An initial insolvency meeting is often the first step for a company director who is worried about HMRC arrears, unpaid creditors, cash-flow problems or the future of their business.
For many directors, arranging that first conversation can feel daunting. You may be concerned that you will be judged, that the company will immediately be placed into liquidation or that you will be expected to make a major decision during the meeting.
That is not how the process should work.
The purpose of an initial insolvency meeting is to understand the company’s position, identify any urgent issues and explain the realistic options available. It is an opportunity to ask questions and receive straightforward advice before deciding what to do next.
Does an initial insolvency meeting mean the company must be liquidated?
No.
Speaking to an insolvency practitioner does not commit you to placing the company into liquidation.
Depending on the circumstances, the available options might include:
- continuing to trade while addressing the immediate problems;
- agreeing payment arrangements with HMRC or other creditors;
- refinancing or restructuring the company;
- proposing a Company Voluntary Arrangement;
- selling all or part of the business;
- entering administration;
- placing the company into a Creditors’ Voluntary Liquidation; or
- taking steps to close a solvent company.
If the company is insolvent, a Creditors’ Voluntary Liquidation may ultimately be the most appropriate option. This is a formal process through which the directors take steps to close the company and appoint a licensed insolvency practitioner as liquidator.
However, the first meeting is about establishing the facts. You should be given enough information to understand your options before being asked to make a decision.
What will we discuss during the initial insolvency meeting?
Every company is different, but the conversation will usually cover the following areas.
What has caused the financial difficulties?
We will ask you to explain what has happened and when the problems started.
This might include:
- a reduction in sales;
- the loss of an important customer;
- unpaid invoices;
- rising wages or supplier costs;
- HMRC arrears;
- the loss of finance or an overdraft facility;
- legal action by a creditor;
- a winding-up petition;
- a dispute between directors;
- employee issues;
- health or personal circumstances; or
- a combination of several problems.
You do not need to present the information in a perfect order. We will ask questions to help build a clear picture of the company’s current position.
The purpose is not to criticise decisions with the benefit of hindsight. It is to understand what happened, what position the company is in now and whether the situation can realistically be improved.
Can the company currently pay its debts?
We will look at the company’s immediate financial position.
Questions may include:
- Is the company able to pay wages?
- Are PAYE, VAT or corporation tax payments overdue?
- Are suppliers refusing to provide further credit?
- Are payments being returned by the bank?
- Are creditors threatening legal action?
- Is there enough money to complete current work?
- Are customers still paying the company?
- Does the company have sufficient income to meet its ongoing costs?
A company can be insolvent because it cannot pay its debts when they fall due, or because the value of its liabilities exceeds the value of its assets.
The answer is not always obvious from the bank balance alone. A company may have money in the bank but still be unable to meet VAT, PAYE, loans, supplier balances and other liabilities as they become payable.
What financial information should I bring?
You do not need to delay the meeting because every document is not immediately available.
An initial conversation can still take place using the information you currently have. However, the following documents can help us provide more detailed advice:
- the latest statutory accounts;
- up-to-date management accounts;
- a recent balance sheet;
- an aged creditor report;
- an aged debtor report;
- current company bank balances;
- recent bank statements;
- details of HMRC liabilities;
- loan and finance agreements;
- a list of company assets;
- employee and payroll information;
- property or equipment leases;
- details of personal guarantees;
- information about any legal claims; and
- details of money owed to or by the directors.
Where accounts are not up to date, reasonable estimates can be used initially. We can then explain what further information will be needed if the company proceeds with a formal insolvency process.
Will personal guarantees be discussed?
Yes.
A limited company is a separate legal entity, and directors are not normally personally responsible for its ordinary debts. However, the position may be different where a director has signed a personal guarantee or has another personal obligation connected to the company.
Personal guarantees are commonly requested for:
- bank loans;
- overdrafts;
- vehicle finance;
- asset finance;
- property leases;
- trade supplier accounts;
- invoice finance; and
- commercial lending.
We will ask whether any guarantees have been given and, where possible, review the relevant agreements.
A personal guarantee does not necessarily determine which option should be chosen, but it is important to understand the potential personal consequences before the company enters liquidation.
