If you think your company may be insolvent or may become insolvent it is essential that you seek the advice of a qualified, Licensed Insolvency Practitioner.

Speaking to an Insolvency Practitioner does not mean that your company will have to go into Liquidation or Administration, in fact, the earlier you speak to an IP the more business finance options he will be able to give you, - these could help your business survive.

The Insolvency adviser will also explain to you want you can and cannot do, this could save you money and help you avoid being banned from being a director.

A company is an insolvent company if it is unable to pay its debts as they fall due. If your company is insolvent you must take great care not to incur credit unless you believe the company will be able to settle the credit when due, you should not prefer one creditor to another one, or sell anything for less than its market value.

If you have guaranteed your company’s overdraft, particular care is needed.

Our Insolvency practitioners can advise you and help you find positive solutions to your company’s financial problems. They are not looking to close your company down; they aim to help Rescue it, if it has a viable future, through the use of informal or formal insolvency processes such as a Company Voluntary Arrangement.

Of course not all companies can be rescued, if your company has come to the end of the road, our Insolvency Practitioners will help you cease trading in a legal and controlled way, they will help you and your employees make claims from the Government Redundancy Fund, they will handle your creditors and maximize realizations for the benefit of all stakeholders. They will help you sleep at night!

Call us now for a free, confidential discussion.

Answer the three simple questions below to determine if you could be insolvent:

Is your company unable to pay its debts by their due date? Does your company owe more than it owns? Or are your firm's liabilities greater than its assets?

Has a creditor obtained a County Court Judgement, or a statutory demand that remains unpaid?

If the answer to any of these questions is YES, or could be in the near future, you should contact our panel now for immediate advice. Don't leave it too late - contact us and we can start helping you now

Insolvency is one of those words that strikes fear into business managers. In the worst case scenarios businesses need to be wound up and closed down, however in many cases the professional use of insolvency procedures can ensure the long-term survival of a business.

Voluntary Arrangements

Often a company with a healthy business can find itself with cash flow problems and creditor pressure due to a one-off event such as the insolvency of a major customer or a contract going badly wrong. A Voluntary Arrangement would normally last 3-5 years and would provide for repayment of up to 100% of the money due to a creditor out of future trade. Often faced with the alternative of receiving a reduced dividend in a liquidation creditors tend to be supportive (75% of votes need to be in favour). All creditors notified, whether voting in favour or not, are bound by the terms of the arrangement and are prevented from taking any further action. By deferring the current creditors, a Voluntary Arrangement can boost cash flow sufficiently to ensure the success of the business.

Administration

An administration order protects a company from creditors by way of a court order. An administrator is appointed to control the business and to make proposals to creditors.

Liquidation

Where a company needs to be liquidated we recommend practitioners who do this in a personal and sensitive way. They attempt to sell the remaining business and assets and by doing so, if possible, preserve some of the jobs and maximise recoveries for creditors.

The Insolvency Act 1986 and the Company Directors Disqualification Act 1986 consolidated legislation on Directors' responsibilities in relation to insolvent companies and introduced the new concept of wrongful trading which can potentially attract personal liability. Directors' responsibilities are onerous and they increase as the company faces insolvency.

This page will deal with some of the frequently asked questions which directors raise when a company is beginning to experience financial difficulties. For definitions of legal terms, see our Glossary

Am I a Director of a company?

A director is an individual or a corporate body who is properly appointed and registered as a director. The term also includes a "shadow director" being any person, which may include a corporate body, on whose instructions or directions the directors are accustomed to act, as well as those persons who hold themselves out as directors although not formally appointed as a director.

To whom do I owe a duty of care?

At all times, a reasonable standard of skill, care, honesty and good faith is owed to the company, its shareholders and employees. If there is any doubt over the company's solvency, a similar duty is owed to the company's creditors. Particular care needs to be exercised if you are the director of one or more companies in a group situation. There is a need to ensure that transactions between companies are in the interests of both of them and that any conflicts of interest are properly disclosed.

What are my responsibilities?

The Companies Act legislation sets out the responsibilities of directors. Any director is in effect a "trustee" of the company's assets in fulfilling his responsibility.

