Map Director Risks Before Choosing an Insolvency Adviser
The Insolvency Service promises earlier help, but directors still need to test every trading, repayment and closure route before appointing anyone.
The Insolvency Service has published a five-year strategy promising earlier guidance for directors and faster action when companies fail. The strategy says a phoenix-company taskforce will grow to 50 people by 2028, but it gives no comparable timetable for helping a viable small company avoid insolvency.
What this means if you are a director
Acting early does not mean waiting for an Insolvency Service letter or calling the first insolvency practitioner whose website appears in a search. It means finding out where the danger sits before an adviser recommends a procedure from which that adviser may earn fees.
The strategy says directors should understand their options earlier. It does not set out a neutral referral system, explain how conflicts will be controlled or publish evidence showing that its proposed guidance will save viable businesses. Its own Director Information Hub tells an insolvent company’s directors to protect assets, avoid worsening creditors’ position and consult or consider appointing an insolvency practitioner. That is sound as far as it goes. It does not replace a route-by-route comparison.
Your first question is whether the underlying business can produce cash after current trading costs and taxes. If it can, time to pay with HMRC, negotiated arrangements with suppliers, controlled refinancing or a Company Voluntary Arrangement may preserve it. A Company Voluntary Arrangement, or CVA, is a formal repayment agreement supervised by an insolvency practitioner while directors usually retain control.
An informal creditor arrangement may be cheaper, but it does not automatically bind every creditor or stop legal action. Refinancing may buy time, but only if the company can service the new debt without giving away security or personal guarantees that turn a company problem into your problem.
If the company can pay all debts, a solvent wind-down may allow it to collect money owed, sell assets, settle creditors and close properly. Strike-off is not an alternative to insolvency, Companies House guidance says, and creditors can object or seek restoration. If the company cannot be saved, a creditors’ voluntary liquidation, or CVL, may be the controlled closure route. Formal insolvency is sometimes right. It is not a sentence imposed merely because tax or suppliers are overdue.
You must also understand who gets paid if the company goes formal. HMRC’s published creditor-priority guidance places fixed-charge lenders against their secured assets first after realisation costs. Insolvency practitioners’ fees and expenses then come ahead of preferential claims. Employee claims with preferential status and qualifying HMRC debts, including VAT, PAYE Income Tax and employee National Insurance deductions, rank ahead of floating-charge lenders and ordinary unsecured creditors. A ring-fenced prescribed part may be available to unsecured creditors. Shareholders are last.
The adviser therefore needs to explain not only what the procedure costs, but whose return those costs reduce. GOV.UK states that a CVA can only be obtained through an insolvency practitioner, who charges to propose and administer it. In administration, the company pays the administrator’s fees. In liquidation, costs and the liquidator’s remuneration are paid from available company assets before ordinary unsecured creditors receive a distribution.
Your personal position sits alongside this. A personal guarantee can expose your home, savings or other assets if the company defaults. An overdrawn director’s loan account is money you owe the company and can be pursued by a liquidator. Continuing to trade while worsening creditors’ losses can raise wrongful trading and misfeasance questions. Serious misconduct can lead to disqualification. None of these outcomes is automatic, but delay makes the evidence harder to explain.
Corporate insolvency procedure differs in Scotland and Northern Ireland, so take advice from someone qualified for the part of the UK where the company is registered.
What to do
- Build a single distress file before discussing a procedure. Include current bank balances, a weekly cash-flow forecast, aged debtors and creditors, management accounts, tax liabilities, payroll, finance agreements, leases and every demand or court document. Separate overdue debt from bills that will fall due soon. Mark which assumptions depend on customers paying on time. This tells you whether the company has a temporary cash gap, an unprofitable business model or no realistic route to meet liabilities.
- Map HMRC arrears by tax and period. List VAT, PAYE, National Insurance, Corporation Tax and any other liability separately, together with filed and missing returns, due dates, penalties and previous payment promises. Contact HMRC before enforcement advances and ask whether time to pay is available. HMRC’s guidance says it will test whether the proposal is realistic and affordable and may expect assets to be released or personal funds introduced. Do not promise instalments that the forecast cannot support, and budget for new taxes as they arise.
- Find every personal guarantee and read the signed document, not the lender’s summary. Record the creditor, guaranteed amount, any cap, enforcement trigger, supporting security and whether more than one guarantor is liable. Ask a solicitor who is independent of the proposed insolvency appointment to check unclear wording. Do not assume liquidation cancels a guarantee. It can instead establish the company’s shortfall and prompt the lender to pursue you.
- Reconcile the director’s loan account. Match withdrawals, expenses, dividends, salary and money introduced against the accounts and bank statements. Do not declare a backdated dividend or move assets to reduce the balance without tax and legal advice. The Insolvency Service’s published fact sheet says a liquidator can take legal action to collect money owed by a director. If you cannot repay it immediately, establish that now and include it in your personal exposure plan.
- Measure payroll and creditor pressure. Identify wages, pensions, rent, utilities, essential suppliers, secured lenders, judgments, statutory demands and any threatened winding-up petition. Mark which suppliers are essential to continued trade and which can be replaced. Record the commercial reason for every payment made while insolvency is possible. Do not repay yourself, family members or connected companies ahead of creditors simply because you control the bank account.
- Test the routes in order, using the same cash forecast for each. First test cost cuts, asset sales, fresh equity and refinancing without unaffordable guarantees. Then test time to pay and written supplier arrangements. If all debts can be paid, test a solvent wind-down. If the business is viable but needs binding creditor relief or protection from action, compare a CVA and administration. If it is not viable, compare a controlled CVL with the risks of waiting for compulsory liquidation.
- Interview more than one adviser and demand a written options paper. Ask what keeps the business trading, what closes it, what each route costs, who pays those costs, what happens to guarantees and the loan account, and what return each creditor class is expected to receive. Ask whether the adviser or an associated firm will take the formal appointment. A practitioner in a CVL acts for creditors, not for you, once appointed. Record the board’s decision, the information used and why the selected route was expected to limit creditor losses.
Do not
- Do not wait for an Insolvency Service, HMRC or lender letter to decide what your problem is. By then, enforcement may have reduced your choices and the first adviser may be discussing only the procedure that firm can sell. This week, assemble the figures, identify your personal exposure and obtain a written comparison of trading, repayment, rescue and closure routes.
