Insolvency is a state no director wants to find their company in. The inability to repay your company’s debts as and when they fall due can lead to creditors taking drastic action to recover what they’re owed; this could include trying to recover assets or forcing the company to close.
The good news is, depending on your company’s situation, it could have several options to alleviate the problem.
How do I know if my company is insolvent?
A company is insolvent if it lacks the funds or assets necessary to repay its liabilities as and when they fall due. As a company director, you should always be aware of that company’s solvent position and take appropriate action if you suspect the company is insolvent. Check your company’s balance sheet to ensure its liabilities don’t outweigh its assets.
Another potential indicator of insolvency is legal action against the company. Creditors can file County Court Judgments (CCJs) and Statutory Demands if your company owes them money. If not dealt with immediately, these can have a damaging impact on your company for years afterwards. Another sign is if debt collectors and even bailiffs are visiting your business and attempting to take assets to repay what you owe.
Options for insolvent company closure
If your company is insolvent, you should close it through a Creditors Voluntary Liquidation (CVL). It isn’t a process you can enact yourself. As liquidation is a formal, legally binding closure process with lots of moving parts, it must be carried out by a licensed and regulated insolvency practitioner.
A CVL closes the insolvent company in an orderly manner, drawing a line under the business’ debts and allowing you, as director, to move on. If you’ve acted in the business’ best interests, you can often set up a new business once the old one is liquidated.
Closing through a CVL is generally favourable to having the company close through Compulsory Liquidation, wherein creditors force the company into liquidation by issuing a winding-up petition. If unchallenged, this leads to the company’s bank accounts being frozen, making trading impossible.
Options for insolvent company recovery
If your company is insolvent, closure isn’t necessarily a foregone conclusion. If your company has an otherwise viable business model with the potential to be profitable without its debts, you may be able to rescue the company.
This could be done through a Company Voluntary Arrangement (CVA). Like a CVL, it is a formal, legally binding process managed by a licensed and regulated insolvency practitioner. During a CVA, your company pays a portion of its unsecured debts tailored to an affordable rate on a monthly basis. The arrangement usually lasts five years, during which, the company continues trading, maintaining its reputation with customers and its position in the market. Once the arrangement concludes, any included debts that are still outstanding are written off.
If more substantial restructuring is needed to bring the company back to a profitable state, you could inquire about administration. An insolvency practitioner will investigate the company’s affairs and attempt to find a way to restructure or sell the company and its assets, with one of the aims being to rescue it as a ‘going concern’ or achieve a better result for creditors than if the company was liquidated. Administration is a temporary process and is often followed by another insolvency process.
To conclude
As a company’s director, you should always be aware of that company’s solvent position. If your company is insolvent, you should act quickly and decisively to alleviate the problem as soon as you notice the potential warning signs. Doing so gives you the best chance of achieving your desired outcome.
Your company may be able to recover if it has a viable business model, or it may require restructuring to return it to a profitable state. Alternatively, if closure would be the best option, doing so voluntarily often leads to a better result than if your creditors try to wind the company up through compulsory liquidation.