If your company struggles to keep up with its financial obligations, it can feel like there’s no clear way out. Creditors are chasing payments, cash flow has dried up, and the stress is mounting. But while the situation may seem daunting, it’s more important to know that there are legal, structured options available and that acting sooner rather than later gives you the best chance of resolving things properly.
A company is considered insolvent when it can no longer pay its debts as they fall due, or its liabilities outweigh its assets. This is a critical threshold. Continuing to trade while insolvent can expose Directors to serious legal risks, including the possibility of being held personally liable for company debts. That’s why understanding the options available at this point is essential for any responsible Director.
Creditors’ Voluntary Liquidation (CVL)
One of the most common and effective routes is a Creditors’ Voluntary Liquidation (CVL). This is a formal process that enables directors to voluntarily close an insolvent company. It ensures creditors are treated fairly and provides a clear legal structure for selling off company assets, if there are any, and distributing the proceeds.
A CVL helps Directors fulfil their duties and brings the company to a close in an orderly manner. It also marks the end of the company’s debts; once the process is complete, any remaining company debt is written off, and the company is removed from the Companies House register.
Company Voluntary Arrangement (CVA)
Another route worth exploiting is a Company Voluntary Arrangement (CVA). This formal agreement between the company and its creditors allows for debts to be repaid over time, often at a reduced amount. A CVA can be a lifeline for companies with a viable business but currently weighed down by historic debt. It allows the company to continue trading while managing its obligations in a more sustainable way.
A CVA must be approved by 75% of creditors (by value), and the business needs to demonstrate that it can meet the terms of the agreement. It’s not always the right fit for companies in more severe financial difficulty.
Administration
In more complex cases, administration may be the best option. This process involves bringing in a licensed insolvency practitioner as an administrator to take control of the company. The goal is to rescue the business, sell it as a going concern, or realise better returns for creditors than a liquidation would.
Administration offers a legal moratorium, meaning creditors cannot take action against the company during this time. While this route is typically more suited to larger companies with substantial assets or a complex creditor structure, it can offer breathing space and a chance to restructure.
Informal arrangements with creditors
There is also the possibility of an informal arrangement with creditors, especially if the company’s financial difficulties are temporary and the number of creditors is small. This might involve negotiating new payment terms, freezing interest, or agreeing to partial settlements.
These types of arrangements are not legally binding and offer no protection from legal action. If even one creditor decides not to cooperate, the entire effort can fall apart. It’s not usually a reliable solution.
Pre-pack administration
In some scenarios, directions may look into a pre-packed administration, where the sale of the business is agreed in advance and executed immediately upon entering administration. This can preserve the core parts of the business, protect jobs, and maintain continuity with suppliers and customers. However, it is a highly regulated process that must be carried out with transparency to ensure creditors are treated fairly.
Director redundancy
It’s also worth noting that Directors of insolvent companies may, in some cases, be eligible to claim Director redundancy pay. If the Directors have worked for the company as an employee on a PAYE basis for two years or more, they may be entitled to redundancy, unpaid wages, or holiday pay. This can help cover personal financial obligations during the transition and provide some stability at a difficult time.
Taking the right next step
Facing financial distress is never easy, but the key is to remain proactive. Ignoring the problem or delaying action only limits the available options and increases the risk of legal consequences. An insolvency professional can assess the company’s financial position early and explore the appropriate route, whether that’s liquidation, restructuring, or a negotiated settlement.
Understanding the available options is the first step toward making a well-informed, confident decision.
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