Any business carries a risk, and sometimes businesses can get into financial difficulties. These can be short term and perhaps just require some additional finance (cash in), which may take the form of additional share capital, loans, overdrafts, gifts or grants. In such a situation, the objective has to be to make business profits that will, over time, recoup any past losses.
This situation can apply equally to “non-profit” businesses, as to their “for profits” cousins. Indeed, we often point out that “non-profit” is a misnomer, a profit is needed for healthy finances of any business. A better description for many social enterprises (including trading charities, community interest companies, and companies limited by guarantee) would be “not for distributable profits” – in other words business profits will help fund future or other activities, and not paid out to shareholders.
The Insolvency Service (a government agency) state that a company is insolvent if either:
a) it can’t pay bills when they become due; or
b) it has more liabilities than assets on its balance sheet.
To continue to trade in these situations will not usually create a problem as long as all creditors get paid before they lose patience, including employees, HMRC (all taxes), suppliers, and loan providers. However, if there comes a time when a creditor stops being flexible, and decides to take action to recover their debt (usually this is HMRC or a bank), directors can find themselves having to pay towards the company’s debts. This only tends to happen if the directors have allowed the company to continue when there is no reasonable prospect of paying all the debts (wrongful trading), or the directors have paid themselves (or related parties) ahead of other creditors (fraudulent trading). Parliament have published a good summary and detailed report, about Directors’ responsibilities during insolvency.
We usually end our blogs with a suggestion to contact us for more information. We’d be happy to give general “GP” accountancy discussion on this, but insolvency advice is different from accountancy, and we’d always suggest to speak to a specialist Insolvency Practitioner if you are in any doubt about a possible insolvency situation.