Simple Business Debt Guide
Simple Business Debt Guide offers an insight (As a simple go-to guide, without detail and not exhaustive in points) into SOME of the points directors should look out for.
Being a director is an important role to accept. The law clearly lays out that ignorance is no defence in company law when it comes to Insolvency of a Limited Company.
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Limited Company debt remains part of how a company operates. Debt allows a newly formed company to act as a part of its working capital. Only when directors can’t manage does it present as a problem.
However, in business, as we all know, things do not always, therefore go to plan (Coronavirus as an example). Your business often has financial issues. It may be then that the companies debt may spiral out of control.
Therefore, acting fast is essential, along with safe, professional, experienced guidance.
The points listed below, although not exhaustive, highlight some of the significant areas of concern, a company director should consider.
- A limited company and how it then shields you from business debt?
- What are the common examples of limited company debt?
- Actions required to handle limited company debt more efficiently?
- Company debts you then cannot pay?
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How Does a Limited Company Shield You from Debt?
“A limited company exists to produce therefore a separate legal entity defining the company’s finances and those belonging to you“.
No distinction exists between you and your business when trading as a sole trader. Personal and company’s finances remain separate.
“A sole trader remains liable for all debts of the business. Not the case with a limited company”.
Limited companies are fenced legally, protecting directors offering ‘limited liability’ from business’s debts. Therefore. If the company remains unable to pay its debts, and an unpaid creditor instigates court action. Then the company assets and finances of the limited company remain at risk. Shareholders lose their initial investment in the failed company if no funds are available, after paying all other creditors of the company.
Can a director be personally liable for his company debts?
- Using company funds for a non-business pursuit;
- Personal guarantees previously are given;
- Deficits have expanded after the company became insolvent;
- Company has overdue PAYE and National Insurance contributions;
- Company Debts have grown due to fraud;
- You proceed to pay shareholder dividends while the company is insolvent;
- predispose of company assets for less than their actual value;
- Directors have an overdrawn director’s loan account.
What are the outcomes of personal liability?
Suppose you are made personally liable for the debt of your company. Then you have no longer protected, and the debt is the same as any other debt you have. Therefore, action to collect the debt may commence directed at you.
When you are unable to repay personally, then personal debt options need considering. Does the main factor remain how large a debt needs resolving? What assets do you have that can raise cash?
- Debt Management Plan (DMP);
- Individual Voluntary Arrangement (IVA):
- Personal bankruptcy.
At what point can the company’s debts be written off?
Company’s debts remain written off once the company commences formal insolvency—however, this remains subject to no misfeasance or fraud taking place.
Formal appointment taking Insolvency processes include:
- Company Voluntary Arrangement (CVA);
- Creditors’ Voluntary Liquidation (CVL).
Offer failing companies the best possible outcomes for the company’s creditors. They stop, any outstanding creditors taking further legal action against the company, along with protecting directors from personal demands for payment.
What are the Common Types of Limited Companies Debt?
Directors need to ensure that they maintain priority debts. A thin line exists though once the company fails. Ensure you keep notes on your rationale for paying the debt. Did it help bring in more cash to pay the debt? Was it truly essential? Avoid misfeasance at your peril.
Creditors owed £750 or more may leverage your company into compulsory liquidation. However, creditors typically consider the impact this may have on future relations if the debt is a short term issue.
Further, creditors will evaluate the:
- Time to action;
- Impact on your business
Therefore, prioritise the repayment of debts such as those.
What are preference debts?
The company law empowers certain creditors to recover money owed. Note, priority creditors impact when the action takes place upon the company then will severely impact your ability to run the business effectively. Failing to react promptly may cause::
- Utilities to be disconnected;
- bailiffs attending;
- Repossess your business premises;
- essential business supplier accounts closed;
- Restriction for any further finance.
Ensure you use wisely monies to pay these debts first
Which creditors require payment first?
When a company is insolvent, directors should tread carefully. Directors have no capacity in law to choose to pay in preference to other company creditors.
Paying creditors in preference to another may lead to the director being held liable for the debts of the company. Such action may lead to a directors disqualification order for possibly fifteen years.
However, solvent companies may prioritise debts such as:
Repaying a commercial business mortgage
- Mortgage lenders can proceed to repossess land and property.
- Lenders for use by a business are more active collecting than with residential loans.
- Failing into arrears with a business mortgage may result in an LPA Receiver appointed to recover monies owed.
Maintaining commercial rent
- Failing to pay rent allows the landlord to send a bailiff to remove stock and equipment without needing a court order.
