Business Insolvency Myths

by Startacus Admin

Insolvency can be a daunting prospect for the uninitiated. All the terminology can make the process seem almost impossible to understand at times, and with so much conflicting advice, it’s easy to confuse even the most experienced business person. So, to help clear up some of the confusion, here are some common misconceptions surrounding business insolvency.

I can keep trading while insolvent

Trading your way out of a difficult time and paying back creditors before the business has to close sounds like an underdog story straight out of Hollywood.

However, trading while being unable to cover your liabilities breaches the Insolvency Act 1986. Doing so could even make you guilty of wrongful trading if you knowingly trade into a situation where you can’t recover. At the very worst, it can make you personally liable for the company’s debts, as trading while insolvent can bypass limited liability protection.

Creditors will try to shut me down

If you owe to multiple creditors, you may fear they will apply for a winding-up petition, and effectively close you down.

While creditors are within their right to pursue your business for unpaid debt, closing your company through compulsory liquidation may result in a smaller return than other debt recovery options. Creditors usually want as high a return as possible, so they should be more likely to approve an insolvency recovery procedure than apply to wind-up the company unless all other action has failed to resolve the issue.

County Court Judgements mean the end of the company

County Court Judgements (CCJs) landing on your doorstep can quickly incite panic and confusion, but in such a scenario, it’s important to keep your head and take stock. If you owe the amount stated in a court order, you should pay it if you’re able to, and as quickly as possible. If you don’t pay the amount owed before the judgement is issued, it can lead to further creditor action and negatively affect your credit rating. Although you can apply to have the judgement set aside, it’s a lot harder than dealing with it before it’s issued and on your credit file.

Customers will stop buying from me

Some customers could be turned off if they hear rumours that the company is struggling. That said, whether your business completely dries up may depend on what you’re selling. If you’re selling expendable, one-time use goods or items that don’t need aftercare, your customers may not be as deterred from buying from you.

If you’re selling high-value items which do require aftercare or long-term technical support, customers may be more inclined to choose a provider with more stable finances or a better public reputation. That said, the act of undergoing an insolvency procedure shouldn’t always be a mark of failure. Some procedures aim to keep your business alive while paying back what it can afford. Although some elements may be scaled back, the best interests of the business and its creditors should take priority.

All my staff will leave

While nobody likes hearing their job might be at risk, you’re unlikely to see mass resignations unless working conditions dramatically decline.

Whether your staff decide to leave may depend on their sense of loyalty towards the company, and how well you’ve treated them. People rarely find new jobs overnight, although staff may start looking if the company’s future looks bleak, or you can’t offer competitive recompense.

Would the company be better off closing?

Whether your business would be better off closing rather than attempting a recovery procedure will depend on the company’s circumstances. If the core business is solid and could be profitable if unburdened by debts, then you may want to consider exploring options to keep the company trading. If, however, the debt is so extreme that the company is past the point of recovery or if the directors don’t want to continue, then you may be better off closing the doors. If your creditors apply for a petition to wind-up your company, which then gets approved by the courts, you won’t have a choice in the matter and will face compulsory liquidation.

Summary

The prospect of insolvency is never a pleasant one, but clearing up some of the common misconceptions can help make things easier to understand. If you continue to trade while insolvent without undergoing an insolvency process, you run the risk of legal action and the insolvency practitioner going after your personal assets. Creditors aren’t, by default, trying to close your company down, and are usually looking for the highest possible return. It’s unlikely your customer base will dry up overnight, nor will your staff quit en masse. Closing your company is an option, but you should consider the likelihood of recovery before applying for a liquidation.

Artice written by Lisa Hogg, Director & Licensed Insolvency Practitioner at Wilson Field

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Published on: 12th March 2020