When does a company become insolvent?

A company is deemed to be insolvent when the company is unable to pay its debts either as they fall due or where the value of its assets is less than the amount of its liabilities including contingent and prospective liabilities.

What action should I take as soon as I become aware of the company's potential insolvency?

Take professional advice from an authorised insolvency practitioner to advise you of the various alternative courses of action.

What options does the company have if insolvency is looming?

The alternatives may include one or more of the following:

• examine business strategy
• injection or additional capital/sale of the business
• restructuring of the company's finances
• conversion of debt to equity
• discussion with company bankers
• company voluntary arrangement or scheme of arrangement
• administrative receivership (if appropriate debenture is in place)
• administration order
• creditor's voluntary liquidation
• compulsory liquidation

In examining the alternatives ensure you obtain advice from an authorised insolvency practitioner.

What must I be aware of once I know the company is insolvent?

• your duties to the company and its creditors
• wrongful trading
• fraudulent trading
• disposal of assets at an undervalue
• diversion of assets for your own use
• paying in customer deposits against the company overdraft
• paying certain creditors who are your close associates without considering the rights of other creditors
• allowing significant arrears due to Crown creditors such as PAYE, NIC and VAT to accumulate paying off creditors whom you have personally guaranteed

For which liabilities can I be personally liable?

• your own personal PAYE and NI deductions which are unpaid
• any unpaid income tax arising where you have taken cash drawings from the company
• any personal guarantees given on behalf of the company, most commonly to banks, finance companies, landlords and occasional major creditors

In addition you may subsequently be liable for the following, if the company is placed into administration or insolvent liquidation:

• any liability arising under a subsequent action for wrongful trading or misfeasance when the company is in liquidation
• any liability arising from an action for voidable preference where your position as director has improved against those of the general body of creditors within the two years prior to an insolvency
• any liability where you have benefited from a transaction at an undervalue and/or a preference

What is wrongful trading?

Wrongful trading is where directors, including shadow directors, carry on trading where they are or ought to be aware that the company cannot avoid an insolvent liquidation. The Court can then order contributions to the assets of the company from the directors.

What steps should I take to minimise the loss to the company's creditors when I become aware of its insolvency?

• protect assets
• incur no further credit
• make no further payments unless they are strictly necessary to preserve the value of the company's assets

Can I pay any creditors after I am aware of the company's insolvency?

You should only pay bills which are essential to protect the value of the company's assets for the benefit of the creditors. However, you should seek advice from an authorised insolvency practitioner, to protect your personal position, before making any payments. Examples of legitimate payments are premiums for short-term insurance of the assets or paying cash on delivery for food to protect livestock.

Can I sell assets after I am aware of the company's insolvency?

Once the company is insolvent, you should not sell assets to pay creditors. In exceptional circumstances, such as perishable foodstuffs, a sale of assets may be appropriate if supported by advice form an authorised insolvency practitioner and professional valuations.

Can I use the company's assets to repay the Bank and protect my personal guarantee?

Once you are aware of the company's insolvency, no creditor should be paid in preference to any other. Any director who has guaranteed the company's bank borrowings has a conflict of interest. Extreme caution should be exercised when realising any of the company's assets and making payments to the bank with the effect of reducing personal guarantee exposure. In these circumstances, professional advice should be obtained from an authorised insolvency practitioner.

What is a transaction at an undervalue?

A gift or transaction where the company receives considerably less than the market value of the goods and services. A liquidator or administrator may take action to reverse the transaction or seek payment for the difference.

Can I pay the employees all their entitlements before I proceed with a formal insolvency?

Employees' claims for arrears of wages and salary, holiday pay, pay in lieu of notice and redundancy will normally be dealt with in accordance with the Employment Protection (Consolidation) Act 1978 which protects employees entitlements at the time of a company insolvency. In no circumstances should claims for redundancy and pay in lieu of notice be paid. In the case of arrears of wages and salaries and holiday pay, it may in certain circumstances be appropriate to make payment but this should only be done after prior consultation with an authorised insolvency practitioner. Payments may also be made for the purpose of retaining the services of staff essential to the preservation of the business and assets.