- Ailing payments means landlords may change locks on-premises. Ensure you keep the landlord informed to help prevent this action.
Rates for your business
- When you can’t pay rates, do not stop. Contact rating authority first;
- Paying what you can afford while advising authority formally;
- Failing a formal arrangement may trip the authority to go to court instructing bailiffs.
- Failing to pay utility bills exposes your company to having utility supply cut off. They though by law, must give 14 days’ notice.
- When in arrear advise supplier requesting a payment arrangement.
When in arrears with any aspect of HMRC debt, ensure you make contact as soon as possible. HMRC system issues penalties and Inters automatically. Providing you act fast, HMRC may agree to a Time to Pay arrangement.
HMRC can apply several various tactics to collect an outstanding tax debt:
- Debt collection agency – HMRC use debt collection agencies who are not bailiffs.
- Bailiff act without a court order – HMRC remains a creditor that does not require a court order to attend and take control of goods. Refusing them entry will prompt a court warrant to gain access. HMRC can instigate a winding-up order against your comp[any if payment is not forthcoming.
Leases and Hire purchase
- Having a company hire purchase and lease deals for assets of the company means they fall between Non-priority and priority debts. A hire purchase or lease deal means your company does not own the assets until the very last payment. Therefore, any arrears allows the lender to repossess the assets and arrange their sale to reduce the debt. Therefore if the asset is of extreme value to keep your business going, then they may be considered priority debts.
Business Trade suppliers
- Specific trade supplier may be considered priority creditors. Ensure these suppliers are aware of your situation and request they work with you while informally repaying any old debt. Suppliers often allow leeway when compared to others as long as you are honest and do not worsen their position.
Business Loans and Overdrafts outstanding
- Exceeding overdraft limit attracts interest and charges;
- Risk of overdraft cancelled; Potential future problems raising finance;
- If at risk of exceeding your overdraft limit? Contact the bank and explain the situation.
Companies should treat loans and overdrafts as priority debts. If the loan or overdraft remains though unsecured, then perhaps a non-priority debt. However, check your terms of the agreement with the bank and banking services at other available banks.
What are the non-preferential debts?
Non-priority debts impact on your company less when unpaid. However, any company creditors owed £750 or more may commence legal action with a county court judgement. Failing to pay or setting aside then allows the creditor to proceed with a winding-up petition.
Company non-priority debts to consider are:
- Business suppliers considered non-essential.
- Company credit cards
- Particular Unsecured bank loans and overdrafts
Actions To Take So You May Manage Company Debt
If suffering growing limited company debts, as a director, ensure you at all times take action to secure creditors first. If in doubt, ask.
Missing priority debt payments may have drastic results.
Keeping financial records up to date. Helping you ensure awareness of outstanding debt and monthly repayments.
How to recover control of your company debts?
Many approaches may be used to recover control of your companies fiscal position. The most suitable path for your company relies on how amenable your companies suppliers remain open to continue supplying?
Raise funds to pay your debts
Available options include:
- Obtain monies from friends and family;
- Look for additional investment into your company;
- Sell company assets no longer required;
- Investigate alternative funding. – such as invoice finance.
Operation cost reduction
Take care, though. Executing without careful consideration can be counterproductive.
So ensure it truly is waste you cut. Check out below areas to consider carefully:
- Downsize to cheaper business premises;
- Decrease your debt repayments;
- Create redundancies.
Renegotiate The terms of your debt
Firstly plan to contact your companies creditors, taking extreme care to explain the financial situation of your company honestly. Ensure you have sought advice and have an achievable business plan which is feasible and allow the turnaround of the business. Inform your companies creditors of the companies intention to repay any debt owed in full. Usually, the majority of your companies creditors will understand your financial predicament. They know failure means little if any, repayment.
So to enable renegotiating the terms of debt, therefore depends on your companies present financial status. they will review your history financially. So, remain upbeat, act honestly and try to approach earlier than later the issues at hand.
To improve your companies financial position, consider:
Ways to Increase your revenue
- Propose early payment discounts;
- Give customer incentives.
Improve company customer credit control and collections
Bolster credit control. Encourage customers and clients to pay per your terms of trade. Introduce regularly updated credit checks and request credible trade references before commencing any work. Do not let your heart rule! REMEMBER: Bad debt can sink you!
- Invoice quickly and accurately;
- State your terms and conditions clearly on every document. Ensure they are updated and legally ROBUST;
- Encourage early payment;
- KEEP regular contact with your clients;
- Scan The Gazette Insolvency Section online for notices;
- Use a reputable credit agency;
- Monitor the industries you supply for downturns.
