The question of personal liability for the business debts needs to be clearly understood.

Sole Traders

If you trade as an individual you are personally liable for the business debts incurred. There is no legal separation and creditors will pursue you for settlement.

Partnerships

Partners are jointly and severally liable for all business debts and creditors can pursue all partners for the total debt. In the event that full payment cannot be recovered from one partner, they will recover payment in full from any other partners.

In the event that a partner becomes bankrupt, the liability will be written off for that partner, however, creditors will still proceed with recovery from the remaining (or former) partners for the debt(s).

The business is in difficulty - What are the options for sole traders and partnerships?

Acknowledging that there is a problem is often the hardest step.

Understanding the problem will require time and effort to identify where specifically the business is failing in order to determine whether the business is worth saving or not.

If, after analysing the business the conclusion is that it is worth saving then a strategic plan of action should be created to address specific areas of weakness such as:

• • Cost reduction
  • Capital restructuring
  • Concentration on profitable products
  • Disposal of part of the business
  • Improvement of financial controls

On the basis of the strategic plan informal arrangements can be made with creditors to pay off the debt.

Unlike a sole trader or partnership, a limited liability company has the benefit of being a separate legal entity from its directors and shareholders.

A company is technically insolvent when it cannot pay its debts as they fall due or where the liabilities exceed the value of its assets.

In general terms, company directors have a duty of care to the company, its shareholders, employees and creditors.

A company director is not personally liable for the company's debts. However they can be personally liable for:

• • Personal unpaid NI and PAYE deductions
  • Unpaid income tax as a result of 'cash drawings'
  • Personal guarantees given to banks, finance companies, landlords etc
  • 'Wrongful trading' - Liabilities incurred as a result of insolvent trading prior to the company ceasing to trade resulting in a benefit from the transaction at an undervalue and/or preference
  • Any liability resulting from fraudulent trading

The business is in difficulty - What are the options for limited liability companies?

There are several options and strategies available to limited liability companies which are technically insolvent or which have major cash flow problems.

Company insolvency: Turnaround, formal and informal arrangements

If, after analysing the business the conclusion is that it is worth saving then a strategic plan of action should be created to address specific areas of weakness such as:

• • Cost reduction
  • Capital restructuring
  • Concentration on profitable products
  • Disposal of part of the business
  • Improvement of financial controls

On the basis of the strategic plan, informal arrangements can be made with creditors to pay off the debt.

Formal arrangements provide an effective strategy but will require the help of a licensed insolvency practitioner.

For further information see, Turnaround, Formal and Informal Arrangements.

Company Voluntary Arrangement (CVA)

The business is fundamentally sound but has cash flow difficulties and needs time to recover. The CVA provides a legally binding formal agreement with company creditors for the settlement of company debts over an agreed time scale.

For further information see Company Voluntary Arrangement.

Company administration

Under the provisions of the Enterprise Act 2002 the ability of a company to go into administration became easier.

In all cases a licensed Insolvency Practitioner is appointed to take control of the company and its affairs to assess the business, with the objective of making formal proposals that will allow a turnaround, or to come to arrangements with creditors which provide a better realisation of the company's assets.

For further information see Company Administration.

Company Administrative Receivership

This is known more generally as Receivership and is where the company assets are realised by the Insolvency Practitioner to repay a major creditor who holds a significant security over the assets e.g. a finance company.

For further information see Company Administrative Receivership.

Company Liquidation

The appointed Insolvency Practitioner realises the company assets which are then distributed among the creditors according to their legal priority i.e. secured creditors are paid in priority to unsecured creditors - typically suppliers.

For further information see Company Liquidation.

Formal arrangements provide an effective strategy but will require the help of a turnaround specialist.

Key points:

• • Analyse the business to identify which areas have underperformed
  • Write a strategic plan for recovery to cover a 12 month period
  • Keep major creditors informed of the situation
  • Constantly monitor and review the plan to adapt to circumstances
  • Rule nothing out - look at all options if the required improvements are not happening

Remember, creditors would rather accept a percentage of the debt than to receive nothing through insolvency.