A company is deemed insolvent when it can’t afford to pay its debts, the monetary value of its assets are lower than the value of its liabilities or if a creditor services a formal payment demand for the amount of £750 or more that is unpaid for 3 weeks or longer.
If a company meets any of these criteria then it’s time to consider insolvency.
Although being insolvent can mean that a company may have to close, there may also be actions you can take towards business rescue that will allow you to continue trading.
If you find yourself in a similar situation and are looking at what to do next, Clarke Bell has put together this comprehensive guide on the 4 steps to business insolvency, so you can find the best route forward for you.
What are the available business insolvency procedures?
There are a number of options available to insolvent companies. From going into liquidation, whether forced or voluntary, to solutions for business rescue, here are the available insolvency producers in the UK:
Liquidation is the process that legally closes your company. This means it will stop trading and employing people. As part of the process, an insolvency practitioner is appointed to ensure that all company contracts are completed.
The company’s business will then cease, any legal disputes are settled, any money owed is collected and funds are distributed to creditors.
The former is best for those companies that are insolvent but care about the future of their business reputation. If this is the case, the best option is to liquidate your company voluntarily with a CVL.
A company director can ask for a CVL in the case that their company can’t pay its debts and if the shareholders agree and pass a ‘winding-up’ resolution.
The repercussions of a CVL are that your company stops trading and will be liquidated, meaning it will be wound-up and struck off the Companies’ House Register.
On the other hand, Compulsory Liquidation is when a company is forced to close by its creditors. This occurs when a creditor attempts to force your company to close to recover debts owed to them. To begin this process, the creditor must issue a winding-up petition to the court. If this is successful, your company will be forced to liquidate and all its assets will be sold to raise the money to repay your debts.
Just as it sounds, this is the most serious insolvency procedure and is subject to the rules as specified in the Insolvency Act 1986.
Another option for insolvent companies is administration. This is generally the best route for larger companies.
A company that goes into administration is given protection from legal action whilst an insolvency practitioner (who is appointed as the administrator) assesses their case, meaning no one can apply to wind up the company during this time.
The aim of administration is to take control of the company’s assets and repay creditors as much of what is owed to them as possible.
During administration, several things can happen including:
- A Company Voluntary Agreement (CVA) can be agreed, meaning the company can continue to trade
- The company can be sold as a ‘going concern’ to another company, meaning that they continue to keep trading, keeping their clients and workforce
- The company’s assets can be sold as part of a Creditors’ Voluntary Liquidation. Here, the creditors will be paid what they are owed from the money raised and the company will be closed
- The company can be closed if there is nothing to sell
Company Voluntary Agreement (CVA)
This option is the best way forward for companies looking for business rescue.
A CVA enables a company to put a formal proposal to its creditors to find an agreement where the creditors accept a sum of money as a way of settlement towards the debts which they are owed. This requires at least 75% of your creditor’s approval. Without this, a CVA cannot go ahead.
Once the agreement has been approved, the company can continue to trade as usual and the director remains in control of the business.
The process is monitored by an insolvency practitioner and usually lasts for around 3-5 years.
Scheme of Arrangement
This option is best for companies that are looking for aid to recover from their financial problems who want to maintain good relationships with clients and continue trading.
A scheme of arrangement is made between a company and its members or creditors. This can include reorganising the company structure, including by merger or demerger, or by a debt for equity swap or other debt-reduction strategies.
Again, this requires approval by at least 75% of your creditors in order to go forward.
Let Clarke Bell help you find the business insolvency procedure most suited to you
When facing difficulties, it is essential that you get the professional help your company needs as soon as possible to avoid running the risk of your company heading into compulsory liquidation.
So, now you know the options available to you, let Clarke Bell help.
If your company is looking for specialist advice from a firm of expert licensed insolvency practitioners, look no further. We have spent over 20 years putting our insolvency knowledge to practice, helping thousands of company directors around the UK.
If your business is facing financial difficulties and you are seeking advice on the best way forward, we can help you deal with your problems and ensure you meet all your legal obligations. So, whatever your situation, we will find the best route forward for your insolvent business.
Get in touch today for specialist business debt advice and to find out the insolvency procedure most suited to you. Get in touch on 0161 907 4044 or email [email protected]