Will the director’s loan account be reviewed?
The director’s loan account is likely to be discussed during the initial insolvency meeting.
The account records money introduced into the company by a director and money withdrawn from the company outside normal salary, expense reimbursement or properly declared dividends.
If the company owes money to the director, the director may be a creditor of the company.
If the director has withdrawn more money than they were entitled to receive, the account may be overdrawn. An overdrawn director’s loan account is normally treated as an asset of the company and may need to be repaid following liquidation.
We may ask about:
- transfers to personal bank accounts;
- personal expenses paid by the company;
- dividends;
- salary and payroll;
- expenses paid personally by the director;
- money introduced to support the business; and
- payments made to family members or connected businesses.
The figures shown in the most recent accounts may no longer be accurate. The account will often need to be updated to include transactions since the last accounting date.
What if the company has a Bounce Back Loan?
An outstanding Bounce Back Loan does not prevent a company from entering liquidation.
The loan will normally be treated as a company liability. However, we will need to understand:
- how much was borrowed;
- how the turnover figure was calculated;
- whether the company met the scheme requirements;
- what the funds were used for;
- whether any money was transferred to a director personally; and
- whether supporting records are available.
Receiving a Bounce Back Loan does not automatically mean that anything improper occurred. Many businesses borrowed legitimately, used the funds for business purposes and later became insolvent.
The application and use of the funds will nevertheless need to be considered if the company enters liquidation.
Will previous payments and transactions be discussed?
We may ask about significant or unusual transactions made before the initial insolvency meeting.
This can include:
- repayment of money owed to a director;
- payments to family members or connected companies;
- repayment of personally guaranteed debts;
- the sale or transfer of company assets;
- dividends paid to shareholders;
- cash withdrawals;
- payments to selected creditors;
- changes to directors’ salaries; and
- assets removed from the company.
These questions are a normal part of understanding the company’s affairs.
Once a company becomes insolvent, the directors’ priorities shift from shareholders towards creditors. Directors should protect the company’s assets, avoid improperly preferring one creditor and ensure that their actions do not unnecessarily worsen the financial position of creditors.
A payment to a director or connected party is not automatically recoverable or improper. The reason for the payment, the company’s position at the time and the supporting records must all be considered.
Being open about transactions from the beginning allows advice to be provided before any further decisions are made.
Can the company continue trading after the initial insolvency meeting?
That will depend on the circumstances.
In some cases, the company may be able to continue trading while further information is gathered or a restructuring proposal is considered.
In other cases, continuing to trade could increase the losses suffered by creditors. The company may be taking new customer deposits, ordering goods it cannot pay for or incurring additional tax and employee liabilities without a reasonable prospect of paying them.
Directors of an insolvent company should protect its assets, treat creditors properly, avoid worsening their financial position and consider taking advice from an insolvency practitioner.
We may therefore recommend immediate practical steps, such as:
- stopping the use of company credit cards;
- avoiding further borrowing;
- not taking new customer deposits;
- preserving company assets;
- keeping insurance in place;
- securing books and records;
- stopping payments to directors or connected parties; or
- suspending trading while the position is assessed.
You should not move money, transfer assets or repay selected liabilities shortly before liquidation without first obtaining advice.
What happens to employees?
Where the company employs staff, we will discuss:
- whether employees are still working;
- whether wages are up to date;
- whether PAYE submissions have been made;
- whether the company can meet the next payroll;
- accrued holiday entitlement;
- notice periods;
- pension contributions;
- redundancy consultation requirements; and
- whether redundancies have already been made.
If the company enters liquidation and cannot pay the amounts owed, eligible employees can usually submit claims to the Redundancy Payments Service for certain statutory entitlements.
This can potentially include:
- redundancy pay;
- unpaid wages;
- accrued holiday pay;
- statutory notice pay; and
- some unpaid pension contributions.
Directors who worked as genuine employees of the company may also be able to submit a claim, although their employment status and working arrangements will need to be assessed.
Employee claims are an important part of the planning process, particularly where the company cannot fund a final payroll.
