Realising that your company – the project that you poured your heart and soul into – has become insolvent and facing closure can easily be one of the scariest moments of your life.
What makes this overwhelming realisation of imminent insolvency especially haunting for most people is the fact that they don’t really know what to do when they find themselves in that position.
Your business is insolvent, but what next? What are your options? Are there even any? Is there a way out – a scenario where your business can come out of this unscathed?
The first thing you need to know is that, in the UK, insolvency proceedings are heavily regulated and involve their own set of laws. Once your company is found to be insolvent, there are several channels and procedures to follow.
But: what exactly are those rules and regulations that define corporate insolvency and dictate formal insolvency procedures?
What Is Insolvency?
First things first – what exactly is insolvency? According to English law, insolvency arises when a business finds itself incapable of covering and paying back the debt it owes to other parties.
Insolvency, however, isn’t simply insolvency. There are two different types of insolvency. In order to find out which kind of insolvency applies to your company, there is a regulated test that determines precisely how and why your company is insolvent.
- Cash flow insolvency:
This is the case when a business does not have enough cash flow to meet debt repayments and pay back its creditors.
- Balance sheet insolvency:
This is when the amount of a business’ liabilities exceed the value of its entire assets.
Insolvency vs Bankruptcy
In both England and Wales, the term “bankruptcy” refers to individuals (as opposed to companies) that are declared insolvent by the court.
However, bankruptcy can be avoided by insolvent individuals in several different ways, including Individual Voluntary Agreements (IVAs) and Debt Relief Orders (DROs).
Just as there are ways to prevent bankruptcy for individuals, there are also a number of options available to companies once they have been placed into a formal insolvency procedure by its directors, shareholders, or creditors or the court.
This is a process that focuses on rescuing the company and securing its business activities. With this method, an external entity takes over the insolvent company for a fixed time period in order to assess the company’s assets and work out if those assets are enough to pay off the creditors.
- Administrative receivership:
This is an option where a secured creditor, typically a bank, is appointed and given the right to sell the company’s assets for maximum value in order to pay off its secured debt, resulting in said company’s liquidation.
- Company Voluntary Arrangement (CVA):
CVAs are the corporate equivalent to the IVAs available to insolvent individuals. They are legally binding agreements between a company and its creditors, where creditors agree to reduce, extend, or reschedule the repayment period for outstanding debts in order to give the company the opportunity to continue to operate.
This option involves a liquidator to collect all of the company’s assets and turn them into cash, which then automatically results in the closing of the business. The acquired cash is then used to distribute among the creditors and pay back the company’s debts.
While the aforementioned tips are a good way to start educating yourself on insolvency and the formal procedures it entails, it is still advisable to seek professional help.
Whether you are an individual facing bankruptcy, a CEO of an insolvent business, or even an employee of a company that is facing financial troubles, there are a number of sources and places where you can find expert advice that will help you make sense of your finances – be it insolvency practitioners, financial advisors, or insolvency softwares.
Whichever option you choose, make sure you act fast and don’t bury your head in sand. Your financial troubles won’t magically disappear or solve themselves by ignoring them, so act now and aim to get your business in order.
About the author
Yaakov Smith has twenty years of experience with developing, configuring and writing software. He is the owner and founding manager of Logican Solutions Ltd, which offers its clients complete productivity software solutions for their business.
Main Image Source – By Travis Nep Smith