When facing insolvency, acting early can make all the difference. Chris Worden from Director First shares a real-life example of how timely action protected directors and creditors alike.
- Early action in insolvency leads to better outcomes
- Ignoring creditor pressure can result in personal liability
- Personal guarantees (PGs) can put your assets at risk
- Controlled liquidation protects directors and creditors
- Seek professional advice before making decisions
The Business Model and Challenges
The case involved a small construction company with three staff and around 13 subcontractors. Despite high turnover, low profit margins and heavy reliance on hired plant and utility suppliers led to significant cash flow strain. The business faced mounting debts, including over £190,000 owed to HMRC for VAT, PAYE, and corporation tax.
How Creditor Pressure Builds
As suppliers became anxious, word spread and creditor calls increased. Aggressive actions followed, including statutory demands and threats of winding up petitions. The directors, under immense pressure, considered signing personal guarantees, risking their homes.
Common Mistakes Directors Make
- Panic paying the loudest creditors
- Continuing to trade in hope of recovery
- Ignoring financial information and cash flow forecasts
- Burying their heads in the sand
- Taking on personal guarantees to delay the inevitable
The Risks of Preference Payments and Insolvent Trading
Paying one creditor over another can result in preference claims, making directors personally liable. Trading while insolvent or ignoring creditor pressure can lead to compulsory liquidation, loss of control, and more severe personal consequences.
How Director First Helped
Chris Worden and his team slowed the process, reviewed all agreements, and confirmed no personal guarantees were in place. They assessed the business's viability and, when recovery was not possible, guided the directors through a voluntary liquidation. This protected the directors from personal liability and ensured all creditors were treated fairly.
Key Takeaways
- Act early to avoid personal risk and messy insolvency
- Do not sign personal guarantees without advice
- Preference payments can create personal liability
- Controlled liquidation is preferable to compulsory winding up
- Seek independent, professional advice as soon as pressure builds
Frequently Asked Questions
- What is a preference payment?
- A preference payment is when a director pays one creditor over others before insolvency, potentially making them personally liable for that payment.
- What happens if I ignore creditor pressure?
- Ignoring creditor pressure can lead to statutory demands, winding up petitions, and loss of control through compulsory liquidation.
- Are personal guarantees always risky?
- Personal guarantees put your personal assets at risk if the business cannot repay its debts. Always seek advice before signing.
- How can voluntary liquidation help directors?
- Voluntary liquidation allows directors to control the process, protect themselves from personal liability, and ensure fair treatment of creditors.
- When should I seek insolvency advice?
- Seek advice as soon as you experience cash flow problems or creditor pressure. Early action leads to better outcomes.
Need Help?
If you’re a UK director facing creditor pressure or HMRC arrears, contact us for free, independent advice from Chris Worden and the Director First team.
