A Company is a separate legal entity. Its shareholders and directors enjoy the benefits of limited liability, as long as the Company works within the rules. This means that personal assets are sheltered from creditors if the Company runs into problems.

It is important that the Directors do not ignore their responsibilities. If they continue to trade when they knew, or ought to have known, that the Company was insolvent then any credit taken from that point could be held as being their personal liability. This is called “Wrongful Trading”.

It is important to recognise the signs of insolvency. Legally there are two measures:

• Can the Company pay its debts as they fall due?
• Are the assets on the balance sheet greater than the liabilities?

If the answer to either of these is “NO”, then the Directors must seek the advice of a licensed Insolvency Practitioner (“IP”). The speed of recognising that there is a problem and seeking help may enhance the possibility of saving the business.

There are various options available.

• Could be saved if it were given a breathing space? If so, a Company Voluntary Arrangement could be the solution.
• If the business has potential, but the level of outstanding debt is too high, an Administration could assist in achieving a sale as a going concern.
• If there is no viable business then a Creditors’ Voluntary Liquidation or a Compulsory Liquidation may be appropriate.

If you are involved with an insolvent Company, doing nothing is not an option.