Dealing with company insolvency
Has your company run out of money to pay its creditors? Are you under pressure from creditors but lack access to credit? If your company can’t afford to repay its creditors and has excessive liabilities, it could be insolvent.
Company insolvency occurs in two situations: when your company is unable to pay its debts as and when they fall due, and when your company’s liabilities exceed the aggregate value of its assets.
If your company is in an insolvent position, it’s extremely important that you act quickly. With an insolvent company, failing to fulfil your obligations as company director could result in charges of wrongful trading being made against you.
In this guide, we’ll explain the company insolvency status to help you understand if your business is solvent or insolvent. We’ll also explain the causes of insolvency and what you should do if your company enters into an insolvent position.
Is your company insolvent?
As explained above, there are two different situations in which a company can become insolvent. The most common situation is when your company simply can’t afford to meet all of its financial obligations, such as paying its employees, suppliers or creditors.
It’s understandable that from time to time, many businesses will need to pay their suppliers and other creditors behind their normal schedule. Doing so doesn’t mean that your business is insolvent, although it could be a warning sign. However, if a creditor issues your company with a statutory payment demand (an urgent legal letter demanding payment) for a debt of £750 or more and you cannot afford to pay it, your company is likely insolvent and could face liquidation.
The second situation in which a company is insolvent is when the aggregate value of its assets – including property, product stock, contracts and bank balance – is lesser than the value of its liabilities. These liabilities include both current debts – debts that are owed by your company to its creditors now, such as loan repayments – and contingent debts such as future legal settlements.
What should you do if your company is insolvent?
If your company is insolvent, you have several legal duties as a director that need to be carried out.
The first of these is that your business needs to immediately stop all trading activity and begin to act in the interests of its creditors. Creditors include employees and company staff, suppliers, contractors and finance providers. Since your company’s insolvency threatens their interests, it’s vital that you cease trading immediately and seek expert help.
Options for insolvent companies
Insolvent companies face a range of options for repaying their creditors and, if doing so is possible, recovering their business. These range from emergency financing to a range of liquidation and administration options, as well as payment arrangements.
The ideal solution for your company depends on its financial viability and the needs of its creditors.
Some of the most common options for insolvent companies that are still potentially viable include:
- Going into administration to restructure the business, reduce spending and maximise the return to creditors.
- Proposing a company voluntary arrangement (CVA) – an arrangement that allows the company to repay some or all of its debts to creditors over time, easing cash flow issues the company faces.
- Entering into a pre-pack administration where a sale of the business and aseets is agreed prior to administration and the sale is effected by an Administrator to a connected or unconnected third party.
- Raising funds via emergency financing or equity investment to pay creditors, improve cash flow and reduce short-term creditor pressure.
Companies that are no longer viable (for example, companies without a successful business model or with extreme amounts of debt) also have a range of options for responding to insolvency:
- Entering into compulsory liquidation through a winding up order issued by a High Court judge against the company.
- Entering into a creditors’ voluntary liquidation (CVL) in order to liquidate the company’s assets and repay creditors.
The ideal solution for your company depends on its viability, the scale of its debt to creditors, its ability to repay creditors on a gradual basis and a wide range of other factors.
If your company is insolvent, it’s imperative that you act quickly in order to avoid a winding up petition being filed by a creditor. Insolvency is an urgent situation, and it requires an equally swift and urgent response.