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COVID-19 has caused my Company to be insolvent

Covid-19 has caused my company to be insolvent.

What are the causes of business insolvency in the UK?

Many directors are worried about closing companies affected by the COVID19 pandemic. Please read ‘UK companies affected by coronavirus (COVID19)‘.

COVID-19, has caused my company to be insolvent: Advice for directors

The current coronavirus COVID19 pandemic is continuing to cause severe financial hardship for businesses in the UK and the rest of the world. Many businesses remain unable to continue trading as a direct cause of the lockdowns in place. Health has come above trade, sadly though, the impact will be far-reaching, and many businesses will fail through no fault of their own.

A shortage of cash, therefore, is a massive issue for businesses, even under normal trading conditions, and can quickly cause cash insolvency as it becomes impossible to pay bills when they fall due.

Balance sheet insolvency can also be a problem if your liabilities then exceed the value of your business assets. So if your business is insolvent and you believe it requires liquidation, what should you consider?

COVID-19, has caused my company to be insolvent: Seek professional assistance to check for alternatives

A licensed insolvency practitioner (IP) will carefully assess your company’s financial situation and might offer alternatives to liquidation. Depending on your circumstances, here are a few options that could be open to you:

  • Company Voluntary Arrangement (CVA) – The company’s debts remain paid off at an agreed rate over a set period in a formal, legally binding agreement.
  • Company administration – Ring fences a limited company from its creditors, allowing a restructure and even a sale of its assets.
  • Emergency funding – whether that’s via alternative lenders or one of the government-backed loan schemes
  • Approaching HMRC to arrange a ‘Time to Pay arrangement’.

If there are no other options left, however, and regrettably, you do need to liquidate, you should choose voluntary insolvent liquidation rather than enforced liquidation by one of your creditors.

Creditors’ Voluntary Liquidation (CVL) vs compulsory liquidation

If liquidation is therefore the only remaining option. Your company should enter Creditors’ Voluntary Liquidation rather than face a winding-up order leading to compulsory liquidation with the official receiver appointed.

By entering liquidation voluntarily, you’re placing creditor interests first. Although the procedure attracts professional fees, you may be eligible to claim redundancy pay and other entitlements as a director, which could help pay them.

Both forms of insolvent liquidation involve investigation into director conduct, but these investigations are more stringent where compulsory liquidation is concerned. A further benefit of CVL is that you have more control and can choose your insolvency practitioner to oversee the process.

Initially, however, a special resolution is passed by the company’s members to place the company into voluntary liquidation and appoint a liquidator.

Appointing a licensed insolvency practitioner during COVID-19

A licensed insolvency practitioner must administer liquidation. Therefore, you’ll need qualified professional insolvency support to protect your business creditor, your business and you. Once appointed, the liquidator confirms the company’s status financially. Then writes to the business’s creditors, confirming their appointment and what will happen next.

All business assets are then valued by an independent registered valuer and sold for the benefit of creditors and the funds distributed. Sadly, all staff, including the former company directors, are forced into redundancy. Then the liquidator applies to Companies’ House to remove the company from the registrar, as it no longer exists as a legal entity.

For further reading on meeting an Insolvency Practitioner, please read ‘First meeting a licensed insolvency practitioner ‘and Duties of an Insolvency Practitioner‘.

Can you claim redundancy as a former director?

If your company had employed you and an appointed director, you might claim redundancy pay and other entitlements. The liquidator will notify you whether you are eligible. The criteria require:

  • You had a contract of employment, whether written, oral, or implied;
  • Your company employed you for a continuous two-year period;
  • Worked at least 16 hours a week in a role that is more than a consultant;
  • Paid through PAYE scheme.

The average payout for a company director who qualifies for redundancy is approximately £9,000, claiming it is worth the effort. Your claim saves you finding money to fund the liquidation during tough times, not only for your business, but you personally.

If you require further help on aspects of company insolvency and entering liquidation during COVID-19, our experienced team at HBG Advisory can provide robust support.

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