It’s quite common for people to ask what business insolvency really means. The simple explanation is that a business is insolvent when they can no longer afford to pay their debts as they are due, or if their liabilities exceed their assets. However, as there is so much confusion around the term, it is not at all surprising that so many people are unsure about what to do if their business is insolvent.
Whilst there are a wide range of options that may be available to insolvent businesses, the steps can be quite complex, so it is important to seek help in choosing the right strategy to benefit you and your employees the most.
To help you navigate the minefield of business insolvency, let’s take a look at the steps to take when your business becomes insolvent, along with some of the options that may be available.
Seek professional help from a Licensed Insolvency Practitioner
It can be hard to ask for help, but in order to achieve the best possible outcome for your business, it’s important to always seek professional assistance as soon as possible if you are facing financial difficulties. The earlier you can contact a Licensed Insolvency Practitioner, the more options there may be available to your business. By seeking help quickly, there may even be an opportunity for your business to be saved – insolvency does not necessarily mean the end.
As well as taking fast action to ensure the best possible outcome for you, your business and your employees, it’s important to always remember that seeking early help also protects you from legal action. Creditors that are owed by you can take legal action via a County Court Judgement (CCJ) or by statutory demand, which can lead to a petition being filed to the court to wind up your business. Insolvency practitioners are here to help you avoid these actions.
Business insolvency options
To help you find the best strategy going forward, an insolvency practitioner will explore all options available to you in the event that your business is insolvent. It could be that insolvency may only be temporary, in which case, one course of action could be to pursue an informal agreement with creditors.
By discussing your cashflow problem with creditors, you may be able to come to an informal agreement for payments until your insolvency issues are resolved. For example, you may be able to agree on extended credit terms, or the creditor may agree to accept smaller payments for a period of time.
It is important to consider that as an informal agreement is not legally binding, legal action can be taken against your business at any time should you fail to repay your debt as agreed. You should also be aware that creditors are entitled to charge interest on overdue debts.
Formal insolvency actions
Formal insolvency options are extremely varied and depend on the circumstances of each business. Some of the most common insolvency actions include:
Administration
Administration is a formal process in which a licensed insolvency practitioner is appointed by the directors of an insolvent company to take control of the business. The appointment of an insolvency practitioner is registered with the court and protects the company from legal action from creditors in the short term.
Choosing to go into administration can provide some breathing space for a company to avoid action from creditors whilst a proposal is put forward to restructure the business, sell it as a going concern, or if possible, save it.
Administration could also lead to an insolvent company entering into a Company Voluntary Arrangement, or simply allow for a more beneficial distribution of the company’s assets than via company liquidation.
Company Voluntary Arrangement
A CVA is an agreement with creditors to repay debts due. This is a formal agreement in which debts may be paid in part or in full, over an agreed period. Unlike administration, under a CVA, directors retain control of the business whilst it continues to trade. A licensed insolvency practitioner will be on hand to ensure monthly contributions are made to an account to repay creditors during the agreed time period of the CVA.
Liquidation
There is more than one type of liquidation for insolvent companies, so your choice will depend on your specific circumstances.
A Creditors Voluntary Liquidation is a process in which company directors instruct an insolvency practitioner to oversee the winding up of their business. This must be agreed on by all shareholders in the company. A CVL is carried out on the assumption that the insolvent business is no longer viable going forward.
Under a CVL, any employees of the company are made redundant and the company and its assets are put up for sale. The proceeds of all sales will be collected by the liquidator (insolvency practitioner), who will agree to the claims of the creditors. Finally, a liquidated company will be dissolved and struck off at Companies House.
A Compulsory Liquidation, on the other hand, is a court-driven process, where the creditor petitions to the court to wind up the insolvent company. To petition to the court, creditors must have obtained a CCJ or have served a statutory demand to the company. Providing these are not settled or disputed by the company in question, a Compulsory Liquidation can be carried out.
Once a winding up order is received by the court, an insolvency practitioner from the Insolvency Service is appointed by the Court. Company directors will be ordered to meet with the appointed insolvency practitioner (Official Receiver) in order to provide their company records and books so that assets and liabilities can be identified by the court.
In order to avoid a compulsory liquidation, it is important for insolvent companies to seek professional advice from an insolvency practitioner to wind up their affairs on their own terms.
Business insolvency advice
Should you find your business insolvent or close to insolvency, so that as many options as possible are available to you, make sure to seek advice from a licensed insolvency practitioner at the earliest opportunity.
Call BEACON on 02380 651 441 or contact us here to arrange an initial consultation.