There comes a point in almost every struggling business when the director asks the same question:
“Can we carry on for just another few weeks?”
Sometimes the answer is yes.
Sometimes it isn’t.
Knowing the difference is one of the most important decisions a director will ever make. Get it right and you may preserve value, protect jobs and improve the outcome for creditors. Get it wrong and the consequences can become far more serious.
Over the years, I’ve seen directors on both sides of that line. Most don’t deliberately make bad decisions. They simply wait too long because they hope the next contract, the next investment or the next payment will solve the problem.
Hope is not a strategy.
There is never a single trigger
Many directors believe there is a moment when a company suddenly becomes insolvent.
In reality, it is often a gradual process.
You may notice:
- Increasing pressure from HMRC.
- Suppliers reducing credit terms.
- Constant cashflow firefighting.
- Borrowing to pay existing debts.
- County Court Judgments.
- Directors funding wages personally.
- Difficulty producing reliable cashflow forecasts.
One issue alone doesn’t necessarily mean the company should stop trading.
Several together should prompt a serious review.
Your duties change
Once insolvency becomes likely, directors must increasingly consider the interests of creditors as a whole rather than shareholders.
That doesn’t automatically mean the company must cease trading immediately. There are many situations where continuing to trade can produce a better outcome.
However, that decision needs to be based on evidence rather than optimism.
The Insolvency Service provides guidance on directors’ responsibilities when a company is insolvent:
Ask yourself some difficult questions
Whenever I meet directors facing financial pressure, I encourage them to answer these questions honestly:
- Is the business fundamentally profitable?
- Is the problem temporary or structural?
- Can taxes, wages and suppliers realistically be paid?
- Are forecasts based on signed work or hopeful assumptions?
- Are losses reducing or increasing?
- Are creditors likely to be better or worse off if trading continues?
If the answers become increasingly uncomfortable, it may be time to rethink the strategy.
Cash is more important than profit
I’ve seen profitable businesses fail because they ran out of cash.
Equally, I’ve seen businesses showing accounting losses survive because they generated sufficient cash.
Understanding weekly cashflow is often more valuable than reviewing last year’s accounts.
If you don’t have a rolling cashflow forecast, now is the time to prepare one.
Don’t ignore HMRC
Many companies first realise the seriousness of their position when HMRC begins enforcement action.
HMRC encourages businesses experiencing payment difficulties to contact them early rather than waiting for matters to escalate.
https://www.gov.uk/difficulties-paying-hmrc
If a Time to Pay arrangement is realistic, engaging early usually provides more options than waiting until enforcement begins.
Keep your records up to date
When businesses come under pressure, administration often slips.
That is understandable, but accurate accounting records, board minutes and Companies House filings become increasingly important if the company’s decisions are later reviewed.
Companies House guidance is available here:
https://www.gov.uk/government/organisations/companies-house
Take advice while options still exist
One of the biggest misconceptions is that speaking to an insolvency practitioner means the business will immediately be placed into liquidation.
It doesn’t.
Very often the first conversation is about understanding the options.
Sometimes that leads to restructuring.
Sometimes refinancing.
Sometimes an orderly closure.
The earlier that conversation happens, the more choices usually remain.
Practical tips
- Prepare a rolling 13-week cashflow forecast.
- Hold regular board meetings and record decisions.
- Avoid taking on liabilities you know cannot be paid.
- Speak to HMRC before enforcement action begins.
- Keep accounting records current.
- Challenge optimistic assumptions.
- Seek independent professional advice early.
Takeaway Checklist
Before deciding whether to continue trading, ask yourself:
☐ Can the company meet its debts as they fall due?
☐ Is there reliable evidence that trading will improve?
☐ Have I reviewed the latest cashflow forecast?
☐ Have I considered the interests of creditors?
☐ Have I spoken to HMRC if tax arrears exist?
☐ Are company records complete and up to date?
☐ Have I documented the reasons for continuing to trade?
☐ Have I taken professional advice while options still exist?
Final thought
Stopping trading isn’t a sign of failure.
Sometimes it’s the most responsible commercial decision a director can make.
Equally, continuing to trade isn’t automatically wrong, provided there is a genuine and well-documented and honestly held belief that doing so will improve the outcome for creditors.
The important thing is that the decision is informed, documented and made at the right time.
That’s what experienced advice is really about… helping directors make difficult decisions with clarity, rather than hindsight.