What is Insolvency?

Insolvency is the business equivalent of bankruptcy. While the two are covered by different terminology and laws, they essentially mean the same thing: you can’t pay your debts. A business, even a financially healthy one, can become insolvent in a number of ways.

How can I tell if my company is insolvent?

The ‘cash flow test’ measures your ability to pay current or future debts that the business may owe, when payments are due. There is also the ‘balance-sheet test’: if your liabilities, including your uncertain circumstances at present and future liabilities, are of greater value than your assets then under English law your company is probably insolvent.

From a legal point of view your company is ‘unable to pay its debts’ if either of these two criteria can be met:

  • you have not paid a Court Order or judgement that has been served

  • you have been served a formal demand at your company’s registered offices for an undisputed sum by one of your creditors to whom you owe more than £750, and you have not paid it within three weeks

What happens if my company becomes insolvent?

A company nearing insolvency will have to be placed under the relevant insolvency procedures in order to try and repair the damage, overseen by a licensed Insolvency Practitioner. There are five options, and the nature of your business and your debts will dictate which procedure is suitable for your business. The options are:

  • Administration: where the IP replaces you and your Board of Directors. Your assets will be protected from creditors taking action so that the Administrator has the opportunity to get your business in a financial state where its debts can be settled. If the company cannot be rescued they could look for a buyer for the business, or distribute your assets in order to settle debt.

  • Administrative Receivership: under new laws it is highly unlikely that your business will be placed into Administrative Receivership, as this has been mostly superseded by Administration. In these instances the Administrative Receiver has to sell off your assets for the highest value in order to repay your creditors.

  • Company Voluntary Arrangement (CVA): a CVA is a legally binding and regulated agreement between yourself and your creditors to help you repay your debts. Usually your creditors will agree to accept lower or rescheduled repayments to give your business the chance to continue trading and settle the debts.

  • Scheme of Arrangement: a more complex version of a CVA which has to be approved by court, a Scheme of Arrangement is usually only used by larger companies.

  • Liquidation: this is where a company is completely shut down and its assets sold to raise cash. The cash raised will be distributed among creditors if the company in question is insolvent. The directors of a liquidated company will have their actions investigated by the Insolvency Practitioner.

What are the consequences of insolvency?

Insolvency procedures have a big impact upon your ability to trade, as customers and suppliers could terminate the contracts through fear of being let down. Transactions from as far as two years prior to your insolvency can be reviewed and reversed, it is more likely people might make personal claims against you, and you could be disqualified as a director.

Why do I need Insolvency Solicitors?

Making the right choices is key to ensuring the survival of your company. Insolvency Solicitors can guide and advise you on all the legal issues regarding your insolvency, such as recovering and realising assets. Limit the damage caused to your business by financial difficulties by calling our experienced insolvency solicitors today.