Company debt problems rarely appear overnight.
A missed HMRC payment, an unaffordable Bounce Back Loan repayment or pressure from suppliers may initially seem manageable. However, the position can quickly become more serious when several debts begin to build up at the same time.
Directors may then find themselves receiving payment demands, worrying about personal liability or considering whether they can simply close the company.
The most important step is to understand the company’s true financial position before making further decisions.
Is Your Company Struggling With Debt?
A limited company may be experiencing financial difficulty if it:
- Cannot pay VAT, PAYE or Corporation Tax when due.
- Is falling behind with Bounce Back Loan repayments.
- Cannot pay suppliers within their agreed terms.
- Is using new borrowing to pay existing debts.
- Has had a Time to Pay arrangement refused or cancelled.
- Is receiving enforcement letters or legal demands.
- Has submitted a strike-off application that has been objected to.
- Cannot meet wages, rent or other essential business costs.
- Is regularly relying on money introduced by its directors.
One missed payment does not necessarily mean that a company must close. However, continuing to trade without properly considering the company’s financial position can make matters worse.
Early advice can help directors understand whether the business remains viable, whether its debts can be restructured or whether a formal insolvency procedure needs to be considered.
What Should Directors Do When Company Debts Are Building Up?
The first step is to prepare an honest picture of the company’s position.
Directors should establish:
- How much the company owes.
- Which creditors are unpaid.
- Whether new liabilities are continuing to arise.
- What money the company is expecting to receive.
- Whether the company can meet its ongoing costs.
- What assets the company owns.
- Whether any personal guarantees have been given.
- Whether there is an overdrawn director’s loan account.
- Whether the business can realistically return to profitability.
It is important not to base decisions solely on the company’s bank balance. A company may have money available today but still be unable to meet VAT, PAYE, loan repayments or supplier debts when they become due.
Company HMRC Debt
HMRC debt is one of the most common reasons directors seek insolvency advice.
A company may owe:
- VAT.
- PAYE and National Insurance.
- Corporation Tax.
- Construction Industry Scheme deductions.
- Other tax liabilities, interest or penalties.
In some circumstances, HMRC may agree to a Time to Pay arrangement. This normally requires the company to demonstrate that it can afford the proposed instalments while also keeping up with future tax liabilities.
A payment arrangement may not solve the problem where the company is continuing to generate further arrears or cannot meet its ordinary trading costs.
Directors should not ignore correspondence from HMRC. Recovery action can escalate and may ultimately include a winding-up petition.
Read our detailed guide: HMRC Debt Advice for Limited Company Directors
Outstanding Bounce Back Loans
A Bounce Back Loan is normally a debt owed by the limited company rather than its director personally.
A company can still enter liquidation with an outstanding Bounce Back Loan. The lender would usually be treated as a creditor within the liquidation.
However, the existence of the loan and the way the funds were used will normally be reviewed by the liquidator.
Directors should be prepared to provide:
- Company bank statements.
- Accounting records.
- Details of when the loan was obtained.
- Evidence showing how the money was spent.
- Explanations for payments to directors or connected parties.
- Details of any director’s loan account.
Using the loan for genuine company expenses such as wages, rent, stock or suppliers is different from withdrawing the funds for personal use without a proper business purpose.
Directors who are uncertain about how the loan was used should take advice rather than assuming that liquidation will automatically make the issue disappear.
Read our detailed guide: Bounce Back Loan Liquidation Advice
Can You Strike Off a Company That Owes Money?
Voluntary strike-off is generally intended for companies that have stopped trading and have no unresolved liabilities or other matters to deal with.
Where a company owes money to HMRC, a bank, a Bounce Back Loan lender, suppliers or another creditor, that creditor may object to the strike-off application.
If an objection is accepted, the proposed strike-off is suspended and the company remains on the Companies House register.
Submitting another application without addressing the underlying debt may simply result in a further objection.
