You are insolvent if you cannot pay debts when they become due (either now or future debts). This is known as cash flow insolvency.
You are insolvent if your assets are worth less than your total liabilities (balance sheet basis). This is known as balance sheet insolvency).
If you feel your company is becoming insolvent you must enlist an insolvency practitioner who will investigate, determine the symptoms and advice solutions. The aim of the insolvency practitioner is rescue, restore and growth of your company. Much insolvency could be avoided if an insolvency practitioner is consulted at the earliest signs.
Insolvency and insolvency procedure may be initiated by various means:
The directors/shareholders if they believe it is about to become insolvent.
Creditors may apply to the courts.
Debtors may apply to the courts.
The insolvency practitioner may advise an individual voluntary arrangement.
During insolvency procedure, control of assets belongs to the insolvency practitioner, except in voluntary arrangements when control of the assets may remain with the company. The company may still trade but only through the signature of the insolvency practitioner. The insolvency practitioner will have overall control in running the business, implementation of solutions and guidance to growth. The earlier you involve the insolvency practitioner the more effective the rescue.
Upon application to courts an administration order will be placed upon the company. This will put it under the control of an insolvency practitioner, the purpose being to preserve the company’s business and assets to allow a reorganisation or ensure the advantageous release of assets while protecting it from action by creditors.
Insolvency must not be confused with bankruptcy, though they are both similar. Both insolvency and bankruptcy deal with liabilities exceeding assets, but insolvency is a current state of business while bankruptcy is a matter of law. Insolvency may lead to bankruptcy, but it may also be a temporary condition and recoverable. Bankruptcy is a legal procedure where the law resolves the debts of an insolvent business.
Examples of non-insolvency solutions are:
Appraisal of financial performance.
Closure and Members Voluntary Liquidation.
Examples of insolvency solutions are:
Company Partnership and Individual Voluntary Arrangements.
Creditors Voluntary Liquidation.
Compulsory Liquidation (bankruptcy).
MVL (company is solvent but directors retire and wish to close the company)
During insolvency procedure your employees must be considered. If the procedure entails liquidation and bankruptcy the employee’s rights may not be protected. If the procedure entails rescue, recovery and growth the employee’s rights may be protected.