For many directors, deciding whether to close a company is one of the most difficult decisions they will make. But financial pressure does not automatically mean liquidation is inevitable. Taking early insolvency advice can help you understand the position, assess the options and make an informed decision about what happens next.

One of the hardest sentences a business owner can say to me is:

“Claire, I think it’s time to close the company.”

Normally, they haven’t reached that conclusion overnight.

There may have been months of juggling cash flow. HMRC payments have fallen behind. Suppliers are becoming impatient. The director has reduced or stopped taking their normal salary. Every payment is being prioritised and the bank balance is being checked before deciding which creditor can be paid.

Eventually, it can feel as though something has to give.

But there is an important distinction:

Thinking that your company needs to close and knowing that it needs to close are two different things.

Is closing the company really the only option?

When a director approaches us because they believe their company may need to close, our first job isn’t simply to recommend a liquidation.

We need to understand what has happened and establish the company’s true financial position.

Some of the questions I would want to explore include:

• What does the company currently owe?
• What cash does the company have available?
• What assets does the company own?
• Is the underlying business profitable or potentially viable?
• What has caused the cash-flow difficulties?
• Is the company behind with HMRC?
• Are suppliers, lenders or other creditors taking recovery action?
• Is there a winding-up petition or other immediate threat?
• Have the directors provided personal guarantees?
• Is there an overdrawn director’s loan account?
• Are employees owed wages, holiday pay or other sums?
• Could the business be refinanced, restructured or rescued?

The answers help us determine whether the business is experiencing a temporary cash-flow problem, requires more fundamental restructuring, or has reached the point where an insolvency process should be considered.

Does speaking to an insolvency practitioner mean my company will be liquidated? NO!

This is one of the misconceptions I would particularly like directors to move away from.

Taking insolvency advice does not commit you to putting your company into liquidation.

An insolvency practitioner can help directors understand the financial position and the different routes potentially available. Depending on the circumstances, these might include refinancing, negotiating with creditors, restructuring the business, a Company Voluntary Arrangement (CVA), administration or a Creditors’ Voluntary Liquidation (CVL).

Sometimes, after considering the position carefully, liquidation will be the appropriate course of action.

Sometimes it won’t.

The important thing is that the decision is made on the basis of the company’s actual circumstances rather than fear, assumption or pressure from one particular creditor.

What if my company can’t pay HMRC?

HMRC arrears are often one of the clearest signs that a company is experiencing financial pressure.

Missing a single payment doesn’t necessarily mean a company is insolvent. However, repeatedly using money that would otherwise have been paid to HMRC to meet wages, suppliers or other operating costs can indicate a more fundamental cash-flow problem.

Directors should be particularly careful where liabilities are continuing to increase without a realistic plan for bringing them under control.

Depending on the circumstances, there may still be options available, including discussing a Time to Pay arrangement with HMRC. But the earlier the problem is addressed, the better.

What about personal guarantee?

This is another reason why directors should understand the complete picture before deciding what to do.

A limited company normally has its own debts and liabilities. However, directors may have personally guaranteed particular obligations, such as bank lending, asset finance, property leases or supplier accounts.

If the company cannot meet those liabilities, the creditor may seek to rely upon the guarantee.

That doesn’t mean directors should make decisions purely to protect themselves from a personal guarantee. However, identifying guarantees early means their potential consequences can form part of the advice directors receive.

What happens to a director’s loan account?

An overdrawn director’s loan account (DLA) can become particularly important if a company enters liquidation.

If a director owes money to the company, that balance is generally an asset of the company. A subsequently appointed liquidator would therefore need to consider the position and whether the balance should be recovered.

This can sometimes come as an unwelcome surprise to directors who have historically taken drawings from their business through a loan account.

That is why I would want to understand the DLA position before, rather than after, a decision is made about liquidation.

What happens to employees if the company closes?

For many business owners, this is their biggest concern.

They may have worked with employees for years and feel a significant personal responsibility towards them.

What happens will depend upon the route ultimately taken. If the company enters liquidation and employees are made redundant, there are statutory provisions under which eligible employees may be able to claim certain amounts from the National Insurance Fund, subject to the applicable rules and limits.

This is an area where directors should obtain specific advice rather than make assumptions about what employees will or won’t receive.

Why taking advice early matters

The word “early” is important.

If advice is taken while there is still cash, time and some flexibility, there may be several options to consider.

If the first conversation happens after the bank account has been frozen, a winding-up petition has been presented, employees haven’t been paid and critical suppliers have stopped providing goods, the available options can be much narrower.

Taking advice early isn’t an admission of failure.

It’s a way of understanding the position before making decisions that may be difficult to reverse.

What should I do if I think my company needs to close?

Start by getting a clear picture of the company’s finances.

Don’t make significant payments, transfer assets or enter into unusual transactions simply because you believe insolvency may be approaching without first taking appropriate professional advice.

And don’t assume that you need to know which insolvency procedure is appropriate before speaking to an insolvency practitioner.

That’s what the advice is for.

At Middlebrooks, we can look at the company’s circumstances, explain the options in straightforward language and help you understand the practical consequences of each route.

Sometimes that conversation ultimately leads to liquidation.

Sometimes it leads somewhere else.

Either way, it allows the decision to be made properly.

Thinking about closing your company?

I’ve also recorded a short video explaining some of the issues directors should consider when they believe it may be time to close their business:

▶ Watch: Moving Forward When It Is Time to Close a Company

If any of the issues in this article sound familiar, speak to us before the situation becomes urgent.

Contact Claire Middlebrook and the Middlebrooks team for an initial conversation about your company’s position and the options that may be available.