A company director should be able to recognise the signs that a company may be insolvent. Isolated incidents are not normally considered a significant risk. However when multiple events occur together action may need to be taken.
- What are Management Insolvency Warning signs?
- Problems with HMRC
- Which insolvency warning signs relate to Creditors?
- Warning signs relating to the Bank
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Management Insolvency Warning Signs
The following insolvency warning signs relate to the management of a company. They may indicate that a company is insolvent or is coming close to being insolvent.
The directors are struggling to find time to do the actual business of the company. Instead they are focusing on juggling cash and negotiating with creditors. Time is constantly taken up with fire fighting rather than being able to sit back, review the whole business and tackle the causes of the financial problems.
Lack of information
The Directors are struggling to get accurate key performance information for the company. This means they never really know where the business stands and how well it is doing.
Outstanding Directors Loan Account
The company management accounts show a Director’s Loan Account. This means the directors owe money to the company. Perhaps they have taken dividends when the company was not in profit. If the company is closed the associated directors are personally liable for these debts.
HMRC Insolvency Warning Signs
One way of telling if a company is in financial difficulty is if it is in arrears with HMRC. The following warning signs often indicate that a company is insolvent.
Behind with HMRC payments
The company is unable to pay monthly PAYE, NIC and VAT payments on time. In addition you may be receiving penalties from HMRC for late payments. Despite agreements to pay you never seem to be able to catch up with the debt.
HMRC has taken legal action
The local HMRC collector has passed the file to the enforcement office or the debt recovery unit. At this point legal action could well start firstly in the form of a Statutory Demand being issued. If left unpaid a winding up petition may well follow.
Wrongly prioritising debt repayment
The company is paying other unsecured creditors and allowing HMRC payments to get into arrears.
Creditor Insolvency Warning Signs
If a company is struggling to pay its trade creditors on time this may be an indication of insolvency. The following will give a good indication that a company is in financial difficulty.
Constantly dealing with creditors chasing for money
Creditors are regularly phoning you chasing for payment. They may also be taking legal action against the company. As a result the directors are spending more time negotiating payment agreements with them than actually running the business.
Directors paying company debts with personal credit cards
The company never seems to have sufficient funds to be able to pay its bills and you often end up having to foot the bill personally often with personal credit facilities thus getting deeper into personal debt.
Company unable to get new credit or extend existing credit
When dealing with new suppliers you are refused any kind of credit line. In addition existing suppliers start reducing their lines of credit or require further orders to be paid in advance.
Bank Insolvency Warning Signs
A company may be insolvent if it is having difficulties with its banking facilities. It is important to look out for signs that your bank may be giving that your company is in trouble.
The overdraft is always at the limit
You are always hitting the limit of your overdraft each month and payments often have to be delayed until additional funds are paid into the account.
The bank wants more information
The bank has contacted the directors requesting that you provide information about the status of the company. This may include a request for management accounts and cash flow forecasts.
The bank has withdrawn credit facilities
The bank informs the company they will be reducing existing credit facilities such as the overdraft or credit card limit. Alternatively in order to maintain the current facilities the directors have been asked to provide additional personal guarantees.