What is insolvency?
Insolvency is when a company is unable to pay its debts or outgoings on time or in full. Put simply, insolvency can be seen as bankruptcy for businesses. A company is deemed insolvent when it has more liabilities than assets on the balance sheet, or when it can no longer meet its outgoings when they are due.
Does insolvency mean my business is beyond rescue?
Although insolvency is a tricky situation to be in, it does not necessarily mean your business cannot be saved. There are a number of rescue methods available which could change your company’s fate and set it on the right path again. This is a complex area to delve into, so it’s best to seek help from a licensed insolvency practitioner who can guide you through your options. They will talk you through your options and explore the best way forward for you and your business.
What is an insolvency practitioner?
An insolvency practitioner is someone who is licensed to act on behalf of companies and individuals when they are facing insolvency or other financial distress. They are often a very specialist form of accountants who work solely with companies in this situation. An insolvency practitioner can help the director of a company work out the best way forwards for their business, and guide them through the process too.
What are some examples of business and company insolvency options?
A Company Voluntary Agreement (CVA)
A CVA allows Directors to retain control of a business whilst allowing restructuring or a change of approach. A CVA is a procedure whereby a company can be ‘saved’ where it has suffered financial difficulties, but still has a viable business, which could survive if the burden of debt is released.
The company agrees to repay some or all of its debts from future profits or asset sales over an agreement period, which is usually five years.
This is where an insolvent company, or a company that is at risk of being insolvent, is put under the control of an insolvency practitioner and the protection of the Court. If you have a viable business that is failing, or likely to fail, because of the burden of debt, an onerous lease or bad debtor, an Administrator can trade the company and often rescue a business.
When a company goes into liquidation, its assets are sold to repay creditors and the business closes down. This is a complex area and there are numerous types of liquidation, so it’s best to seek professional advice if this is something you are considering for your company.
Creditors’ Voluntary Liquidation
A Creditors' Voluntary Liquidation (CVL) is an official procedure whereby a company's assets are liquidated in order to pay creditors. Although it is usually initiated by directors when their company becomes insolvent, a licensed insolvency practitioner will act as liquidator and help guide you through the process.
If you fail to pay debts when they are due, a creditor can initiate a petition to the court for a winding up order against the company via the compulsory liquidation process. If you are experiencing financial difficulties, it is best to contact an insolvency practitioner to help you before compulsory liquidation is necessary.
A company can apply to the Registrar of Companies for dissolution, whereby the company is struck off the Register at Companies House. There are rules and procedures that need to be followed, so do seek advice from an insolvency specialist before you go ahead with this.
If you’re a business owner wondering where to turn next, the team here at Beacon LIP can help. Please contact us on: 02380 651 441.