Strike-off may not be appropriate where:
- The company is insolvent.
- HMRC or other creditors remain unpaid.
- A Bounce Back Loan is outstanding.
- The company owns assets.
- There are unresolved disputes.
- Money is owed by a director to the company.
- Creditors have already objected.
- The directors are unsure about the company’s position.
Where the company cannot pay its debts, a Creditors’ Voluntary Liquidation may provide a more appropriate and orderly way to close it.
Read our detailed guide: Strike-Off Objection Advice for Directors
Could the Director Become Personally Liable?
A limited company is a separate legal entity. The starting point is therefore that company debts belong to the company rather than its directors.
However, personal issues can arise in certain circumstances, including where:
- A director has given a personal guarantee.
- The director’s loan account is overdrawn.
- Company money has been used for personal purposes.
- Assets have been transferred for less than their proper value.
- Certain creditors have been treated more favourably than others.
- The company has continued trading and its position has become worse.
- Records are missing or do not explain significant transactions.
- There are concerns about the application for or use of a Bounce Back Loan.
The presence of one of these issues does not automatically mean that the director will be personally liable. It does mean that the circumstances should be examined carefully and explained at an early stage.
Should the Company Continue Trading?
Whether a company should continue trading depends on its individual circumstances.
The business may still be viable where it has profitable work, reliable income and a realistic plan for dealing with its debts.
However, directors should be cautious where the company is:
- Incurring new debts that it cannot pay.
- Taking customer deposits without confidence that orders can be completed.
- Using money due to HMRC to fund everyday trading.
- Paying selected creditors while leaving others unpaid.
- Relying on borrowing without a realistic repayment plan.
- Continuing to trade without up-to-date financial information.
Taking advice does not automatically mean placing the company into liquidation. It allows the available options to be considered before the position becomes more difficult.
What Options Are Available?
The appropriate route will depend on whether the underlying business remains viable and whether the company can realistically deal with its liabilities.
Possible options may include:
Informal Arrangements
The company may be able to negotiate revised payment terms with certain creditors.
HMRC Time to Pay
A manageable payment arrangement may be possible where the company can meet both the instalments and its future tax liabilities.
Refinancing or Additional Funding
Additional finance may assist a viable company, although directors should be satisfied that the borrowing can realistically be repaid.
Company Voluntary Arrangement
A Company Voluntary Arrangement may allow a viable company to repay an agreed proportion of its unsecured debts over time.
Company Administration
Administration may be considered where there is a business or asset value to protect and one of the statutory purposes of administration can be achieved.
Creditors’ Voluntary Liquidation
Where the company is insolvent and cannot continue, a Creditors’ Voluntary Liquidation can provide a formal process for closing the company and dealing with its creditors.
Read more about Creditors’ Voluntary Liquidation.
Do Not Wait Until a Creditor Takes Control
Directors sometimes delay taking advice because they are worried that speaking to an insolvency practitioner will mean losing control of the company immediately.
That is not the case.
An initial conversation is an opportunity to understand:
- Whether the company is insolvent.
- Whether the business can be rescued.
- What the directors should do next.
- What actions should be avoided.
- Whether any personal issues need to be addressed.
- What formal and informal options may be available.
Taking advice before a winding-up petition, enforcement visit or other legal action will usually provide more time to consider the available routes.
Speak to DCA Business Recovery
DCA Business Recovery provides clear, confidential and practical advice to limited company directors dealing with company debts.
We will consider the whole position rather than looking at one debt in isolation. This may include HMRC arrears, Bounce Back Loans, supplier debts, personal guarantees, director’s loan accounts and any concerns about the company continuing to trade.
Our initial advice is free and without obligation.
Call us on 01702 344558 or contact our Freephone Directors Helpline on 0800 066 2544, available from 8am until 8pm, seven days a week.
You can also arrange a confidential discussion by using the booking link at the top of our website.
