The Situation
A husband-and-wife-owned business approached us for advice after experiencing significant cash flow pressure.
We quickly realised that despite the challenges, the underlying business remained profitable, retained a loyal customer base, and continued to generate work.
The issue was not the business itself, but the historic debt built up during 2023 and 2024. Loan repayments of more than £1,600 per month absorbed the cash the business generated, restricting its ability to move forward.
Like many directors in this position, their first thought was whether closing the company and if liquidating it would solve the problem.
Assessment
After reviewing the circumstances, it quickly became clear that liquidation was not the best solution.
There were several reasons for this:
- Borrowing was personally guaranteed.
- There was a possibility that other finance agreements included personal guarantees.
- The directors had an overdrawn Director’s Loan Account (DLA) of approximately £34,000.
- Most importantly, the directors wanted to continue trading because the business itself remained viable and profitable.
In these circumstances, liquidation would not have removed the directors’ personal liability. In fact, it could have left them facing repayment demands from lenders and the overdrawn DLA without the benefit of an ongoing business generating income to help meet those obligations.
Recommendation
Rather than pursuing liquidation, we recommended exploring a refinance and restructuring strategy.
The proposed approach was:
- Repay the overdrawn Director’s Loan Account using personal finance obtained at a lower cost than the existing business borrowing.
- Use the loan funds to settle the most expensive company debts.
- Recover the Section 455 tax paid on the overdrawn loan account, potentially releasing approximately £11,000 back into the business.
- Replace high-cost borrowing with lower-cost personal lending, reducing monthly outgoings and improving cash flow.
The key point was that the directors were not taking on new personal exposure. The debts were already personal to them because of the guarantees. This strategy replaced expensive debt with more affordable borrowing while preserving a profitable business.
The Outcome
At the point of advice, the next step was for the directors to:
- Confirm the exact Director’s Loan Account balance with their accountant.
- Establish the precise Section 455 tax recovery available.
- Obtain settlement figures from lenders.
- Explore personal loan options and affordability.
- Check the proposed strategy with their accountant or financial advisor before making any commitments!
By considering these steps, the directors were able to evaluate a route that could improve cash flow, reduce monthly commitments, and allow the business to continue trading successfully.
Key Takeaway
This case highlights an important principle of our approach: Liquidation is not always the right route forward.
Many business owners assume that insolvency practitioners only recommend closing companies. In reality, our role is to assess all available options and recommend the solution that best serves the directors’ circumstances.
Where a business remains viable, liquidation can sometimes worsen the position, particularly where personal guarantees exist, directors have overdrawn loan accounts, or the underlying business is still profitable.
In this case, rather than recommending liquidation, we identified an alternative route forward that could enable the directors to retain their business, improve cash flow and reduce borrowing costs.
Our advice is always the same: we look for the best outcome, not just the easiest insolvency process. If there is a realistic route to preserve a viable business and improve a director’s position, we will always explore that before recommending closure.
If you have any questions or need some advice regarding your business, please reach out to a member of the team today for a confidential discussion.
