely to be liable for if found guilty is the actual amount that creditors have lost as a result of continuing to trade when they should have known the company was incapable of surviving in its current format.

Recovery of an overdrawn Directors Loan Account and Dividends

If your limited company should enter into Liquidation, the Liquidator will look to realise any assets. It might not have occurred to you but if you have an overdrawn Director’s Loan Account, this will be considered an asset of the Company and will be vigorously pursued by a Liquidator for the full amount that is overdrawn.

Fines or Imprisonment

Breaking the terms of disqualification can impose a fine or imprisonment

If you think your business may be insolvent or if you have concerns regarding any of the possible dangers to directors above then it is important you seek professional advice as soon as possible. Focus Insolvency Group are licensed insolvency practitioners and are able to offer free impartial advice to business owners and individuals alike, contact us today.

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Winding Up Petitions

Have you had a client issued with a Winding Up Petition (WUP) against their company?

In these situations it is extremely important to seek professional advice at the earliest opportunity in order to protect your client’s company and their interests as much as possible.

Due to the costs and implications involved in a WUP, issuing one to a company suggests that the creditor is very serious about recovering any money owed to them and probably sees this as a last resort after breakdowns in the business relationship. HMRC have been very quick in recent months to issue WUPs. Any creditor with a debt of £750 or more can move to issue a WUP.

A WUP, issued by HMRC or another creditor, is by far the most damaging and serious course of action that can be taken and will result in its closure and assets sold/employees dismissed if left to run its course in court with no defence or strategy/ proposal suggested as an alternative.

If the company is viable going forward and is to be saved then immediate action is essential! The very act of presenting a petition is likely to result in the bank account being frozen, which can cripple trading.

If the debt can be paid in full then this should be done immediately unless the debt is disputed, in which case legal representation is essential. Otherwise there may still be time to propose alternatives to the WUP such as a Company Voluntary Arrangement (CVA) or Administration. These are powerful tools to help rescue a company from collapse.

It is vital to seek professional insolvency advice by this stage to ascertain if the WUP can be halted and alternative arrangements made to pay the debt or risk the company being handed over to the Liquidator.

There may also be personal liability implications to the director or board members of a company issued with a WUP if personal guarantees have been made within the business or they are implicated in trading whilst insolvent.

If any of your clients have been issued with a WUP then do not hesitate to get in touch with us and we can work together to save the employees jobs and rescue the company.

MVL – A Tax Efficient Exit Route

A Members Voluntary Liquidation (MVL) is the formal procedure for winding up and liquidating a ‘Solvent’ company.

This means that the company has sufficient assets to cover its debts and everyone will be paid in full, with any remaining funds distributed to shareholders. As the company is solvent entering into MVL is voluntary.

Because the process is voluntary and the business is solvent, the process is often relatively straightforward and often costs less than a creditor’s liquidation.

When a company is ‘dissolved’ through Companies House it is often a forgotten fact that a creditor could apply to have the company restored within a period of 20 years from dissolution, however this is not the case if the company is closed through Members Voluntary Liquidation.

As from 1st March 2012 if a company undergoes an informal winding up procedure, HMRC will allow distributions up to a maximum of £25,000 to be treated as capital. Should total distributions exceed £25,000 then distributions will be treated as dividend income.

However, should the company enter into Members’ Voluntary Liquidation, the £25,000 limit will not apply and distributions will be treated as a capital receipt and have the tax advantage of being subject to capital gains tax rather than income tax.

The costs of an MVL will be paid from the funds at bank and will significantly save you money when compared with the tax savings.

We strongly recommend that independent professional tax advice is taken prior to a company entering an MVL for this reason (we can help you find the best advice).

MVL Benefits

•  Provides a potential tax efficient exit route to shareholders
• Provide a managed exit as the shareholders control the process
• Useful for shareholders who are considering retirement
• Closure of a company when it has come to the end of the project it was formed for
• Enables a group of companies to close down a subsidiary which is no longer required

The MVL Process

Firstly, the Directors must make a ‘Declaration of Solvency’ which states that the company is solvent and is able to repay its debts together with statutory interest within 12 months.

