When cash flow becomes an issue and you are struggling to regain control, it can turn into a serious situation surprisingly quickly. Even if you’re making a profit, unreliable cash flow can have devastating effects, even having the potential to put you out of business entirely. During these times it is important to understand your options should your business continue to decline.
What are some formal insolvency procedures for sole traders?
Insolvency procedures are sometimes the only option, and although it may seem as though turning to one signals the end of your business, they can in fact turn a business around by offering the extra time needed to trade out of difficulty. As an example, the Debt Arrangement Scheme (DAS) involves paying your debts in full, but at an affordable rate across a set period of time. It freezes any interest and charges on the debt, and crucially, stops legal action by creditors. As a sole trader you are personally liable for all the debts of your business, so a failure to keep on top of them could be disastrous for your own financial position. In some cases you may have to consider sequestration – the Scottish equivalent of bankruptcy – if your debt problems become simply unmanageable. A licensed insolvency practitioner will be able to examine your sole trader business and its associated debts and advise on the most suitable option based on your individual circumstances.
Advice for company directors
Limited companies are, by their very nature, afforded limited liability status which in many cases is part of the attraction of setting up as a corporate entity as opposed to operating as a sole trader. This means you will not be held personally responsible for the debt of your company. However, if your company is experiencing financial distress, it is still vital that you seek the help of a licensed insolvency practitioner in order to achieve the most favourable outcome for you, your company, and its creditors. If your limited company has the potential for future success, a formal restructuring procedure known as a Company Voluntary Arrangement (CVA) may be possible. A CVA allows you to enter into negotiations with your outstanding creditors to devise an affordable plan for paying off the money you owe. Often a portion of the debt will be written off, with the remaining being paid through monthly instalments over a number of years. Alternatively, it may be the case that your company’s problems are more serious; you have no desire to continue trading; or there is simply not a large enough market for your product anymore. In these instances you may want to consider bringing your business to a formal close. This is most commonly done through a process known as a Creditors’ Voluntary Liquidation (CVL). In a CVL, all company assets will be sold and the funds distributed to outstanding creditors. The company will then be officially shut down and removed from the Companies House register; any remaining debts will be written off unless the director has personally guaranteed them. The closure of your business may also be achieved using an Administration procedure if it is believed that this will generate a better level of returns for creditors rather than opting for liquidation.
How are company directors affected by limited liability?
While limited liability does protect a directors personal financial position, there are times when a director can be held liable for company debts, not least when there are signs of director misconduct (whether intentional or unintentional), when a personal guarantee has been given, or when a director has built up a large directors’ loan account to the point where it is overdrawn. In an insolvency situation, this overdrawn loan account would be an asset of the company and would need to be repaid to realise funds for creditors. In other words, you as a director are in debt to your own company. In this situation, your company could find itself in a corporate insolvency procedure whilst you could be in a separate personal insolvency procedure such as sequestration. It is important you seek professional advice to understand the potential effects closing down your company may have on your personal situation. Enlisting the help of a licensed insolvency practitioner at an early stage can help reduce the chance of being held personally liable for company debts should the business be beyond rescue.
