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What is business insolvency

Myles

Author: Myles Robinson - Advisor

Posted: May 31, 2022

What is business insolvency? A Guide to Business insolvency & how it works

We often hear “what is business insolvency? Is it the same as bankruptcy? Continue reading our guide to find out about an insolvent company.

When a company can’t pay its bills, it is considered an insolvent company. This could be either:

  • Company directors can’t pay its bills when due
  • It has more assets than liabilities on its balance sheet insolvency

An insolvent company is at risk of being shut down.

Company directors may be able to take steps to allow the company to continue to trade.

Even if your company is experiencing financial difficulties, it is important to understand the options and the consequences of insolvent companies.

Also, you should consider seeking professional legal action and advice from:

  • Citizens Advice Bureau
  • Solicitor
  • Qualified accountant
  • Authorised Insolvency Practitioner
  • Reputable financial advisor
  • Centre for debt advice

Business insolvency can be defined as a situation in which a company cannot pay its outstanding debts. This could be due to cash flow problems or liabilities that exceed its assets. If you are concerned about insolvency, there are certain warning signs that you should be aware of.

Contact today for a free no-obligation consultation if you have company debts and financial distress.

Insolvency is a condition in which a company loses its business.

However, insolvency can sometimes lead to complete closure. There are steps that companies can take to avoid this.

Insolvency is a difficult liquidation process that involves many decisions.

We will be looking at some questions you might have if you choose this path.

What is business bankruptcy?

Businesses are insolvent when they can’t pay their company debts. This could be due to cash flow problems, which means that bills aren’t being paid or that the balance sheet shows more liabilities than the company’s assets.

 

What is the difference between insolvency, bankruptcy, and liquidation of business?

Insolvency refers to the condition in which a person or company has insufficient assets and cash flow to pay its liabilities and debts.

Business insolvency is, in essence, the same thing as personal insolvency.

Bankruptcy refers to insolvency. It is mainly applicable to individuals and sole traders.

Company liquidation is the process that replaces bankruptcy for limited companies. This is when the business is wound up or shut down to allow it to sell its assets and repay creditors.

What happens if a company declares bankruptcy?

Declaring insolvency is a company declaring bankruptcy. This means that the company prioritises the repayment of its business debts. It may be necessary to cease trading immediately so that the debts don’t build up.

A private Insolvency practitioner is usually hired by businesses to help them decide if this is necessary or if they can improve their chances of repaying creditors by continuing to trade.

It is important to remember that the insolvency process for Scotland differs from those in England and Wales.

What are the signs that a company is insolvent?

There are several red flags that can be spotted if your business is in danger of going bankrupt. These are:

  • Those who aren’t paid have been threatened with legal action by creditors
  • The company’s overdraft exceeded its limit
  • Rejection of credit applications
  • Unpaid wages
  • missing HMRC’s tax payment deadlines

The UK government website provides a place where you can check the status of a company to see if it is insolvent or in liquidation proceedings. It can be found here.

 

What does it mean to be in liquidation?

Liquidation refers to the process of closing down a business so its assets can be sold to pay its debts. For companies that are solvent, but want to close, it may be a company voluntary arrangement.

It usually involves a company that is insolvent and cannot continue to operate because of financial difficulties. It is also known as compulsory liquidation. Creditors have requested a court to issue a winding-up order.

Although it is ideal to sell the assets so that creditors can be paid, this is not always possible.

However, liquidation does not apply to sole traders as there is no legal distinction between the individual and the business.

For sole traders, there are two options for insolvency: bankruptcy or individual voluntary arrangements (IVAs), and sequestration and Protected Trust Deeds (PTDs) in Scotland.

Is it possible for a business to survive insolvency while still being able to trade?

Insolvency does not necessarily mean that a company must stop trading. Sometimes, the insolvency process may allow the company to bounce back and continue its business.

Some companies employ corporate recovery specialists to help them solve their debt problems and allow them to trade on the company’s behalf.

If a court finds that the company is unable or unwilling to repay its debts, it can be charged with wrongful trading. The directors of limited companies may now have to repay the debts, which could be a significant change from what they were protected.

 

How to solve insolvency

There are other ways to deal with insolvency, which don’t involve liquidation or any other legal procedure.

Many companies seek informal agreements with creditors. A repayment plan is then put in place that suits all. While this may incur higher interest payments and come with some risk, it can be an option if there are good relationships between the business and its creditors.

A company voluntary agreement (CVA), which is similar to an informal arrangement with creditors, allows the company to continue trading.

In order to avoid liquidation, some companies choose to go into administration. Insolvency practitioners take control of a business and create a recovery plan. They also seek repayment agreements with creditors.

It is often followed by liquidation but it does not always. This gives the company some hope that it will be able to trade while it addresses its debts.

Can I set up a new company after a liquidation?

After a liquidation, there is no reason to stop starting a business. However, there are some important things to keep in mind.

You should not use the same name as your old company. Otherwise, you could be charged with ‘passing off. This is outlined in Section 216, 1986 Insolvency Act.

There may be more practical obstacles, particularly if you have been involved in multiple company liquidations.

HM Revenue & Customs may require a security deposit if your company falls behind in tax payments. Some suppliers might be reluctant to make arrangements with companies that are linked to liquidations.

Experiencing temporary financial difficulties

You should seek advice from an accountant, qualified solicitor, or authorised insolvency practitioner if your company is facing financial difficulties. Before you appoint an insolvency practitioner, make sure you understand the costs involved.

We offer free advice and resources that can help people manage their business finances and debts. They are available via phone, webchat and website.

Avoid Company Insolvency:

1. Take a look at the larger picture

It won’t solve the problem by burying your head in the daily operations or working harder. However, it is often the best solution for many hardworking business owners.

Instead, look at the larger picture. What strategies are you able to implement that will help? What should you stop doing? What are the areas of your business that are causing you to lose cash?

2. Changes can be made to your company’s way of doing business

Directors of companies should evaluate the viability and validity of contracts and plans to avoid future cash flow problems. If the employees aren’t qualified financial professionals, it might be a better idea to outsource this task.

It may be worthwhile to seek professional advice if you are able to negotiate some of the company’s debts. It’s in the creditors’ best interests to get their money back.

It is crucial to be prepared for unexpected costs that could lead to your company’s demise.

3. Reduce your operations

Focusing on the basics often allows you to return to the most profitable areas of your business. This could mean redundancy or selling assets. It also means that you will need to analyze exactly what your business needs.

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