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My company is insolvent due to Covid-19 – what now?

Posted on: Monday 18th January, 2021

My company is insolvent due to Covid-19 – what now?

The effects on businesses of Covid-19 have been devastating, with entire industries experiencing unprecedented financial distress. Despite the government’s coronavirus support packages for business, the impossible trading conditions inflicted continue to disrupt efforts towards recovery.

So what should you do if your company is insolvent due to Covid-19? Here’s what happens next.

What happens when a company is insolvent due to Covid-19?

If your company is insolvent, you must stop trading straight away. This protects your creditors from further losses, and enables you to meet your statutory obligations as a company director.

You’ll need to seek assistance from a licensed insolvency practitioner (IP) to confirm your company’s position, and follow an insolvent liquidation procedure called Creditors’ Voluntary Liquidation (CVL).

The key consideration when your company is insolvent is your creditors. CVL places their interests above your own and those of the company, and helps to minimise the possibility of misconduct allegations being made against you in the future.

Entering Creditors’ Voluntary Liquidation when your company is insolvent

After you’ve sought help from a licensed IP, they will administer the CVL process. This broadly involves dealing with the company’s outstanding affairs, and repaying debts where possible from the sale of assets.

You’ll need to assist the IP in their work by providing financial information and relevant documentation when requested. The IP will also investigate the actions of directors up to the point of insolvency, to establish whether any wrongdoing occurred.

Actions that could be construed as misconduct include repaying one creditor in preference to others – if a personal guarantee was attached to a loan, for example, and this was repaid first. Transactions that indicate the sale of assets at undervalue will also be scrutinised carefully by the liquidator, and may be reversed.

The fact that you’ve entered insolvent liquidation voluntarily, however, demonstrates your intent to protect creditors from further loss, and it’s highly beneficial for you to take this route rather than waiting to be forcibly liquidated.

CFS Redundancy Payments are a very professional company, Caroline who is dealing with our case is friendly, compassionate and very clear in explaining everything during this difficult time. The service we have received has been amazing, Thank you.
Tina Hill
Tina Hill

What are the benefits of CVL for companies affected by Covid-19?

Although entering liquidation clearly isn’t an ideal outcome, if the company has experienced severe financial difficulty to the point that it’s become insolvent, there are specific benefits when taking this route.

We’ve already mentioned the legal requirement for directors to prioritise creditor interests, but you also protect yourself from possible disqualification and personal liability. Additionally, you might be able to claim director redundancy pay if you’re an employee of the company.

This isn’t a widely known fact, but directors are eligible to claim statutory redundancy and other entitlements in certain instances. If you believe you can’t afford to pay for a CVL, a redundancy payout could fund some or all of the cost.

The first step to take if your company is insolvent

You must seek professional help if your company has become insolvent, whether as a result of the coronavirus pandemic or for any other reason. Continuing to trade, however well intentioned, can increase losses for your creditors, for which you could become personally liable at a later stage.

You may be tempted to try to dissolve your company voluntarily, but again, there are repercussions when you attempt to close an insolvent company via this method, as it’s intended for solvent companies only and creditors can push back on this which will see the dissolution rejected by Companies House.

Please get in touch with one of our experts to find out more. CFS Redundancy Payments operates offices around the country, and will be able to let you know if you’re eligible for statutory redundancy.

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