When a company can no longer afford to cover its day to day costs or debts, its liabilities outweigh its assets or a creditor has served a formal payment demand that has gone unpaid, it is deemed insolvent.
If this is the case for your company, there are several options open to you, from liquidation, Company Voluntary Agreement (CVA), Administration to a Scheme of Arrangement.
Whatever your situation, to help you find the best route forward for your company, Clarke Bell have put together this handy guide outlining the different routes available to insolvent companies.
When is a company classified as insolvent?
A company is deemed as insolvent if it passes one, or both, of the following tests:
- The balance sheet test: this test measures whether your liabilities are greater than your assets. If this is the case, your company can be deemed as insolvent.
- The cash-flow test: this is a test to see whether a company can pay its bills and debts. If it cannot, it is classified as insolvent.
If this is true for you, it’s time to explore what options are open to your insolvent company. After all, there are a number of different routes available to insolvent companies, from going into liquidation and subsequently ceasing to trade, to finding a solution for business rescue. Next, we’ll look at all your options in depth.
Option 1: Liquidation
The first option is liquidation. This is a formal insolvency process that legally winds-up your company meaning it must stop trading and is officially dissolved, meaning it is taken off the Companies House Registrar.
As a legal procedure, a licensed Insolvency Practitioner must be appointed to oversee and implement the liquidation process.
There are 3 main types of liquidation, Creditors’ Voluntary Liquidation, Members’ Voluntary Liquidation (MVL) and Compulsory Liquidation.
Creditors’ Voluntary Liquidation
Creditors’ Voluntary Liquidation is applied for voluntarily by a company director and needs the agreement of at least 75% of shareholders to progress. This is a voluntary insolvency process that winds up a company that can no longer feasibly operate
Members’ Voluntary Liquidation
Unlike a Creditors’ Voluntary Liquidation, a Members’ Voluntary Liquidation is only for solvent companies that can pay their bills and have assets of over £25,000. A company director will usually opt for Members’ Voluntary Liquidation if they are looking to retire, move abroad or close their business in a tax-efficient manner to free up funds.
As the name suggests, this form of liquidation is mandatory and forced onto a company by its creditors looking to retrieve money owed to them after failed payment demands.
This is the most serious form of insolvency and is subject to rules specified in the Insolvency Act 1986.
In this instance, the creditors who are owed money will issue a winding-up petition to the court. If this is successful, the company will be forced to liquidate and its assets will be sold and the funds distributed to pay debts.
Option 2: Administration
Another option for insolvent companies is to go into administration. This is usually the best route forward for larger companies.
The aim of going into administration is to take control of a company’s assets and repay creditors that are owed money.
Whilst in administration, a company is given protection from legal action. A licenced Insolvency Practitioner is appointed as the administrator and assess the case, in which time no one can apply to wind-up the company.
There are a number of things that can happen whilst a company is under administration, including:
- The company being closed and trading ceased if there is nothing to sell
- A Company Voluntary Agreement (CVA) can be reached, meaning the business can continue to operate and trade
- The company can be sold as a ‘going concern’ to another company. This means they can continue to operate, keeping their clients and workforce
- The company’s assets can be sold as part of a Creditor’s Voluntary Liquidation. With this route, the creditors are paid what they are owed from the money raised and the company is closed.
Option 3: Company Voluntary Agreement (CVA)
If an insolvent company is looking for business rescue, a Company Voluntary Agreement is the best way forward.
Here, a company can put forward a formal proposal to its creditors to find a way of turning the business around from insolvency. Both the company director(s) and creditor(s) will come to 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 the creditors’ approval. This is a process that must be carried out and monitored by an Insolvency Practitioner and can last for up to 3-5 years.
Once this has been agreed and approved by both parties, the company is able to keep trading as usual and the company director remains in control of the business.
Scheme of Arrangement
Again, this is an option that is best suited for companies looking for business rescue in order to continue trading.
A Scheme of Arrangement is made between the company and its creditors. This requires at least 75% of creditors to agree to progress.
This option can include reorganising the company structure, whether by merger or demerger, or by a debt for equity swap or other debt-reduction strategies.
Looking to find out more about the best way forward for your insolvent company? Get in touch with Clarke Bell today for expert insolvency advice
Now you know what options are out there for your insolvent company, get in touch with Clarke Bell to discuss the best way forward.
If your company is facing difficulty then it’s best to act quickly, before things get worse. Here at Clarke Bell, we can offer specialist insolvency advice to help you deal with your problems whilst making sure you meet all your legal obligations. So, whatever your situation, simple or complex, we can help find the best option for your insolvent business.