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Frequently Asked Questions (FAQs) about Insolvency and Business Recovery
Frequently Asked Questions (FAQs) about Insolvency and Business Recovery
Navigating insolvency, redundancy, director liability, and financial distress can be a little overwhelming. We always work to offer you clear, expert guidance so that we can help business owners, directors, creditors, charities, and CICs make informed decisions during challenging times.
Some questions about insolvency, including what insolvency practitioners do, how employee redundancy is handled, directors' responsibilities, and what to do if your business or organisation faces financial uncertainty, tend to come up regularly. So we have answered a few of the most common ones below.
Whether you're based in Leicester, Coventry, Warwick, Northampton, elsewhere in the Midlands, or beyond, we are happy to help, so please use these FAQs as a jumping off point. If they answer your question, that’s great. If they raise more questions or the answers are telling you there may be an issue to deal with, just contact the team for a confidential, no-obligation discussion, and we will see how we can help you.
What is an Insolvency Practitioner (IP), and how can you help my business if I am having financial issues?
An IP is a licensed professional authorised under the Insolvency Act 1986 to manage formal insolvency processes and liquidations as well as areas such as Members Voluntary Liquidations. What we do varies, but we all adhere to a code of practice, and you should only ever use a licensed practitioner.
How we go about our duties can differ. Here at Smart Business Recovery, for example, we tend to focus on offering a compassionate and empathy based approach. While we must strictly adhere to the legal and ethical considerations (we will make this clear to you when you speak to us), we will always look for the best solution for all concerned. It is about taking a practical route to resolving your problems. We can help with restructuring, refinancing, exit strategies, and arranging early intervention to minimise stress and maximise recovery.
Am I bankrupt or insolvent, what’s the difference?
The difference between insolvency and bankruptcy is very clear, however, the press tends to use bankruptcy as a sort of catch all term, and that can cause some confusion.
- Insolvent means your business or personal affairs can’t cover debts with current assets.
- Bankruptcy is a formal status applied to individuals by the courts.
A limited company, therefore, cannot be “bankrupt”; it can only be insolvent
How much will an Insolvency Practitioner cost and do I need to pay for the initial consultation?
We can’t speak for other IPs, but Smart Business Recovery offers a free, confidential initial consultation.
As to the ongoing costs, that will be made clear as soon as we know where we stand with your situation in terms of the complexity, size, and the details of the insolvency.
So, while we can’t tell you in advance, we will explain costs in detail and make things as transparent as possible at all times as soon as we can.
Can a business still trade if it is insolvent?
Technically, yes, but to avoid any misunderstanding, it’s often a bad and even dangerous choice. Trading when insolvent is technically not allowed, so unfortunately, this is one of those ‘maybe’ answers.
If, and only if, there is a possibility that continuing to trade would be the best solution, then yes, and IP may agree to a continuation of trade.
Rationally speaking, (not to be pessimistic here, just to make sure we are being realists), continuing to trade is not likely because you are already in a position of insolvency. We will explore your position in the initial meeting.
How quickly can an insolvency practitioner step in to assist with my business difficulties?
As soon as is practical and always as soon as possible. Speed matters in insolvency, so we emphasise urgency with all our advice and processes. The reason we keep Midlands-based offices in Leicester, Warwick, and Coventry is partly to make sure we can offer a rapid, personalised response.
The sooner we start, the sooner we can get a solution for you.
As a director, am I personally liable for my company's debts if it becomes insolvent?
Generally, no, because limited company status protects directors. However, you can be held liable under certain circumstances.
The most common reasons a director may be personally liable for company debts are:
- You signed a personal guarantee
- You traded while insolvent, misfeasance, or preferred certain creditors
- You withdrew excessive funds or issued unlawful dividends
It’s important you are aware of where you stand with these, so we will make a point of assessing your personal liabilities, if any, early in the insolvency consultations.
What happens about directors’ loans when a company becomes insolvent?
It is probably fair to say that directors loans are one of the areas of real financial concern when a business becomes insolvent. The reason they can cause such distress is that an overdrawn director's loan is considered a company asset. That means you will be pursued for repayment as part of the insolvency.
If not repaid, your director's loan remains a debt owed to the business and may result in personal liability.
From the other perspective, if you loaned the business money, then you would be classed as an unsecured lender and a creditor. You may be tempted to take the money back sooner than you intended if you see financial problems looming.
DO NOT TAKE ANY ADDITIONAL MONEY BACK, OR PAY ANY LINKED PERSON DIFFERENTLY, PRE-INSOLVENCY.
