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:-
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:-
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:-
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:
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.
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.
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.
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:
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.
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.
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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