Many businesses go through difficult periods when cash flow is tight.
In the past, a short term increase in overdraft facilities or the refinance of property or equipment might have produced a much needed cash injection to help the company trade through a problem. But with a dearth in the availability of finance to all but the healthiest of businesses this is often not an option.
Each year thousands of companies run into financial difficulty for a variety of reasons.
If you are the director of a company you will be all too aware that the pressures of running a business can be huge. If your company has cash flow problems it may be trading whilst insolvent. This is also known as wrongful trading and is a complex subject which here at Wilson Field we can help clarify and advise on the way forward. As well as making sure that you are not operating illegally we can often formulate a strategy to help your business survive.
There are different definitions of “insolvency”. Balance sheet insolvency is where a company’s debts exceed the value of its assets. This can be further complicated by contingent liabilities (eg liabilities which may or may not arise as a consequence of warranties or guarantees given). Cash flow insolvency is where a company is unable to pay its debts as and when they fall due.
Obvious signs that a company is insolvent might include:
- Not paying employees’ deductions in respect of PAYE or NI by 22nd of the month (or the 19th of the month if paying by cheque through the post).
- Building up VAT arrears.
- Accumulating trade creditors.
- Failing to keep up to date accounts.
- Taking credit from suppliers where there was no reasonable prospect of paying the creditor on time.
If you are a director, the main risk of allowing wrongful trading is that you may become personally liable for the debts of the company. Additionally, you can be fined and possibly also be disqualified from holding office as a director for up to 15 years.
If you are concerned that your company may be trading whilst insolvent, you need the advice of a Licensed Insolvency Practitioner without delay. Give us a call.