What is Business Insolvency?
When a business is unable to pay debts as they become due, they become insolvent. There are two types of insolvency: cash flow and balance sheet.
Cash Flow Insolvency
Cash Flow Insolvency takes place when a business is unable to pay its debts when they are due. This is usually because of poor cash availability in the business.
Balance Sheet Insolvency
Balance Sheet Insolvency is when the total value of a company’s liabilities exceeds its assets.
The difference between these two types in that cash flow insolvency is used when a company is unable to pay debts due to a lack of cash, yet their assets are still worth more than their liabilities. When their liabilities exceed their assets, they are balance sheet insolvent.
Once a business owner decides to pursue insolvency, there are a number of different ways it can be carried out, not all necessarily resulting in liquidation. A company will only go into liquidation once it becomes impossible to rescue the company through any other means.
What are the Differences Between Liquidation and Insolvency?
Insolvency is a process where a business is unable to pay back debts, but it is not a legal process and exists to merely describe the situation. If a business is insolvent, it is not required to declare itself as being so, and is usually a precursor to being wound up. To put it another way, insolvency is an accounting or financial term, not a legal one.
Liquidation can be either voluntary or compulsory and is the process where a business or company is ‘wound up’ and the property of the company is redistributed amongst creditors.
There are three types of liquidation in the UK; Creditors Voluntary Liquidation, Compulsory Liquidation and Members Voluntary Liquidation.
How Can Admitting Your Business Is Insolvent Help?
The processes that you may follow can give you time to formulate and implement
a business rescue or turnaround plan.
Directors can remain in control of their business while solutions to the problem are investigated.
Creditors may become more likely to agree to give the business more time to pay or write off of some parts of the debt if they can see that the business is making efforts to rectify the situation and find ways of clearing the debts.
Advice if you think you are insolvency or in need of company debt advice
Insolvency does not have to be a last resort. Using a turnaround practitioner could rescue the
business before it becomes insolvent.
Seek professional help as soon as you realise that you are insolvent
Do not borrow any more money. While this may seem like a good short-term solution, it may cause you more problems in the future.
Understanding Priority debts
Priority debts are debts owed to creditors that can take serious action against a business if it fails to repay them. They are not necessarily the business’s biggest debts in a monetary sense, but they are the most important because of the potential consequences that come with not paying them.
Consequences of Not Dealing with Priority Debts
There are a number of potentially serious consequences which can occur when a business fails to pay back its priority creditors.These can include:
2.Having gas or electricity supplies cut off
3.Repossession of the business premises (mortgage arrears)
4.Distraint and being summoned for court actions
However, before any of these actions are taken the businesses creditors will always give a warning so that there is time to come to an arrangement.
Types of Priority Debts
There are a number of debts that should be considered as priority debts.These include:
1. HMRC Debts: PAYE, Corporation Tax, National Insurance, Business Rates, VAT.
3. Court Fines
6. Gas and Electricity bills
In the case of all of these debts, creditors will be able to take serious action; these can include the cutting off of services and utilities and taking the business to court.