If you’re unable to service your business debt, or if your business assets are valued lower than your total debts, your business is insolvent.Every year, thousands of businesses struggle with debts, with a large number entering into bankruptcy procedures and winding up orders.
If you’re unable to pay your personal debts, legal action may be taken against you, resulting in a legal declaration of bankruptcy.Individuals, individual members of a partnership and sole traders, those with personal guarantees for loans and sole traders may find themselves at risk of bankruptcy.Insolvency may result in a liquidation process, whereby a liquidator will be appointed by the court wind-up a limited company or partnership. Cases of insolvency are referred to local official receiver offices which determine the cause of insolvency.
Limited Companies and Insolvency
Limited companies can look at a range of options for dealing with insolvency.
Informal arrangements. A good course of action for businesses seeking support with their debt problems is to contact creditors as soon as possible to discuss the possibility of arranging a restructured payment plan. Make sure you have calculated a manageable timetable of payments that will suit your budget.
Informal arrangements with friends or family. You may have family or friends that are willing to provide you with a short term loan to help you through a difficult period.
CVAs (Company Voluntary Arrangements). Similar to informal arrangements, CVAs offer a more formal approach. With the aid of a licensed insolvency practitioner, a company’s directors can apply to the court to arrange a meeting with creditors. At the meeting, a new schedule for repayment should be proposed to the creditors.
Administration. Entering into administration will give a business some protection from its creditors and safe from liquidation for at least 12 months. A licensed insolvency practitioner must be appointed by the court to act as the administrator in the process.
An accountant or solicitor may advise that arrangements and administration is highly unlikely to save your company. In this case, you or your creditors may choose to put your company through one of three types of liquidation processes:
Creditors’ voluntary liquidation.This is the most typical form of liquidation, which allows shareholders to put the company into liquidation. There must be a lack of assets to cover all creditors’ debts, making the company insolvent. A liquidator will work to get as much value for the creditors whilst winding up the company.
Members’ voluntary liquidation. In this instance, the shareholders will choose to put the company into liquidation and there are enough assets to cover creditors’ debts, meaning the company is still solvent.
Compulsory liquidation. Compulsory liquidation will see a creditor or company petition the court for a winding up order against the company.