Insolvency Solicitors 

When the directors of a company believe that its solvency is in doubt, they are required to concentrate on minimising losses to creditors rather than maximising returns to shareholders.

Whilst there is no statutory definition of the term 'insolvent', the Courts are likely to determine that a company is insolvent by reference to the relevant provisions of the Insolvency Act 1986 which, in turn, refers to circumstances where either:

  • The value of a company's liabilities exceeds its assets (balance sheet insolvency); or
  • A company is unable to pay its debts as and when they fall due (cash flow insolvency).

Directors need to regularly monitor financial management information and to remain alert to signs of their company being cash flow insolvent. Typical examples of such signs include:

  • Trade creditors being asked to wait for payment;
  • Cheques and direct debit payments being returned by the bank;
  • Monies ear-marked to pay PAYE, NIC, VAT or corporation tax being used for other purposes;
  • The landlord(s) chasing the quarterly rental payment;
  • Receipt of statutory demands or winding up petitions
  • The company becoming increasingly close to or exceeding its overdraft limit; and/or
  • Customer deposits being used to fund the purchase of other customers' orders.

Where the directors believe that the company may be or is about to become insolvent they:

  • Should immediately seek professional advice from a solicitor (such as JMW Solicitors), accountant or insolvency practitioner with regards to the appropriate next steps; and
  • are duty bound to consider the formal insolvency processes available to the company in order to protect the creditors of the company.

If the directors fail to take appropriate action, they could become personally liable for the debts of the company. This would be the case if the directors were (as appropriate) found liable for/guilty of:

  • Wrongful trading;
  • Fraudulent trading; or
  • Misfeasance/breach of duty.

In the event that the directors could not then meet these debts, they could find themselves being pursued into bankruptcy. They might also have to face disqualification proceedings and risk being prevented from acting as a company director again for a period of up to 15 years (in the most serious cases).

It is important to point out that not all instances of a company being technically insolvent require the instigation of formal insolvency proceedings. For example, a company may have an insolvent balance sheet but be perfectly able to meet its liabilities as they fall due for payment; if it is trading profitably and can reasonably predict that its cash flows will permit it to meet its present and future debt obligations then creditors are not being put at undue risk.

If the company however is both balance sheet and cash flow insolvent then, clearly, immediate formal insolvency proceedings are likely to be required.

Taking professional advice early can help to avoid any claims against the directors personally in relation to the company's liabilities. JMW Solicitors has considerable experience in providing timely, practical advice to directors of financially troubled companies. We appreciate the urgent and sensitive nature of any enquiries and can quickly offer a free initial consultation to confidentially discuss the relevant issues. Please call us on 0345 872 6666 or complete the online enquiry form and we will get straight back to you.

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