In today’s economic climate, many businesses are struggling.
With the cost-of-living crisis still lumbering on, soaring energy bills, and the after-effects of the COVID-19 pandemic hanging over UK businesses, if you’re facing a period of financial difficulty, you aren’t alone.
According to the latest government insolvency statistics, there were 5,747 registered company insolvencies - making the number of insolvencies 18% higher than the same period in 2022.
With many businesses facing insolvency, if your company is struggling financially, you most likely have a lot of questions regarding the insolvency process, what your options are, and what insolvency means for the future.
So, with that in mind, we answer your top insolvency questions in this blog.
Your top insolvency questions answered
How do I know if my business is insolvent?
According to the Insolvency Act 1986, a company is insolvent when it can’t pay its debts. This means that it either can’t pay bills when they are due, or it has more liabilities than assets on its balance sheet.
What are the causes of business insolvency?
There are a number of different reasons why a business can run into financial difficulty, from cash flow issues to a loss of a big client or customer to an overall increase in debts.
When should I seek advice?
As soon as possible. Although it might be tempting to bury your head in the sand, if you act soon enough and enlist the help of an insolvency practitioner, you might be able to take the necessary action that allows your company to continue trading.
What is a licensed insolvency practitioner?
An insolvency practitioner, or IP, is someone licensed to act on behalf of companies and individuals in informal and formal insolvency procedures, or during the closing of a solvent company.
What are my responsibilities as a director should my business become insolvent?
When a company becomes insolvent, the directors’ duties shift from promoting the success of the company to minimising its losses to and acting in the best interests of the creditors.
Am I liable for company debts?
Usually, no. However, when a company is insolvent the insolvency practitioner has a duty to investigate the period leading up to the insolvency. If it is discovered that the directors acted improperly, it may result in charges of wrongful trading which can then result in personal liability for company debts.
Ok, so what about my options if I’m facing insolvency?
Depending on whether your business is facing temporary difficulty but could become profitable again in the future, or if there is no other choice but to close the company down, there are a few different choices available to you. These include a company voluntary arrangement, company administration, or a creditors voluntary liquidation.
What is an informal agreement?
An informal agreement is a good solution if your company is experiencing temporary financial difficulties and there is no immediate threat of legal action by your creditors. It’s essentially an agreement with your creditors to pay your debt on different terms, usually giving you longer to pay.
What is a company voluntary arrangement?
A company voluntary arrangement (CVA) is an official insolvency procedure that effectively draws a line in the sand with all your creditors and strikes a deal to repay them from your future profits. It’s a type of business rescue solution that is based on preserving the company, rebuilding sales and profits, and paying your debts back over and agreed period of time. Once that period is up, all remaining debts are written off.
What is company administration?
Company administration involves you handing your company over to an insolvency practitioner. During this time, the company is protected, which means that your creditors can’t take any further action without the permission of the court. During this time, the administrator (insolvency practitioner) will draw up a plan to either restore the company’s viability, come to an agreement with its creditors, sell the business, or sell the company assets.
What is administrative receivership?
Administrative receivership is slightly different to administration in that it is a process initiated by secured creditors who have lost faith in a company’s ability to pay its debts. As with company administration, the administrator will then draw up a suitable plan - however, they only owe a duty to the specific creditors who initiated the receivership rather than to all unsecured creditors.
What is pre-pack administration?
A pre-pack administration is a pre-packaged sale of a business immediately after the company is placed into administration to a new or related company that is often made up of the same directors, essentially enabling the company to restart without the burden of debt.
What is liquidation?
If a company cannot be saved it will be liquidated and cease to exist. Both solvent and insolvent companies can be wound up by their directors in a voluntary liquidation, or if a creditor applies to wine up an insolvent company it is known as a compulsory liquidation.
What is a creditors’ voluntary liquidation?
A creditors’ voluntary liquidation (CVL) is a quick yet powerful way to close a business whilst ensuring everything is dealt with legally and properly.
What is a members’ voluntary liquidation?
This is slightly different in that the company in question is solvent and has enough assets to pay all of the company debts. In a members voluntary liquidation, the surplus cash is paid back to its shareholders (members) and the business is closed down.
How can I put my company into liquidation?
If you want to put your company into liquidation, the shareholders must approve the resolution to do so. You will also need the assistance of a licensed insolvency practitioner to take you through the appropriate legal procedure.
So, what is compulsory liquidation?
Compulsory liquidation occurs when a creditor takes action to recover their debt by getting a court judgement or issuing a statutory demand. If they are still unable to recover the debts they are owed, they can apply to wind the company up. Once a court order is issued, the liquidation process will begin.
What will happen to my employees during insolvency?
If your business becomes insolvent and ends up being liquidated, your employees may claim for arrears of wages, holiday pay, redundancy pay, and pay in lieu of notice from the Redundancy Payments Office. Payment is usually made within six weeks of the liquidation date.
Next steps if your business is facing insolvency
If your business is facing insolvency and you are unsure what to do next, our knowledgeable team are here to help and advice.
As insolvency experts, we will work together with you to provide clear advice on what to do next and decide on the best plan of action for your own individual needs. If you are struggling financially and want to establish your next steps, contact us today for confidential help and advice.
