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Simple Business Debt Guide 

Simple Business Debt Guide. Written by John A Waller, Director. Reviewed December 31st, 2022.

Simple Business Debt Guide provides an insight into SOME of the points directors should watch out for.

Company debt, when unmanageable, requires urgent attention by directors.

Being a director is a crucial role to accept. The law states that ignorance is no defence in company law regarding the Insolvency of a Limited Company.

Help is at hand with any points raised in the Simple Business Debt Guide!

For further help, please contact John @ HBG advisory on 0330 056 3120 or arrange a virtual meeting Safe and Private.

Limited Company debt remains part of how a company operates. Debt allows a newly formed company to act as part of its working capital. Only when directors can’t manage is it a problem.

However, in business, as we all know, things do not always go to plan (Coronavirus as an example). Your business often has financial issues. It may be then that the company’s debt may spiral out of control. 

Therefore, acting quickly 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.

  1. A limited company and how it then shields you from business debt?
  2. What are the common examples of limited company debt?
  3. Actions required to handle limited company debt more efficiently?
  4. 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 finances remain separate. 

“A sole trader remains liable for all debts of the business, not the case with a limited company”.

Limited companies are legally fenced, protecting directors, offering ‘limited liability from business’s debts. Therefore. An unpaid creditor instigates court action if the company cannot pay its debts. Then the limited company’s assets and finances remain at risk. Shareholders lose their initial investment in the failed company if no funds are available after paying all other company creditors.

Can a director personally be liable for his company debts?

Yes.

They include:

  • 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 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.

Simple Business Debt Guide – What are the outcomes of personal liability?

Suppose you are personally liable for your company’s debt. 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.

Personal debt options must be considered when you cannot repay personally. Does the main factor remain how large a debt needs to be resolved? What assets do you have that can raise cash?

Options include:

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.

Formal appointment taking Insolvency processes include:

Offer failing companies the best possible outcomes for the company’s creditors. They stop any outstanding creditors from taking further legal action against the company and protect directors from personal demands for payment.  

What are the Common Types of Limited Companies Debt?

Directors must 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;
  • Cost;
  • Impact on your business.

Therefore, prioritise the repayment of debts such as those.

Bounce Back Loan advice for Company Directors

Directors should seek professional advice if they have Bounce Back Loan worries regarding repayments. The UK government introduced the COVID-19 support scheme to support businesses through the pandemic. However, repaying the loans has been difficult. So ensure you seek advice sooner than later.

Simple Business Debt Guide – What are preference debts?

The company law empowers certain creditors to recover money owed. Note priority creditors impact when the action takes place on the company, which will severely impact your ability to run the business effectively. Failure to react promptly may cause::

  • Utilities to be disconnected;
  • bailiffs attending;
  • eviction;
  • 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 cannot 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 company’s debts. Such action may lead to a director’s disqualification order for possibly fifteen years.

However, solvent companies may prioritise debts, such as:

Repaying a commercial business mortgage

  • Mortgage lenders can repossess land and property. 
  • Lenders for use by a business are more active in 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 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 formally advising authority;
  • Failing a formal arrangement may trip the authority to court instructing bailiffs.

Utilities

  • Failing to pay utility bills exposes your company to having utility supply cut off. By law, they must give 14 days’ notice. 
  • When in arrears, advise the supplier requesting a payment arrangement.

HMRC Debt

When in arrears with any aspect of HMRC debt, ensure you make contact as soon as possible. HMRC system automatically issues penalties and Inters. Providing you act quickly, HMRC may agree to a Time to Pay arrangement. 

HMRC can apply several 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 final payment. Therefore, any arrears allow 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, it may be considered a priority debt.   

Business Trade suppliers

  • Specific trade supplier may be considered priority creditors. Ensure these suppliers know your situation and request they work with you while informally repaying any old debt. Suppliers often allow leeway compared to others if 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 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 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 allows the creditor to proceed with a winding-up petition. 

Company non-priority debts to consider are:

  1. Business suppliers considered non-essential.
  2. Company credit cards
  3. Particular unsecured bank loans and overdrafts 

Actions To Take So You May Manage Company Debt

If suffering growing limited company debts, ensure you always 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 company’s fiscal position. The most suitable path for your company relies on how amenable your company’s suppliers remain 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 is waste you cut. Check out the below areas to consider carefully:

  • Downsize to cheaper business premises;
  • Decrease your debt repayments;
  • Refinance.
  • Create redundancies.

Renegotiate the terms of your debt

First, plan to contact your company’s creditors, taking extreme care to honestly explain your company’s financial situation. Ensure you have sought advice and have a feasible business plan that allows the business’s turnaround. Inform your company’s creditors of the company’s intention to repay any debt owed in full. Usually, most of your company’s creditors will understand your financial predicament. They know failure means little, if any, repayment. 

So, renegotiating the terms of debt depends on your company’s current financial status. They will review your history financially. So, remain upbeat, act honestly, and approach the issues earlier than later. 

To improve your company’s 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 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 cannot pay its liabilities when they are due, it’s said to be insolvent. Once a company is known to be insolvent, the company directors must meet new legal obligations. If they fail to do so, they could be personally liable for the company’s debts and banned from operating as a director for up to 15 years.

Company Insolvency Test?

Company directors remain legally obliged to recognise whether their limited company is solvent. If insolvent, they must ensure immediate action to protect the company’s creditors remains in place. To determine if your company is insolvent, complete the tests 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 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 believe your company is insolvent. In that case, you must take several initial actions 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 solid commercial track record;
  • Ensuring you protect the interests of the company’s 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 company’s creditors;
  • Avoid any preferential moves for anyone, whatever.

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 on its up-to-date position. 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 and consider negotiating a time to pay with HMRC. Failing to do risks your company facing severe collection failure, which is a winding-up order.

However, HMRC, if contacted early enough, may grant a three- to twelve-month instalment plan (Time To Pay).    

Many directors find dealing with HMRC overwhelming. (Fearful). Therefore, utilising the services of experienced insolvency practitioners makes good commercial sense when the survival of your business remains at risk. HMRC responds to companies seeking professional help. 

Agreeing a Time TPay arrangement enables directors if actions fast to avoid further late payment penalties and interest charges. Additionally, if you plan to turn around your underperforming business, a Time TPay extends your time to do so. You have then removed the worry of HMRC, allowing you to focus better and operate as a director.

Company Voluntary Arrangement (CVA)

  • Company Voluntary Arrangement remains a legally binding agreement between the company and its creditors, allowing repayment in full or a percentage of your company’s debts ranging from one to five years. To be approved, 75 per cent of your creditors (by value) must vote for the CVA.
  • Then, any legal action and interest charges from the company’s creditors cease. Then debts agreed upon 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 ensures creditors’ money is collected as agreed in the CVA as voted. 

Pre-Pack Company Administration

If your company’s debts do not allow it to be 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 new company, while not carrying over the debts of the previous company. Too many pre-packs are considering unsafe and financially immoral sales. Extreme care is required, as creditors will censor every action.  

The insolvency practitioner, who manages the process, must 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. 

By Taking early action with a robust and transparent plan, you and your team will 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 COVID-19 pandemic, we have set up a VIRTUAL meeting connection, which allows directors to discuss issues in the safety and privacy of the home or workplace.

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