Insolvency: consequences for company owners
Contributed by: Berley

Man holding open an empty wallet

If you are facing insolvency, you are not alone: it’s estimated up to 17,243 companies became insolvent last year, a rise of 4.2% on the year before, according to the Insolvency Service.

As insolvency can have serious consequences for everyone involved, you need to find an insolvency practitioner if you are having problems with cash flow or balances. Creditors won’t go away just because you ignore their calls and letters; in fact, they can make things much worse for you.

How does a company become insolvent?

If a company is unable to pay its debts, it is considered insolvent under English law. To determine if a company is – or will become – insolvent, we can use two tests: the cash flow test, and the balance sheet test. The cash flow test checks if the company can pay its debts on time, while the balance sheet test looks over assets and liabilities to see if the company can meet its obligations in the future. If a company fails either of these tests, it is considered insolvent.

If you suspect your company is about to face insolvency, it’s important you contact a licensed insolvency practitioner immediately to determine what steps to take next. Rescuing the company may even be an option, as long as you address your problems head-on and take action.

Who is affected by insolvency?

Insolvency can have serious consequences for everyone involved. Creditors may struggle with their own businesses if they don’t get paid, especially if the debt is large. One example is the recent collapse of construction giant Carillion; a lot of their subcontractors were smaller firms who will probably be out of pocket after the banks take their share. In turn, this means employees could find themselves getting nothing at all.

However, there is another group of people affected by insolvency: the company directors and owners. Insolvency is not simply a process of walking away without paying creditors; on top of the financial problems, there can be serious legal consequences as well.

Consequences of insolvency on the owner

If you are a sole trader, or the company is a non-LLP partnership, you will be responsible as the business owner for the debts incurred by the company. This means even your personal assets can be sold to repay debts, whether they are with suppliers, customers, or HMRC.

If your company is facing liquidation or administration, a licensed insolvency practitioner will be appointed, generally by a meeting of creditors or the courts. If you have already involved an insolvency advisor, they can often be retained, so it’s always best to stay ahead and get professional advice as soon as possible. Otherwise an insolvency practitioner will be appointed for you, without your input.

Part of the role of an insolvency practitioner is to make a report to the Insolvency Service; depending on this report, a company director may be disqualified for up to 15 years. A disqualification prevents you from setting up, running or even marketing a business, but it can also affect other aspects of your professional life. For example, you may not be allowed to sit on the board of a charity, or be a registered social landlord.

Contact Licensed Insolvency Practitioners now

If you need to talk to an insolvency practitioner in London, don’t hesitate to call the insolvency experts at Berley Chartered Accountants. We can explain your options, put together a plan of action, and support you through the process. Remember, the sooner you act, the sooner we can help you sort things out. Call us now on 020 7788 8261, email us on info@berley.co.uk or complete our Free Online Enquiry and we’ll be in touch.