The insolvency process is a serious undertaking for any business and it’s stressful. But if you make the decision early enough, the range of options available to you are much greater and could even include the opportunity to rescue your business.
Insolvency can either be designed to protect your business or deals with the closure of the company.
What is Insolvency?
Insolvency means that you can no longer pay your debts as they become due. It can happen in one of two ways, or both at once.
You can experience cash-flow insolvency which means the business doesn’t have enough accessible cash to pay debts, but still has illiquid assets. Or you might have balance-sheet insolvency which is more serious and means that the debts of the business are greater than its total assets, liquid and illiquid. The former is easier to handle, but the latter typically relies on ceasing trading immediately.
How to Handle Insolvency?
Before handling insolvency, it’s highly recommended that you get expert advice from a licensed professional. Business insolvency is incredibly complex and can be confusing, so having professional advice on your side will ensure you take the right steps.
With that in mind, what options are available for a struggling business?
1. Create an informal arrangement with your creditors
As soon as you are aware of your financial problems, it’s critical that you contact your creditors and let them know the situation. If the financial concerns are temporary, and you’ve spotted them early on, you may be able to arrange a payment plan. However, this doesn’t work if there’s a threat of formal action from creditors.
It’s important to note that these conversations and any arrangements you come to aren’t legally-binding, and a creditor can withdraw from the agreement at any point. But it may serve as a helpful temporary solution that enables your business to continue trading.
2. Enter into a CVA
A CVA, or Company Voluntary Arrangement, is similar to the former suggestion in that it is an arrangement made with creditors to pay off any money owed over a new time period. However, the difference is that this is a binding arrangement for both parties and allows the business to continue trading during and after the arrangement has completed.
3. Go into administration
Administration can be a difficult decision to make for a business, but it does offer some benefits. It provides respite from any creditor actions and the company can either continue or be sold on.
Administration is a fairly simple process to undertake – the business owner hands over the company to an insolvency practitioner, and they take control of it so that creditors can’t take any legal action without the court’s permission. The administrator will then draw up proposals to either restore company viability, restructure or sell the business, or realise assets to pay creditors.
4. Use administrative receivership
Sometimes known as being ‘in receivership’, this is initiated by the holder of a floating charge which is usually a bank. The holder will appoint a receiver who will be responsible for recovering money owed – this option doesn’t usually involve a court.
The administrative receiver is a private insolvency practitioner, but they’re not the same as the official receiver. The administrative receiver won’t make payments to unsecured creditors, but they are responsible for recovering enough money to pay their costs, the floating charge holder’s debt and preferential creditors.
5. Liquidate the company
Also known as ‘winding up’ a company, liquidation essentially refers to closing the company. The assets are sold and the proceeds of those sales are handed over to preferential creditors to pay off any money owed. However, this will usually not cover all creditors.
Solvent and insolvent businesses can choose this option. If the business is solvent, the term to refer to this process is a member’s voluntary liquidation, and for insolvent companies it is referred to as a creditors voluntary liquidation.
Insolvency isn’t something any business wants to go through but sometimes it’s necessary to deal with financial difficulties.
Depending on the extent of your debts and losses, you may be able to continue trading or you might need to close the company down. However, an experienced professional will be able to offer expert advice to ensure the decisions made are best suited to your circumstances.