Fearing insolvency? Bite the CVL bullet, and stop putting good money after bad

We’re witnessing a rise in CVLs related to IR35 reform and quite frankly, how could anyone really be surprised, writes John Bell, director of insolvency firm Clarke Bell.

A treble-whammy, at least

In fact, it’s been a bumpy 12 months for limited company contractors who have spent the period facing a number of challenges, Covid and the Off-Payroll legislation chief among them. The ‘double-whammy.’ Plus to hit them while they’re up against it, there’s been Brexit effects too. 

So we know a lot of contractors have seen a reduction in their business and, worse still in some cases, they have seen no work at all, due to contracts getting put on hold while hirers similarly wrangle with both the pandemic and the new off-payroll legislation.

Even those contractors who have been fortunate enough to secure contracts may now be facing late payments which, for a one-person company, can put a significant strain on a limited company’s bank account and cashflow. 

Debt to stay alive? The government was on-hand to oblige

Could it get any bleaker? Probably not actually, because let’s not forget that government initiatives to help through the pandemic did little to cater for limited company contractors. The result is that many directors were forced to take out government-backed loans, via the Coronavirus Business Interruption Loan Scheme (CBILS) or Bounce Back Loan Scheme. They got into debt to help support their company during the pandemic, or simply to keep their commercial lights on.

Positively, those loans have helped incorporated businesses which were doing well before coronavirus hit. But since May, repayments of those loans have been due. Some contractors are now struggling to repay their loan and, if they have no work or reduced money coming in, insolvency is upon them.

But this not insignificant amount of affected contractors should not despair. Like them, if your PSC is insolvent, a Creditor’s Voluntary Liquidation (CVL) is often the best course of action to deal with the company debts and fulfil legal obligations as a company director.

Benefits of a CVL

There are several benefits for company directors and their creditors in using a CVL:

• It’s a good option for directors who want to take control of their situation and act before things get any worse for their business;
• As a voluntary process, directors are free to choose which Insolvency Practitioner (IP) they appoint to carry out the CVL (as opposed to a compulsory liquidation);
• The director can close their company and has the option to open another business in the future;
• By opting for a CVL, the directors can avoid their company being forced into compulsory liquidation - which is the most serious type of liquidation.

Talk should be cheap,  even free ideally

First and foremost when insolvency looms, you should contact a licensed IP, to obtain some free and confidential advice. See if a CVL is the best option for you and your company. A good IP will tell you(without charging for the privilege!) if there is a better option for your particular situation.

Right now, a common scenario is that contractors have an overdrawn director’s loan account – i.e. money they have borrowed from the company. This is money that needs to be repaid to the company. Your IP will help you with that repayment, to ensure that your obligations are fulfilled.

Assuming a CVL is the right solution for you, an IP worth their salt will work with you (and your accountant where applicable), to collect all the necessary information to proceed with the liquidation. They will seek to gather a full list of your creditors, along with copies of your company accounts. But be aware as soon as the CVL process starts, your company will need to stop trading.

What contractors should expect from an IP (cont.)

However you won’t be alone, as your IP will lead you through the process step-by-step, including with all the necessary paperwork.

While these activities might not feel with you sheer delight, doing nothing is not an option when you are the director of a company which is facing financial difficulties. As a company director, you have a legal duty to do something about your insolvent company. And remember, the head-in-the-sand approach is no longer viable with the ‘wrongful trading’ rules back in force since their hiatus during covid’s peak.

Good money after bad? Put a stop to it

So the sooner you get professional advice if your limited company can’t shake of its distress, the more options you are likely to have open to you. Be reassured, you can get free and confidential advice face-to-face from an insolvency advisory, at least initially. If you’re not convinced just ask around – a lot of company directors, and PSC contractors right now say that they wish they had got an IP on board a lot sooner than they did. Had they done so, they would not have put ‘good money after bad,’ potentially sparing them months of unnecessary stress and sleepless nights. And unfortunately those are not in short supply with much of the perfect storm of Brexit, covid and IR35 reform, still rumbling on.