Following reports this week that company insolvencies have risen dramatically, Laura Pickering, Director with Stoke-on-Trent-based insolvency and restructuring practitioners Moore Recovery, provides timely advice for business owners and directors.
Recent insolvency figures have painted a worrying picture for company directors as the economy struggles amidst the cost-of-living crisis.
There were 2,315 company insolvencies registered in October 2023, a dramatic 18% rise from the total insolvencies recorded in October 2022.
Overall insolvencies are now at their highest level since 2009, rivalling the economic fallout of the 2008 financial crash. In the past 12 months, around 1 in 191 companies have been forced to face the prospect of liquidation.
Small-to-medium-sized companies are particularly at risk as they struggle to deal with rising overheads and shrinking revenue.
Certain industries are feeling the squeeze more than others. Construction, engineering, hospitality, business services, and manufacturing businesses have faced the highest insolvency levels this year.
As this upward trend continues, many more companies will, unfortunately, have to start thinking about what to do in the event of insolvency. A company becomes insolvent either when it cannot pay its debts as they fall due, or when its liabilities become greater than its assets.
It is important to keep track of whether your company is solvent. Once your company becomes insolvent, your duties as a director fundamentally change; this means you must place the interests of the creditors first, not your company and its shareholders.
The best way to uphold this duty is to take advice on whether it is appropriate to consider a formal insolvency option. Continuing to trade can worsen your company’s finances, weakening the position of your creditors and increasing your personal risk as a director.
If you do carry on trading in the hopes of turning your business around, you risk being pursued by a liquidator or administrator for misfeasance or wrongful trading if the company does later enter into a formal insolvency procedure. This could result in you being made personally liable for company debts, hit with court fines, or disqualified from future directorship.
So, what are the options for insolvent company directors?
One of the most common solutions is a creditors’ voluntary liquidation.
The procedure results in the company’s cessation of trade and hands control of the company over to a liquidator, who then sells the company’s assets to help repay its creditors. Any remaining debts are then written off. Employees – including directors – may then seek payment from the government’s Redundancy Payments Service.
Some businesses may also want to consider a company voluntary arrangement.
This is an alternative to liquidation and functions as a formal repayment plan. Your company makes one monthly repayment into a trust account, which is divided up between your creditors to repay an agreed percentage of their debt. Your company will be safe from creditors’ legal action as long you meet these repayments and continue to meet ongoing creditor liabilities incurred after the company voluntary arrangement is agreed.
Keep in mind that you’ll need the backing of 75% of your creditors (by value) to proceed with this. Creditors must be reassured that the business can keep up with the repayments, or they might reject the proposal.
The final option to consider is administration.
This puts the company into the control of an administrator and grants it some breathing room while the company is restructured. The administrator will seek to save the business – where possible – before either liquidating or selling the company. However, the procedure is expensive and isn’t suitable for some smaller companies that are beyond the point of recovery.
No matter your situation, it’s important to remember that you’re not alone – these are turbulent times, and there’s nothing wrong with getting some help