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How do you know if your business is insolvent?

A business is insolvent if it is unable to pay its debts when they fall due. This is generally shown in one of two ways:-

  1. Cash flow insolvency – i.e. the business cannot pay its bills when they fall due
  2. Balance sheet insolvency – when a company’s total liabilities outweigh its total assets

If you believe one of these may apply to your company, you must act appropriately to ensure that you minimise the risk to the company’s creditors.  You need to be aware of the risks of business insolvency and its potential consequences.

Other warning signs to look out for:-

  • Increasing creditor pressure – and threats of legal action
  • Reaching bank overdraft limits.
  • Late/missed payments to HMRC

 

What are your options and who can help?

There are options open to you once you believe that your company is insolvent, including some that allow the company to continue trading. Remember – as soon as you believe your business is insolvent, you must consider the interests of creditors. If you don’t, you could be made personally liable for your company’s debts. The important thing is not to panic!

Business insolvency is a complex process. Seeking expert advice is essential. Advice can be sought from:-

  • Citizens Advice Bureau (citizensadvice.org.uk)
  • Solicitor (solicitors.lawsociety.org.uk)
  • Qualified accountant
  • Licensed insolvency practitioner
  • Debt advice centre

However, only a licensed insolvency practitioner can take the necessary steps to protect the business or its creditors. Many insolvency practitioners will outline your options to you for no charge.

Briefly, there are 3 options that can allow an insolvent company to continue trading. You can:

  • contact all your creditors to see if you can reach an informal agreement with them;
  • enter into a company voluntary arrangement (‘CVA’)
  • put the company into administration which offers some respite from creditor action and potentially enables the company to continue or for property to be sold

You also have the option of liquidating (‘winding up’) your company. This means the company is ‘closed down’ and its assets are sold and distributed to its creditors.

Informal arrangement

It is vital that you contact your creditors as soon as you become aware of your company’s financial distress.

If your company is experiencing temporary financial difficulties, try contacting your creditors to arrange a payment plan. This usually only works if there is no immediate threat of formal action by creditors. Such arrangements are not legally-binding and a creditor can withdraw from the agreement at any time.

Company Voluntary Arrangement (‘CVA’)

A CVA is an arrangement made with creditors to pay an agreed amount over an agreed period of time. This is a binding arrangement for all of the company’s unsecured creditors and allows you to continue trading during the arrangement and after it concludes. The vast majority of CVA’s are for a 5-year period.

Administration

The administration process means you hand over control of your company to an insolvency practitioner (the ‘administrator’). While in administration, your creditors are unable to take legal action to recover their debts or start compulsory liquidation without the permission of the court.

The administrator draws up proposals to:

  • restore the company’s viability
  • come to an arrangement with the creditors (a CVA)
  • sell the business as a going concern or realise more from the assets than in a liquidation
  • realise assets to pay a preferential or secured creditor

It is up to the creditors whether to agree to the administrator’s proposals. The proposals may achieve a better result for the company’s creditors as a whole than would be achieved in an immediate winding up.

Closing a company – liquidation or ‘winding up’

Winding up a company effectively means closing it down. The assets are sold and funds realised are paid to creditors. Often, this will not cover the money owed to all creditors.

Both solvent and insolvent businesses can do this. If your company is solvent, the term given to this is a member’s voluntary liquidation (MVL). If it is insolvent, its known as a creditors voluntary liquidation (CVL) or a compulsory liquidation.

Further information

If your company is in financial difficulty you should get advice. Make sure you are aware of the costs involved before appointing an adviser.

Business Debtline (www.businessdebtline.org) provides free advice and resources to help people deal with their business finances and business debts. Their service is available over the phone, through their website and via webchat.

The Business Banking Resolution Service  is a new free and independent service to help eligible SMEs resolve complaints against their banks.  You can find out more:  https://thebbrs.org/news/boost-for-small-businesses-as-free-and-independent-service-for-unresolved-bank-complaints-goes-live/

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