Company insolvency is defined within UK Insolvency Act 1986 section 123, part of which is extracted here:
123. Definition of inability to pay debts
A company is deemed unable to pay its debts – […]
(e) if it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due.
This is known as cash flow insolvency
A company is also deemed unable to pay its debts if it is proved to the satisfaction of the court that the value of the company’s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities.
This is known as balance sheet insolvency.
So what do you do if your business is insolvent, apart from taking professional advice – we can explain here some of the options – it is difficult to give all the options without full knowledge of the individual business circumstances.
One option is a Company Voluntary Arrangement – creditors voluntarily agree to take repayment normally in monthly repayments over three or five years. This does not mean that 100% is repaid and frequently the creditor agrees to a smaller percentage and repaid slowly with their benefit coming in obtaining some repayment and continued supply agreements. Going through a CVA process takes time and there is a moratorium or protection against hostile creditors from the Courts for an initial 28 day period provided that two of the following criteria are met:
net assets below £2.8m,
turnover below £5.6m
50 employees or fewer
Some examples of where this might be an appropriate tool:
where the business has just lost a major customer
the management are clear how the business can perform profitably
the business has just suffered from the loss of a large bad debt
there is pressure form HMRC re VAT or NI/PAYE
Another choice is Prepack Administration.
This mechanism allows the sale of the business in a pre-packaged arrangement. The company will go into administration which means it is able to trade whilst the prepack is organised. The company suffers no interruption. This is an alternative on administration which is a process to protect the business going forward and allow the business to trade whilst other options are considered.
Other options include Creditors Voluntary Arrangement; Compulsory Liquidation; or Company Receivership. The creditor’s voluntary arrangement means that the creditors voluntarily accept the liquidation of the company; this may be less expensive and the creditors may receive more of their money back than the compulsory liquidation or company receivership.
So the next step is to talk to an adviser to go through the options and decide on what to do next.