Writing off unaffordable debts. Can it save my company?

If you find your limited company burdened with unaffordable amounts of debt, you might look for a way of writing them off to save the company.

However your company became insolvent, if you can’t repay what your company owes when they’re due, you do have options that can help you write off those unaffordable debts. If you act early enough, these actions could potentially save the company.

What can happen if I can’t pay my company’s debts?

If your company cannot repay its debts when they fall due, your creditors are within their rights to pursue you for what you owe them.

Their first attempts are likely to be through repayment reminders. These can come in the form of phone calls, letters, and emails. If the debt relates to a limited company, they should be addressed to that company rather than you, personally, and should be delivered within working hours. Anything outside these parameters and using threatening language in their correspondence could overstep the boundaries of creditor pressure and constitute harassment.

If you ignore reminders from your creditors, they can issue more formal debt recovery options. These could include County Court Judgments (CCJs) or Statutory Demands. The former of these can have a severe detrimental impact on the company’s credit file, making it harder to obtain credit in the future.

Ignoring this level of creditor pressure is ill-advised, but if you do, it can lead to visits from debt collectors, and even bailiffs, where they can attempt to collect monies, or company assets equivalent to its value.

If you owe more than £750, your creditors can even apply for a winding-up petition, which forces the company into compulsory liquidation, freezing the company’s bank accounts and making trading impossible.

Writing off unaffordable company debts

Support is available to help you write off your company’s unaffordable debts. Depending on your situation, including the value of your company’s assets, the level of debt, and what you want for the future, your company could have several options.

Repaying your company’s unsecured debt in affordable instalments

If your company has a viable business model, and the potential to be profitable were it not for its burdensome debts, it may be possible to repay those debts in instalments tailored to what the company can afford. This can be achieved through a Company Voluntary Arrangement (CVA), which usually lasts five years, and allows the company to continue trading for the duration. Once the arrangement concludes, any remaining unsecured debt is written off.

Restructuring the company

If the company would benefit more from restructuring, you can explore administration. A licensed and regulated insolvency practitioner takes control of the company as an administrator while making the changes necessary to make the company profitable again and appealing to potential buyers.

Closing the company

If your company’s debts are of such a level that recovery isn’t feasible, you should put the company into voluntary liquidation before the creditors can force your hand. Doing so allows your company to close in an orderly manner and writes off its unsecured debts.

Insolvent companies can achieve this by entering a Creditors Voluntary Liquidation (CVL). The process is formal and overseen by a licensed and regulated insolvency practitioner. It closes your insolvent company and draws a line under its debts, staff are made redundant, with leases terminated, and allowing you to start afresh.

Starting again

As long as you’ve acted with due diligence in your time as director, you should be able to start a new company once the insolvent company is liquidated.

Depending on what your insolvency practitioner advises, you may be able to purchase assets from the insolvent company and start a new one. This can be done through a pre-pack administration or liquidation. However, there are strict criteria around when this can be enacted, especially around the use of the old company’s name, and your company may not be suitable for either.

Similarly, if the insolvency practitioner finds you’ve neglected your directorial duties or acted outside of the best interests of the company and its creditors, there could be grounds to issue you with a director’s ban or disqualification.

Personal liability for your company’s debts

In most cases, you won’t be held personally liable for your company’s debts. This is due to limited companies coming with limited liability protection, separating the company’s finances and its debts from your personal finances.

This could change if, during a formal insolvency process, such as liquidation, the insolvency practitioner finds you’ve traded while knowing that the business is insolvent (trading whilst insolvent, if you’ve committed wrongful trading, or signed personal guarantees during your time as director.

Summary

If your limited company is overwhelmed by unaffordable debts, you need to act swiftly to ensure you stand the best chance at achieving your desired outcome. Burying your head in the sand and hoping that the problem will go away will only worsen the situation and may lead to your creditors pressuring your company to recover what you owe. By speaking to a licensed and regulated insolvency practitioner can help you ascertain which options are most suitable for your company and its circumstances. Those options could include restructuring, paying into a formal repayment plan, or closing via voluntary liquidation. In most cases, the company’s limited liability protection means you won’t be held personally liable for its debts, though depending on your actions as director, this may change.