Will you contact HMRC or the company’s creditors?
We will not normally contact creditors simply because an initial insolvency meeting has taken place.
The company has not entered liquidation at that point, and the directors remain responsible for its affairs.
Where urgent action is required, we may discuss whether a creditor, landlord, bank or HMRC should be contacted. This would normally be agreed with you first.
If the company subsequently proceeds into a Creditors’ Voluntary Liquidation, creditors will receive formal notice and will be invited to submit details of their claims. A licensed insolvency practitioner must be appointed to conduct the liquidation.
Will I be asked about my conduct as a director?
We will ask questions about the way the company has been managed, but this does not mean that an allegation is being made against you.
If the company proceeds into liquidation, the liquidator has statutory responsibilities. These include:
- securing and realising company assets;
- understanding the causes of the company’s insolvency;
- reviewing the company’s financial affairs;
- considering the conduct of its directors; and
- submitting a conduct report to the Insolvency Service.
It is therefore helpful to identify any potential issues before the company enters liquidation.
Matters that may require further consideration include:
- incomplete accounting records;
- unpaid taxes;
- overdrawn director’s loan accounts;
- unlawful dividends;
- asset transfers;
- payments to connected parties;
- Bounce Back Loan applications;
- substantial cash withdrawals; and
- continued trading while the company was insolvent.
Most directors we meet have tried to keep their company trading and paying its liabilities for as long as possible. The purpose of the initial insolvency meeting is to understand what happened and explain how the position will be dealt with.
Do I need to decide anything during the meeting?
Usually, no immediate decision is required.
At the end of the initial insolvency meeting, we should be able to explain:
- whether the company appears to be insolvent;
- whether any deadlines or urgent risks exist;
- which options appear realistic;
- whether the business can continue trading;
- what further information is required;
- what the likely costs will be; and
- what the next steps would involve.
There may be circumstances where a quick decision is needed—for example, where a winding-up petition has been presented, bailiffs are due to attend, employees cannot be paid or the company is continuing to accept money for work it cannot complete.
Even in those circumstances, we will explain why action is required and what the available choices are.
What happens after the initial insolvency meeting?
The next steps will depend on the advice given.
They might include:
- Gathering additional financial information.
- Speaking to the company’s accountant.
- Preparing updated accounts or cash-flow forecasts.
- Reviewing personal guarantees or finance agreements.
- Considering a payment arrangement or restructuring proposal.
- Arranging a further meeting.
- Preparing the documents required for a Creditors’ Voluntary Liquidation.
- Taking no immediate action while the company’s position is monitored.
If a Creditors’ Voluntary Liquidation is recommended, the process will be explained before any appointment is accepted.
A CVL requires shareholder approval from at least 75% by value of the shareholders voting on the resolution. Once appointed, the liquidator takes control of the winding-up process, realises the company’s assets and deals with creditor claims.
Directors also have a legal obligation to cooperate with the appointed liquidator and provide information about the company’s affairs.
How should I prepare for an initial insolvency meeting?
The most helpful thing you can do is be open about the company’s position.
Before the meeting, it may help to make a short note of:
- what caused the difficulties;
- how much the company owes;
- which creditors are applying the most pressure;
- what assets the company owns;
- whether employees are owed money;
- whether you have signed personal guarantees;
- whether the company owes you money;
- whether you owe money to the company; and
- what you would ideally like to happen to the business.
Do not worry if some figures are estimates. The initial insolvency meeting is intended to establish the position, not to test whether you can recall every transaction.
It is much easier to provide useful advice where all concerns are disclosed at the beginning, including issues you may consider embarrassing or difficult.
Arrange an initial insolvency meeting with DCA Business Recovery
Taking advice does not mean that your company must be liquidated.
An initial insolvency meeting gives you an opportunity to understand the company’s financial position, discuss the available options and identify any matters that need immediate attention.
DCA Business Recovery offers free, confidential initial advice to company directors. We aim to explain the position clearly, without jargon or unnecessary pressure.
Call us on 01702 344558 or book an initial discussion with our team.
This article provides general information only. The appropriate advice will depend on the individual circumstances of the company and its directors.
