(Newswire.net — March 12, 2024) — Closing an insolvent company can involve many steps and factors, some of which directors might be less aware of. Factors such as dividends, creditor preference, and whether creditors will act to recover what they’re owed can affect a director’s available options.
Dividends
Directors can take dividends if the company is profitable enough to allow for them and the company is solvent. A company is solvent when:
- It can repay its liabilities as and when they fall due.
- Its assets exceed its liabilities.
- There is no legal action filed against it.
If a dividend is taken outside these parameters, it could be considered unlawful. This can also happen if the company’s profits have been miscalculated, records of board meetings are incomplete or poorly kept, or the company has insufficient profits to justify a director taking a dividend.
An unlawful dividend could result in directors being personally liable if they’re found to have breached their duties, and the recipient may have to repay the dividend.
Creditor preference and who gets paid first
If your company’s cash flow starts to slide into the red, it can be tempting to repay what you deem its most important bills first. However, if the company is insolvent, repaying any creditor before others can lead to accusations of creditor preference. This is because you’ve prioritized one creditor over another, where they should have been treated equally as per the repayment hierarchy. Repaying outside of this structure could potentially worsen the company’s position.
Can the company’s creditors intervene?
The company’s creditors can pursue the company for what it owes.
While creditor pressure is unpleasant, directors shouldn’t ignore it. What starts as postal, telephone, and email reminders can soon escalate to visits from debt collectors. Left unchecked, this could escalate further into legal action, including Statutory Demands and County Court Judgements (CCJs).
If you continue to ignore these, and you owe a creditor more than £750, they can file a winding-up petition. The company’s bank accounts will be frozen, making trading impossible and forcing the company into compulsory liquidation.
Choosing the right solution
If you’re worried about any of the above scenarios, you should speak to a licensed insolvency practitioner as soon as you’re aware that the company is insolvent. They can advise you on the best route forward for you and your company.
If the company’s debts are of such a level and it’s buckling under unbearable creditor pressure, it might be best to close the company and draw a line under the debts. In this case, the insolvency practitioner might suggest the company enters a Creditors Voluntary Liquidation (CVL).
If the company has a viable business model and could be profitable if not for the burdensome debts, then a Company Voluntary Arrangement (CVA) could be viable. The process involves the company’s unsecured debts being consolidated into a single repayment managed by the insolvency practitioner.
If more substantial restructuring would be required to return the company to profitability, then the insolvency practitioner may recommend administration. The process provides protection from creditor pressure while the insolvency practitioner works to:
- Rescue the company as a going concern.
- Achieve a better result than if the company were to close via liquidation.
- Or to realize the company’s property and assets to make a distribution to certain creditors.
To summarise
There are many factors to consider when a company becomes insolvent, some of which directors might not have considered. Make sure any dividends taken have been done so lawfully; doing otherwise could leave directors personally liable. While repaying creditors might seem like a good idea, doing so outside the framework of an insolvency arrangement can worsen the company’s position. Additionally, simply hoping the problem will go away on its own can lead to creditors taking legal action to recover what they’re owed. If the company is insolvent, seek advice from a licensed insolvency practitioner who can advise you of the best route forward.