Businesses can run into difficulty for a number of reasons - especially in today’s tumultuous climate.
If your business is struggling financially, it’s only normal to be stressed and anxious - and to have a number of questions, too. Is your business insolvent or do you just have a temporary cash flow issue? Can you turn things around? If so, how? And what happens if you need to close the doors for good and walk away?
If you’ve got questions about insolvency, rest assured we’ve got the answers - so read on to discover everything you need to know about what happens when you face insolvency.
The definition of insolvency
First things first, when is a company insolvent? According to the Insolvency Act 1986, a company is insolvent when it can’t pay its debts. This could mean either:
- It can’t pay bills when they are due
- It has more liabilities than assets on its balance sheet
If your company is insolvent, it is in danger of being closed down. However, if you act soon enough, you might be able to take the necessary action that allows your company to continue trading.
My business is insolvent: what happens next?
If your company becomes insolvent, first and foremost, whatever you do from now on, you must act to maximise your creditors’ interests.
Secondly, what you do next will very much depend on whether the company can be rescued and you decide to put a strategy in place to turn things around, or whether it’s too late for a turnaround procedure and it’s time to walk away.
Business rescue and recovery
There are several options that allow an insolvent company to continue trading. You can either contact your creditors to see if you can reach an informal agreement, raise new finance, enter into a company voluntary arrangement, or put the company into administration:
Informal agreement
An informal agreement is usually a good solution if your company is experiencing temporary financial difficulties and there is no immediate threat of formal action by your creditors.
With an informal agreement, you essentially make an agreement with your creditors to pay your debt on different terms. To make an informal agreement, you should contact your creditors as soon as possible to discuss the options available so you can put an agreement together to pay off your debts.
However, it’s important to note that an informal agreement is not legally binding, and as such, the creditor can choose to withdraw the agreement at any time - essentially putting you right back where you started.
Raise new finance
If your company needs a cash injection to turn things around, there are a number of refinancing options that could enable you to rescue your business.
Options include crowdfunding, peer to peer lending, asset finance, invoice factoring and discounting and more. Discover 12 possible solutions if borrowing is the best option for your business in this blog.
Company Voluntary Arrangement
Alternatively, another option for your company if it is facing insolvency is a company voluntary arrangement (CVA). A CVA is an official insolvency procedure that can be proposed by the company’s directors to allow the company to agree with its creditors about how their debts should be dealt with.
It is a very powerful tool that effectively draws a line in the sand with all creditors and strikes a deal to repay them from your future profits. Plus, proposing a CVA demonstrates that you are trying to maximise creditors’ interests, so it can often be viewed positively.
A CVA is based on preserving the company, rebuilding sales and profits, and paying your debts back over an agreed period of time. What’s more, a CVA also mitigates wrongful trading issues and allows you to focus on running the business, giving you a chance to turn things around.
Administration
The administration process involves you handing over your company to an insolvency practitioner (the ‘administrator’). Whilst the administrator is in charge of the company it is protected, which means that your creditors can’t take any further action without the permission of the court.
The administrator will then draw up a plan to either restore the company’s viability, come to an agreement with the creditors, sell the business, or sell the assets to pay a preferential or secured creditor.
It is ultimately up to the creditors whether or not they agree to the administrator’s proposals. However, usually, the proposals drawn up by an administrator achieve better results for the creditors than winding the company up, which means they will usually agree to the proposal.
Administrative receivership
Administrative receivership differs slightly to administration because it is a process initiated by secured creditors who have lost faith in a company’s ability to repay its debts.
Similarly to administration, when a company goes into administrative receivership, control is handed over to an administrative receiver who will then look to sell the company’s assets to recover the creditor’s money.
However, with a receivership, the administrative receiver only owes a duty to the specific creditors who have initiated the receivership, rather than having a duty to all unsecured creditors.
Closing the business down
If it is decided that your company cannot be saved it will be liquidated, removed from the register at Companies House, and ultimately cease to exist. Both solvent and insolvent companies can be wound up by their directors in a voluntary liquidation, or if it is a creditor that applies to wind up an insolvent company, this is known as compulsory liquidation:
Creditors’ voluntary liquidation
If a business is insolvent and does not have enough money to pay all of its debts, there is sometimes no other appropriate course of action than for the company to be put into liquidation. A creditors’ voluntary liquidation (CVL) is a quick and powerful way to close a business whilst ensuring everything is dealt with legally and properly.
With a creditors’ voluntary liquidation, the company must pass a special resolution under the Companies Act 2006, declaring it is unable to continue. A meeting with the creditors will then take place within 14 days, a liquidator will be appointed, all debts that cannot be repaid will be written off, and the company will be removed or “struck off” from the register.
Compulsory liquidation
Finally, compulsory liquidation occurs when a creditor takes action to recover their debt by getting a court judgement or by issuing a statutory demand.
If they are still unable to recover the debts that they are owed, they can then apply to wind the company up - which is also knows as compulsory liquidation. On the issue of the court order, an official receiver will then be appointed as liquidator and the liquidation process will begin.
However, it’s worth noting that compulsory liquidation is usually a last resort for creditors, as there is very little chance that they will get back the money they are owed.
What does insolvency mean for me as a director?
Ultimately, the effect on company directors will depend on the type of insolvency the company enters.
If the company enters into a company voluntary arrangement, you will still be able to fulfil your role as a director. However, if the company enters administration, you will need to seek the consent of the administrator before you can exercise any management powers.
Finally, if the company enters into liquidation - either compulsory or voluntary - you will lose all power to conduct acts in the company’s name or to control the company’s affairs from the date of the liquidation.
Can a director be personally liable for a company’s debts?
In some cases, yes. When a company is insolvent, the IP has a duty to investigate the directors’ actions in the period leading up to the insolvency - and if it is discovered that the directors acted improperly, charges of wrongful trading may be brought, which can result in personal liability for company debts.
Additionally, if you are charged with wrongful trading, you could also be subject to disqualification proceedings, which can prohibit you from acting as a company director in the future.
Need advice about your next steps?
If your business is facing financial difficulty and you aren’t sure of your next steps, the sooner you act, the more options you will have available to you. Although it may be tempting to bury your head in the sand, by taking control of the process and seeking professional help, you might just be able to turn things around