What If You Have Company Debts You Are Unable To Pay?
Despite all your best efforts, there may be times when your company has accumulated debts; it simply cannot afford to repay. When a limited company is unable to pay its liabilities when they are due, it’s said to be insolvent. Once a company is known to be insolvent, the company directors have a new range of legal obligations they must meet. If they fail to do so, they could be made personally liable for the company’s debts and banned from operating as a director for a period of up to 15 years.
Company Insolvency Test?
Company directors remain legally obliged to recognise whether their limited company is solvent or not. If insolvent, they are required to ensure immediate action required to protect creditors of the company remain in place. To determine if your company is insolvent carry out the tests detailed below. It only takes one test to prove Insolvency.
- Cashflow Test. Can you pay the bill as and when they fall due? If not =POTENTIALLY INSOLVENT?
- Balance Sheet Test. DO Liabilities exceed Assets? If So POSSIBLY INSOLVENT.
- Legal Action Test. Unable to pay Statutory Demands? Then INSOLVENT
If you fail any of the above tests consult with HBG Advisory and protect company creditors and your position as a company director.
What must directors do if their company is insolvent?
Suppose you cannot pay your debts and you believe your company is insolvent. In that case, there are several initial actions you must take to avoid personal liability for those debts and accusations of fraudulent trading. You must:
- Stop trading instantly;
- Then ask advice from an experienced licensed insolvency practitioner with a good commercial track record;
- Ensuring at all times, you protect the interests of the companies creditors first;
- Maintain detailed well-documented records of all steps & decisions made regarding the companies insolvency position;
- Analyse the rescue options for the business or consider closing the company ensuring the best advantageous method for the companies creditors;
- Avoid any preferential moves for anyone what so ever.
Available options when your limited company can’t repay its debts?
Insolvency may not remain an indefensible position. Several options remain possible to save your limited company from closing. To consider which remains suitable for your limited company rests on its up to date position financially. What viability if any and will creditors support a move?
Time to Pay Arrangement
Having arrears with VAT, PAYE, Corporation Tax, or National Insurance contributions requires you as a director to make IMMEDIATE CONTACT with HMRC., Failing to do risks your company facing harsh collection failing which a winding-up order.
However, HMRC may if contacted early enough may grant a three to twelve-month instalment plan (Time To Pay).
Many directors find dealing with the HMRC difficult. (Fearful). Therefore, utilising the services of an experienced, insolvency practitioners make good commercial sense, when the survival of your business remains at risk. HMRC respond to companies seeking professional help better.
Agreeing a Time To Pay arrangement enables the directors if actions fast to avoid any further late payment penalties and interest charges. Additionally, if you plan to turnaround your underperforming business, a Time To Pay extends your time to do so. You have then removed the worry of the HMRC, allowing you to better focus and operate as a director.
Company Voluntary Arrangement (CVA)
- A Company Voluntary Arrangement remains a legally binding agreement between the company and its creditors, allowing repayment in full or a percentage of your companies debts ranging fro one to five years. To be approved, Seventy-five per cent of your creditors (by value) must vote in favour of the CVA.
- Then any legal action and interest charges from the companies creditors cease. Then debts agreed will be paid by one combined monthly payment.
A CVA also befits company creditors in the long run. Compared to liquidation, they often receive far greater returns. A CVA usually enables companies to maintain a trading relationship still moving on while the IP ensure creditors money is collected as agreed in the CVA as voted.
Pre-Pack Company Administration
In the event, your company debts do not allow it as a viable concern to trade further. Then, subject to finance availability and permanent closure, a pre-pack administration enables the ailing former business to be sold as a going concern. Perhaps by, what was the previous board of directors. The business assets upon payment transfer to a newco while not carrying over the debts of the previous company. Too many pre-packs are considering very risky and financially immoral. Great care required as creditors will censor every action.
The insolvency practitioner, who manages the process, is required to opt for the most suitable buyer for the business.
Debts in Limited Companies Do Not Mean the End of Your Business
A rising debtor book looks good on paper. It does though:
- Absorb working capital;
- Stifle cash flow;
- Mask potential bad debts.
Taking early action with a robust and transparent plan, you and your team, you’ll have every chance of turning your business around. If things don’t improve, there are still formal insolvency procedures that we can use to rescue your business or close it down while ensuring all your obligations as a company director.
For a free initial, no-obligation conversation regarding your limited company’s debts, please contact HBG ADVISORY as soon as possible!
Due to the Coronavirus Covid19 Pandemic, we have set up a VIRTUAL meeting connection allowing directors to discuss issues in the safety and privacy of the home or workplace.