Once the ‘Declaration of Solvency’ has been made, a meeting of the shareholders is called to pass the necessary resolutions and appoint a liquidator. An authorised Insolvency Practitioner must be appointed as the liquidator and it is their role to realise all the assets of the company and distribute to creditors in the correct order.

Following settlement of all the companies’ debts, the Liquidator will then distribute the remaining funds between the shareholders.

If, during the course of an MVL, the liquidator finds that the company will be unable to pay its debts in full within the period stated in the ‘Declaration of Solvency’, he must call a meeting of creditors to take place not later than 28 days after the day on which he formed the opinion. The process is then converted to a ‘Creditors Voluntary Liquidation (‘CVL’)’

What Next?

If you would like to discuss any of the options available to your company including a Members Voluntary Liquidation then remember that Focus Insolvency Group can offer free impartial advice and guidance. Get in touch or leave a comment below.

The CVL Process

Last week we brought you part one of our information on Creditor’s Voluntary Liquidation (CVL), this week we conclude with part 2 – the CVL Process.

You can catch up with any of the blogs in our ‘options available to struggling limited companies’ series by clicking on the links at the end of this blog.

Liquidation Process

Stage 1: Advice and Decisions

An insolvency advisor will help you explore your options. They will discuss the company’s financial position with you, review the company’s viability, financial forecasts and background and explain the various insolvency procedures, such as a voluntary liquidation (CVL), Company Voluntary Arrangement (CVA) or even administration and discuss which would be appropriate for your company.

All initial advice and guidance will be free of charge.

Stage 2: Creditors informed of CVL

Your insolvency practitioner will act as the advising member and proposed liquidator. At this stage all creditors and shareholders are written to and informed of your wishes to put the company into voluntary liquidation.

Stage 3: Creditors meeting

The insolvency practitioner writes to the creditors and shareholders informing them of a creditors meeting. The director(s) act as a chairman and the insolvency practitioner conducts the meeting. In most cases no creditors attend the meeting but if they do, questions may be asked over the cause of the company failure.

A statement of affairs that has been prepped by the insolvency practitioner with the help of the directors is given to creditors at the meeting. The creditors officially agree the appointment of the liquidator at this time. Your insolvency practitioner will be the proposed Liquidator however ultimately the appointment decision lies with company creditors (hence the name Creditor’s Voluntary Liquidation).

Stage 4: Liquidation and asset sale

The liquidation commences properly at this point. The assets of the company are sold, the outcome of this sale is reported to the creditors and if any value is left after the liquidation process, payment is made for settlement of the creditor’s claims.

Once the company is in liquidation, your role as a director would cease and your involvement from thereon would be minimal.  You will have to pass over any company books and records and complete a director’s questionnaire regarding your role within the company.

After CVL

After the company is liquidated you do still have the option of being a company director, there are however some strict rules around the reuse of a company name and restarting the same business. Professional advice should be sought in the case of a ‘Phoenix Company’.

If you are planning to set up a new company and feel the old company’s assets are of benefit to your new venture then you will be given the opportunity to make an offer for any assets providing it reflects the valuation figures.

Otherwise, you will be free of the company debt and able to move out without the burden.

What Next?

If you would like any help or advice with decisions on liquidation or any of the other insolvency and turnaround options we have covered in this series then remember that Focus Insolvency Group are here to offer you free and impartial guidance. Get in touch today.

Next week we will be gathering together everything we have discussed in our ‘options for struggling limited companies’ series so far so you can see all the choices in one place.

If you have any questions or feedback please get in touch or leave a comment below.

Related Blogs

Is My Company Insolvent?

Business Health Check

Turnaround Advice

About Company Voluntary Arrangements

CVA Process

Is Administration Right for your Company?

