Question 1

Does insolvency mean my company has to close?

Accepted Answer

Not necessarily. Insolvency is a legal state, not an outcome. If the underlying business is viable, procedures such as a CVA, Administration, or a Company Moratorium can be used to restructure the business and allow it to continue trading. Closure is one possible outcome - it is not the automatic one.

Question 2

Can I be personally sued if my company is insolvent?

Accepted Answer

As a director, you are generally protected by the principle of limited liability. However, wrongful trading - continuing to incur debts while knowing there is no realistic prospect of avoiding insolvent liquidation - can result in personal liability for those debts. Personal guarantees and overdrawn directors' loan accounts are additional routes to personal exposure. We assess all of these in our initial consultation.

Question 3

What is a CCJ and how does it affect my company?

Accepted Answer

A County Court Judgment is a formal court order requiring the company to pay a debt. Left unpaid, it damages the company's credit rating and is frequently the first formal step a creditor takes before filing a winding-up petition. If the company has received a CCJ, the window for voluntary action is narrowing.

Question 4

Should I pay the smallest creditors first to clear the decks?

Accepted Answer

No - and this is one of the most common mistakes directors make. When a company is insolvent, creditors of the same class must be treated equally. Paying one creditor in full while others go without - particularly if the favoured creditor is a connected party - can be challenged as an unfair preference by a liquidator and the payment reversed.

Question 5

How much debt does it take to become insolvent?

Accepted Answer

Under the cashflow test, any debt you cannot pay as it falls due is sufficient. Under the balance sheet test, any excess of liabilities over assets is sufficient. However, for a creditor to force a company into compulsory liquidation, the debt must typically be over £750 and undisputed. The legal threshold for insolvency and the practical threshold for enforcement action are different things.

Question 6

Is my Bounce Back Loan a factor?

Accepted Answer

Yes. A Bounce Back Loan is a company liability and is included in both the cashflow and balance sheet assessments. If the company cannot service or repay it, this contributes to the insolvency position. It is important to address Bounce Back Loan obligations through a formal process rather than simply allowing the company to become dormant - the liability does not disappear if the company stops trading informally.

Blog

Am I Insolvent? Understanding Your Company’s Financial Position