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Dealing with Creditors when Facing Insolvency

Creditors & Insolvency

How do I deal with creditors when facing insolvency? 

If you’re facing the prospect of insolvency then it’s crucial to take appropriate action without delay. Trying to ride out the storm can be risky, particularly for company directors. However, there are various potential ways to avoid or deal with insolvency, all of which require a swift response to the situation. Directors need to take extra care if their business is having financial difficulties, as they can be held personally liable for debts in certain circumstances and can even be disqualified.

Dealing with the effects of insolvency 

The first thing to try and do when facing insolvency is to see if it’s possible to obtain some new financing. You could also try and achieve a compromise with your creditors. But if the situation is dire you can decide to initiate voluntary liquidation proceedings, before a client decides to do so. However, it’s often possible find a solution through dialogue with creditors, such as extending or altering debt repayment agreements, as the survival of your business is usually their best chance of getting paid! 

Don’t favour creditors 

Transactions which favour specific creditors can be set aside by a court when a business goes into liquidation. It’s important to understand how sections 238 and 239 of the Insolvency Act 1986 can essentially invalidate business deals which took place in a certain period before a company is wound up. Additionally, directors can face becoming personally liable for debts in cases where these types of transactions are set aside. 

How can I avoid liability for debts as a company director? 

Company directors who allow their business to carry on trading in the face of impending insolvency can be asked by a court to personally repay some of the company debts. This is because they have an ongoing duty to protect any creditors. They can also become liable in cases of misfeasance, where there are pension deficits or personal guarantees. 

How can I avoid disqualification as a director? 

There are a variety of reasons a director can be disqualified. As long as you maintain admin and try and protect the interests of your company and its creditors - and ensure these attempts are recorded in board minutes - it’s unlikely you’ll be disqualified as a result of insolvency.

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