This could lead to accusations of preferential debt payments, and legally it could land you in some very hot water.
Will insolvency proceedings affect my personal credit rating or ability to run future businesses?
It shouldn’t affect your personal financial standing if everything is in order and the insolvency is managed correctly. Your personal credit can be impacted, though, if, for example, you hold personal guarantees. Usually, though, no, it won’t affect you personally because your personal and business finances are separate things.
In terms of your professional standing, Directors may face disqualification (2–15 years) if misconduct is found.
Handling the process responsibly through a reputable IP like Smart Business Recovery can mitigate long-term effects. Whether you are affected personally or professionally, though, will depend on the circumstances of your insolvency.
What happens to my employees if my business enters insolvency proceedings?
Sadly, it is usually the case that any employees will be made redundant as part of the insolvency process because the business will no longer be trading. They can claim:
- Statutory redundancy pay
- Notice pay
- Holiday pay
- Outstanding wages
We will help with this and advise on how to resolve redundancies as the appointed Insolvency Practitioner.
Who is responsible for paying employee redundancy claims during insolvency?
Employees’ claims are usually paid by the Insolvency Service's National Insurance Fund, up to the statutory limits. If we are your insolvency practitioner, we will coordinate the submissions to the right department and make sure the reimbursement happens as soon as possible.
Can company directors claim redundancy pay if their business enters insolvency?
The answer to this is in two parts.
Technically speaking, yes, according to the rules, a Director is an employee and is therefore entitled to redundancy pay.
The second part of the answer is a little less upbeat, I'm afraid. The practical answer may be yes, but that is only if you meet the right criteria, and Directors often don’t.
Talk to us and we can assess whether you have a valid claim through the redundancy payment service.
Can charities and Community Interest Companies (CICs) go through insolvency?
Yes, unfortunately, charities, CICs and other third sector organisations can enter liquidation, like commercial entities. In fact, we think this is becoming more common as times are getting harder.
The logistics and governance around these kinds of liquidations are different, though, so here at Smart Business Recovery, we specialise in insolvency support to third‑sector organisations such as charities and CICs.
What happens to charitable funds or grants if a charity becomes insolvent?
The rule is simple in theory. Funds held for specific charitable purposes must be returned or applied as per the agreed use.
It’s also worth remembering at this point that misappropriation may lead to trustee investigation or personal liability.
That said, this area can be complex, so we will look at how these funds can be used during the insolvency and always take the right legal and ethical route.
Are trustees or directors of charities personally liable if the charity becomes insolvent?
Generally, no. However, there are some exceptions to this, such as misappropriating funds or breach of duty. If these are proven, then it may be that the trustees or directors could be liable to at least some extent.
It’s important to take advice as soon as possible if your charity is having financial problems and may be insolvent. You must get a clear picture of what constitutes the right conduct and the expectations of the trustees.
What rights do creditors have when a business enters insolvency?
In a nutshell, when a business is insolvent, the creditors receive notice, can submit claims, and may attend creditor meetings.
Secured creditors are paid first, then preferential creditors. Preferential creditors could be, for example, wages, holiday pay, and now HMRC, and then finally unsecured creditors will receive payment if funds remain.
Under no circumstances should you be seen to be giving preferential payment to a creditor or yourself through means such as director loans, or by paying linked persons, if you are facing insolvency.
How are HMRC debts handled during insolvency proceedings?
After a recent change, HMRC is now what is known as a preferential creditor again. That means it’s paid after employee claims but before unsecured creditors, such as suppliers and similar, for the most part.
At the time of writing these answers, HMRC are being very persistent when it comes to pursuing debts. Directors may therefore face the potential of personal liability instigated by HMRC via a Personal Liability Notice for unpaid VAT, PAYE, or National Insurance, but only if neglect or fraud is proven.
Can creditors take action against directors when a company enters insolvency?
No, not in most cases. The business and the directors are separate legal entities.
In short, it is only possible to take action directly against a director if there’s a personal guarantee, misconduct, wrongful trading, misfeasance, breach of duties or similar reason.
Can insolvency proceedings help me negotiate debt repayment plans with creditors?
Yes. It is possible, and we will look at all available options. Our aim is always to find the best working solution. However, it isn't always practical or possible, and each case is different.
How does insolvency affect existing contracts and agreements with suppliers or creditors?
During insolvency, the company's bank account will be frozen. That means no further payments, and you should certainly not use any lines of credit or other methods to obtain stock or services.
Most contracts will immediately be terminated, and suppliers may try to reclaim stock, but everything will now depend on the strategy we have in place, the legal requirements, and the best solution for your situation.
