How Can You Avoid Creditor Pressure As A Director?

When you’re the director of a company, it’s your responsibility to act in the best interests of the company and make sure your business is financially healthy.

In the event of trading uncertainty or difficult market conditions, you need to make sure that your business can stay viable.

Understanding how to measure the success of your business can increase your likelihood of survival and reduce the chances of long-term financial distress. Without knowing this, your business could experience damage and even face legal action from creditors.

Director responsibilities

Let’s start off by looking at the responsibilities of a director.

As a director, you need to be actively promoting the success of the business and supporting relationships with key stakeholders. These stakeholders include:

• Employees
• Suppliers
• Creditors

In the event of financial difficulties, you need to act in the best interest of the creditors because they are the parties that are owed money.

If your company is unable to maintain financial commitments, and settle debts due to restricted cash flow, you’re likely to come under serious pressure from creditors. This pressure can include legal action and a winding-up petition.

It’s your responsibility to take action to mitigate these risks so your company doesn’t collapse. This can include seeking professional advice from an insolvency practitioner.

If you fail to seek this advice in a timely manner, you could expose your business to serious financial and reputational damage, which could lead to liquidation.

There are two tests you can do to see where your business ranks on the scale of financial distress. These are the cash flow and balance sheet tests.

Cash flow test for insolvency

This is a straightforward analysis of company cash flow to check whether your company is contingently insolvent. To understand this test, company directors need to understand the use of company cash flow.

Cash flow should be used to carry out the day-to-day operations of the business and make essential payments such as wages, bills and, replenish stock.

If company cash flow falls short, the company could quickly find itself in debt and running out of cash. If these payments are not made on time, the business may well be insolvent.

Balance sheet test for insolvency

This test tracks your company’s assets and liabilities. If you have more liabilities than you do assets, then you may be looking at balance sheet insolvency.

A company’s assets can be classed as anything that the company owns that holds value. This can include property, machinery, equipment, and stock. When calculating company assets, you should note the existing market value of the assets and leave out any bad debts.

As well as checking your cash flow and your balance sheet, you may need to analyse the way that creditors are treating you.

Creditor pressure and business debts

If you have a strained relationship with your creditors because of overdue payments, then your interactions will probably be tense. This can lead to urgent payment requests and final notices.

If this happens, it’s likely that your creditors are thinking of taking legal action against you. If creditors are unable to recover their funds through chasing the payments, they may be able to launch a winding-up petition against your company. This can happen if the amount owed is over £750.

If the winding-up petition is granted, it can result in company liquidation. If you follow your director responsibilities and appoint a licensed insolvency practitioner, you can stop the forced closure of your company. This is through an insolvency procedure that aims to rescue your business.

If you need to enter liquidation or administration, you must put creditor interests first. If you breach any of your director responsibilities while going through these processes, it can have serious consequences, including the end of your role as a director.

You need to seek professional advice as soon as it looks as though your business is in trouble to minimise the impact that is felt on your creditors.

• 28 Mar 2024 - Why Does Your Company Need A Contingency Plan?
• 25 Feb 2024 - March 4th updates - Registered email and lawful purpose statement
• 01 Feb 2024 - Setting Up A Limited Company? Here’s What You Need To Know
• 15 Jan 2024 - How Do You Know If Your Business Is Doing Well?
• 13 Dec 2023 - Making Your Company Dormant