What do I do when a bailiff arrives to levy execution on a judgment debt?

If insolvency of the company is looming, endeavour to negotiate a series of payments over a period of time. Do not agree to a schedule of payments which cannot be met from the company's resources. If insolvency has been reached, allow the bailiff to take walking possession over the company's assets. Ensure assets owned by third parties or specifically charged to third parties are excluded. Immediately arrange to take advice from an authorised insolvency practitioner on the bailiff's action and the company's overall financial position.

How do I deal with a creditor claiming title retention on goods supplied?

If the point of insolvency has been reached do not allow the creditor to repossess the goods, but allow him to count and take a written record of goods supplied which are presently on the company's premises. A copy of the written record should be signed by the creditor and yourself as agreement to the count. The creditor should be able to provide documentation to support his claim to title retention. The physical count record and the supporting documentation supplied by the creditor should be passed to an authorised insolvency practitioner or the company solicitor so the validity of the claim can be considered. In the meantime, goods supplied by the creditor should not be sold and they should only be returned once independent positive confirmation is received on the validity of the creditor's claim.

Which creditor claims rank as preferential?

The claims include:

• Inland Revenue for PAYE and subcontractors tax in the construction industry for a period of twelve months before the date of insolvency
• Department of Social Security in respect of Class II contributions for a twelve-month period
• Customs & Excise for VAT due in the period of six months before insolvency
• employees' remuneration for a period up to four months before the Insolvency (maximum 800 per employee) together with any accrued holiday

Are the settlement of debts due to my family or other companies in which I have an interest likely to be scrutinised by a duly appointed insolvency practitioner?

Under the Insolvency Act, family members and other companies in which you have a financial interest are usually deemed to be connected parties. Consequently, if any debt due to a selected party is settled within two years of the company's insolvency, it may be possible for the Liquidator or the Administrator to recover the amount of the payment if the company was insolvent when the company made the payment.

What are my responsibilities as a director once a formal insolvency has taken place?

• provide the insolvency practitioner with a statement of the company's financial affairs
• co-operate with the insolvency practitioner in realising the company's assets and providing him with such information as he may require in relation to the company
• attend on the insolvency practitioner at such times as he may reasonably require

There are also additional duties but these vary with type of insolvency procedure adopted.

How can I protect my own position if I know the company is insolvent and my fellow directors refuse to acknowledge the fact?

• ensure all meetings are properly minuted with your dissenting view
• advise your fellow directors in writing of your views and the reasons for them
• consider resignation although this of itself will not be a means of avoiding personal liability
• take advice from an authorised insolvency practitioner and also consider taking independent legal advice

What reports are made on me as a director of a failed company?

Within six months from the date of his appointment, the insolvency practitioner has a duty to report to the Secretary of State for the Department of Trade and Industry on the conduct of any director of an insolvent company who has been a director within three years from the date of insolvency. It is a matter for the Secretary of State to determine whether to take proceedings for the disqualification of a director.

What are the implications of being disqualified as a director?

You are unable to take part in the promotion, formation or management of a company.

For how long can a director be disqualified?

Between two and fifteen years as determined by the Court.

Can I incorporate another business and use a similar name to that of the failed company?

Once a company is in insolvent liquidation it is an offence for a director of that company to set up a new company with a similar name or to act as a director of or be concerned in the management of such a company or to take part in an unincorporated business using a similar name. A director can however seek the leave of the Court to use a similar name or where the insolvency practitioner sells business of the insolvent company to a purchaser to which the director is also a director, then that company may give notice to the insolvent company's creditors within 28 days of the purchase. This procedure avoids the need for the director of the insolvent company to seek leave of the Court.

The legislation on prohibited names is complex and proper advice should always be sought before a potentially prohibited name is used by a director of the originally insolvent company in a new business. The maximum penalty for these of a prohibited name by a director is 2 year's imprisonment.

This page has been prepared in an endeavour to help directors to consider their responsibilities when their company is faced with financial pressure. It can only, however, represent a very brief summary of some very complex law and legislation. This page should not be taken as sufficient for making decisions. There is no substitute for taking specific advice from an authorised insolvency practitioner as each situation varies according to its own facts.