Q&A - Bad debt means I can't pay staff or suppliers this month - does this make my business insolvent?

Q: I am a director of a limited company. A major customer went into liquidation owing me a large sum of money and I have no real prospect of being paid. I am now unable to pay my staff their full wages this month. I also have supplier bills which the company cannot pay, but which I will pay using my personal credit card. Is the business insolvent? What can I do?

A: Sadly, the failure of one business can often have a domino effect on other businesses. You need to take professional advice as soon as possible, the sooner you do so the better the prospects for your business. In addition, there are implications for you personally if you fail to act promptly in relation to your business.

There are two main economic tests of whether your company is insolvent, but this analysis requires careful consideration of all the business's financial circumstances.  Failure to seek professional insolvency advice and/or continuing to trade when you should have ceased trading could potentially result in legal action against you.  As a company director, you could face action for various breaches of the Insolvency Act 1986 and, in some circumstances, you can be held personally liable for some or all of the company's debts.  If a company director does not act responsibly and in accordance with his duties to the company, or is reckless or fraudulent, there can be severe penalties, including Directors Disqualification proceedings.

If your company is deemed insolvent it need not necessarily spell the end for the company. Depending on the circumstances, there are various options you can consider with your professional adviser, such as a Company Voluntary Agreement ("CVA"), whereby you come to an arrangement with your creditors to pay a proportion of your debt to each creditor.  The important point is to take professional advice sooner rather than later.