About Creditor’s Voluntary Liquidation

Options Available to Struggling Limited Companies  – Round Up

Image from freedigitalphotos.net

About Creditor’s Voluntary Liquidation

Welcome to our latest blog in this series about the options available to insolvent limited companies. We are a couple of days late this week due to the Jubilee Celebrations; we hope you had a really great extra-long weekend.

You can catch up with the rest of the business insolvency series in the posts linked at the bottom of this blog.

We conclude our look into business insolvency with part one of two blogs about Creditor’s Voluntary Liquidation (CVL). Part 2, the CVL Process will be published this coming Monday.

If the results of your Business Health Check aren’t very promising and you think that continuing to trade might be just too much for you to handle then CVL is something you might want to look into.

 What is a Creditor’s Voluntary Liquidation?

Creditor’s Voluntary Liquidation is referred to by a number of other names, CVL, voluntary liquidation, business bankruptcy or simply just liquidation.

Sometimes a company is overwhelmed by crippling debt, it is not able to trade out of cashflow problems and does not have enough money to pay its debts as and when they fall due. In these circumstances the company is insolvent and the only appropriate course of action is for the directors to cease trading and seek professional advice.

A voluntary liquidation is the most common way for directors and shareholders to deal voluntarily with their company’s overwhelming debts.

A voluntary liquidation would stop demands from company creditors and allow the company to write off 100% of its debts. It would also enable the directors to close the company as soon as possible.

If you have been experiencing pressure from creditors such as bailiff action or a winding up petition you can still put the company into Voluntary Liquidation. Once your insolvency practitioner has given notice to the company’s creditors, any bailiff action against the company assets is void and therefore they tend to put all action on hold pending the appointment of a Liquidator.

When might a CVL be appropriate over other forms of insolvency and turnaround advice?

With a voluntary liquidation the company will cease to trade, its assets are realised (sold) and employees dismissed.

Where it may be possible to trade out of the situation, or continue in business, other insolvency procedures such as company voluntary arrangement (CVA) need to be considered. It is for this reason that directors should contact a licensed insolvency practitioner who can guide them through the options.

Voluntary liquidation is most appropriate where:

• The company is insolvent (use these three quick tests to find out if your company may be insolvent)
• A CVA is not appropriate
• The company does not appear to be viable even if restructured
• The directors do not feel they have the finances or determination needed to rescue the company

Advantages of CVL

Voluntary liquidation can have a number of major advantages for directors and shareholders of a company that has overwhelming debt problems.

The main advantages are:

•  Allows you to step away from the insolvent company with no further liability (unless debts have been personally guaranteed)
• Write off 100% of what the company owes
• It shows creditors you have done the right thing by taking professional advice and can steer you away from the implications of wrongful trading
•  A very quick, cost-effective way of formally closing down a company and complying with your duties as a director
• Can be funded using company assets such as cash at bank, sale of assets, book debts etc.
• Employees and potentially directors can make a claim from the National Insurance Fund and receive payments for outstanding wages, holiday pay, pay in lieu of notice and redundancy
• Stop demands from creditors
• Provide peace of mind to the directors and enable a fresh start free from debt

Entering a voluntary liquidation means that your insolvency practitioner will become the point of contact for all your creditors, this means that you do not have to take any more harassing phone calls and any threatening letters can simply be forwarded on for them to deal with.

It is the liquidator’s (Insolvency Practitioner’s) duty to deal with all creditors and realise the company assets. The directors are removed from office and are free to make a fresh start.

What Next?

If you would like any help or advice with decisions on liquidation or any of the other insolvency and turnaround options we have covered in this series then remember that Focus Insolvency Group are here to offer you free and impartial guidance. Get in touch today.

On Monday we will bring you part 2 of our guide to CVL’s with a look at the process of liquidation. If you have any comments or feedback please let us know in the comments below or send us an email.

Related Blogs

Is My Company Insolvent?

Business Health Check

Turnaround Advice

About Company Voluntary Arrangements

CVA Process

Is Administration Right for your Company?

The CVL Process

Options Available to Struggling Limited Companies  – Round Up