What Should I Do If My Business Seems Likely To Become Insolvent?
07th June 2017

The worst thing you can do is to bury your head in the sand. If you are a company director, you should certainly not just resign – you have a duty to take every step you can to minimise the loss to creditors of your company, and resigning could put you in breach of that duty.

You stand a better chance of reaching a successful resolution if you take action as soon as you identify a potential problem, instead of letting things drift until the business is in crisis. A licensed insolvency practitioner can advise on the best course of action and may offer a free initial consultation.

If long-term prospects are good, you may be able to arrange additional financing: for example, by taking out a new loan, factoring your debts, chasing customers who owe you for prompt payment, or selling non-essential assets. You may also be able to negotiate a compromise agreement with your creditors – for example, by offering revised payment terms – particularly if you make your creditors aware that the alternative may be the delay and cost of insolvency proceedings with the risk that the creditors will receive less or nothing at all. Investigate the alternatives which may be available to you (see 9 and 10), and if appropriate take steps to negotiate a voluntary arrangement (or apply for an administration order) before creditors instigate legal action against you.

If your prospects are poor, you may have little option but to cease trading. Beware of creating ‘preferences’ when paying creditors (see 7).

If you allow your limited company (or a limited liability partnership) to continue trading with no reasonable prospect of avoiding insolvency, you may be held liable for ‘wrongful trading’ if it does, in fact, become insolvent. This means you could become personally liable for the company’s debts (as well as being disqualified from being a director). This personal liability can apply even if you did not know there was no reasonable prospect of avoiding insolvency – it is sufficient if you ought to have known. This makes it vital to keep close tabs on the financial state of your company’s business at all times, so you spot any potential financial problems as early as possible. If you do, it is essential to seek specialist advice as soon as possible.

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