Essential Insolvency Advice For Small Businesses In 2022

Any business can become insolvent, no matter how big or small they are. However, when the economy is under pressure, and external stress factors are heightened, smaller businesses are particularly vulnerable.  

2022 has been a particularly challenging year for businesses, with rising inflation, disruption to supply chains and the ongoing impact of the pandemic. So what should you do if you are the owner of a small business that’s facing insolvency?

The first and most important piece of insolvency advice for small businesses is to act quickly. Don’t bury your head in the sand. This will only allow problems to escalate to a potentially irreversible state.

First things first, it’s crucial to know the most common signs of insolvency to look out for. This will help you to be proactive in detecting problems. The most common signs of small business insolvency include:

• Reaching maximum borrowing limits
• Pressure from creditors & demands for payments, such as a Winding Up Petition
• Struggling to pay staff wages

If any of these signs look familiar, there is crucial insolvency advice for small businesses that you can take in order to place your business in the best position possible. If you act early, it can be possible to recover an insolvent business through restructuring or other rescue methods. So, if your business is struggling, it’s important to consider the following steps:

Contact An Insolvency Practitioner

Whether you know that your company is definitely insolvent, or have concerns that it might be heading that way, it’s important to seek professional advice at the first signs of trouble. A licensed insolvency practitioner will be able to identify the main causes of your financial problems, and suggest the best course of action accordingly. Depending on the individual circumstances of the company, the following paths may be taken in response to a small business insolvency:

Voluntary Liquidation

In many cases, where a small business is unable to repay their creditors, the most sensible option is to liquidate the company. The process for liquidating an insolvent company is known as Creditors Voluntary Liquidation (CVL). The main benefit of a CVL is that it removes creditor pressure quickly, whilst preventing further legal action from being taken against the company. It means redundancy payments and other statutory entitlements can be claimed from the government, and that all affairs are wound up correctly so that directors can direct a new company in the future.

Compulsory Liquidation 

As we mentioned a moment ago, the most essential piece of insolvency advice for small businesses is to act fast and not ignore the creditor pressure being faced. If creditors have made several attempts to claim money that is owed to them without success, then they may issue a Winding Up Petition. If a judge decides that the company should be liquidated then a Winding Up Order will be issued for the company to be  dissolved and its assets distributed. Where possible, compulsory liquidation should be avoided at all costs. It is far better to voluntarily liquidate your company, as you maintain some level of control of the business, unlike in compulsory liquidation where you have no control. Voluntarily liquidating the company also shows that as a director, you are being proactive in prioritising the interests of creditors. 

Administration

The best insolvency advice for small businesses may not always be to close the company. Where there is a realistic prospect of recovery, there are various business rescue options that could be utilised. One of these is administration. This process provides an automatic stay on any current or pending legal actions to facilitate the rescue of the company or the sale of the business and its assets on a going concern basis.

Company Voluntary Arrangement (CVA)   

A CVA is another useful business rescue tool that has proven successful for small businesses in financial difficulty. This is a binding contract between a company and its creditors to pay back some or all of its liabilities over a specified period of time. Crucially, this gives companies the breathing space that they need to restructure their business in order to make it successful once again. 

Company Moratorium 

Often used as a preamble to administration or a CVA, a moratorium  provides a company with protection from the court against any new or existing legal actions being bought by creditors. This gives creditors the breathing space that they need to implement a recovery plan. 

Ensure You Know Your Director’s Duties

When a company becomes insolvent, it is the duty of the insolvency practitioner to investigate the conduct of directors in the period leading up to liquidation. This isn’t just insolvency advice for small businesses, but for any kind of business. If your company is struggling financially, it’s crucial that you’re aware of what your duties are as a director. When facing insolvency, it’s essential that directors are prioritising the interests of creditors, and putting the company first. If insolvent, the company must not continue to trade. Trading whilst insolvent is considered a part of wrongful trading, which could result in directors being disqualified, or in the most severe cases, legal action being taken against them. 

For further insolvency advice for small businesses, or to discuss the option of liquidating or rescuing your struggling company, please don’t hesitate to get in touch with the team at My Liquidation.