A company director should seek insolvency advice at the first sign the business is struggling financially.
If you are quick to act more options will remain open to you, whether that is voluntary liquidation, a Company Voluntary Arrangement, company restructure or the sale of the business as a going concern.
If you don’t act, however, you may be forced into compulsory liquidation.
Whatever your situation, if your business is facing financial difficulties and you’re unsure of the best time to seek insolvency advice, Clarke Bell has put together this handy guide, to help you know when it’s best to take action.
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What are the signs of financial deterioration?
It goes without saying that every company director should have a clear idea of their company’s finances. If this is the case, it should be easy for you to identify the first signs of financial difficulty.
There are several things to look out for that can spell trouble, including:
- Cash flow problems
- Falling profits that continue to decline
- Growing pressure from creditors
- Debts with HMRC
- The inability to pay liabilities and debts when they are owed
- Insufficient funds to invest in growth
If your company is experiencing any of these difficulties this should act as the first signs that it’s time to get help.
After all, the quicker you act, the more avenues will remain open to you.
What if my business is insolvent?
Although some businesses will be showcasing the first signs of financial distress, others may be insolvent. If this is the case, it’s important to seek professional insolvency advice right away.
There are two main tests that can determine if your company is insolvent, these include:
- Cash-flow test: if a company can no longer pay its bills and cover its day-to-day costs then it is deemed insolvent.
- Balance sheet test: if your company has more liabilities than assets it is also deemed insolvent.
Likewise, if you have received a Statutory Demand or winding-up petition from the court, this means you have creditors that want to retrieve debts you owe them (over the amount of £750 or more.) If creditors’ repayment demands have gone unfulfilled for 21 days or more, they are entitled to turn to the courts to help them get back what they are owed.
This is also a key sign of insolvency and if you are issued a winding-up petition it is important to act as quickly as possible to avoid being forced into compulsory liquidation.
What options are open to insolvent businesses?
If your business is insolvent, there are several options available to you.
Company Voluntary Arrangement
For insolvent companies looking for business rescue, a Company Voluntary Agreement may be the best route forward.
With a Company Voluntary Arrangement, a licensed Insolvency Practitioner will be appointed to put forward a formal proposal to creditors to help find a way to turn the business around and restore profitability.
In this case, both parties, including the director(s) and creditor(s), come to an agreement where the creditors will accept a sum of money as a way of settlement towards the debts they are owed. 75% of the creditors must agree for this to progress.
Once this has been agreed, the company is able to continue trading and the director remains in control of the business.
Scheme of Arrangement
This is another option for those looking to turn around their insolvent company and find a solution for business rescue.
A Scheme of Arrangement is made between the company and its creditors and again requires at least 75% of creditors to agree in order to progress. A Scheme of Arrangement can include reorganising the company structure through a merger or demerger, or by a debt for equity swap or other debt-reduction strategies.
Another option for insolvent companies is to go into administration. This is an option that aims to take control of the company’s assets and repay creditors money that is owed to them.
When a company goes into administration, they are given protection against any legal action. An Insolvency Practitioner is appointed as the administrator and whilst they are overseeing the case, no other party is able to apply to wind-up the company.
Another option for insolvent businesses is to go into liquidation. This can be completely voluntary through Members’ Voluntary Liquidation (MVL) or Creditors’ Voluntary Liquidation (CVL) or can be forced on the company through compulsory liquidation.
Liquidation is the process that officially winds-up a company, bringing its trading and operations to an end.
The different types of liquidation include:
Creditors’ Voluntary Liquidations
A Creditors’ Voluntary Liquidation is a completely voluntary process initiated by the company director. This is the best option for insolvent businesses that can no longer feasibly operate, and is a way for the director to take control, close the business whilst paying back creditors what they are owed.
Members’ Voluntary Liquidation
A Members’ Voluntary Liquidation can only be applied for by solvent companies. This is a great way to close a company in a tax-efficient way.
Finally, unlike both a Creditors’ Voluntary Liquidation and a Members’ Voluntary Liquidation, a Compulsory Liquidation is forced on a company by creditors who want to retrieve money owed to them after several failed payment demands after 21 days.
Just as it sounds, this is the most severe form of insolvency. Creditors that are owed money will issue a winding-up petition to the court and, if successful, the company will be forced to liquidate and its assets will be sold. The funds from the sale will be used to settle debts.
Let Clarke Bell help with our expert insolvency advice
Now you know when you should seek business insolvency advice, Clarke Bell are here to help to find the best route forward for you.
Whether you wish to liquidate your insolvent business or are looking for options for business rescue, Clarke Bell can help find the best solution for you. Get in touch today to talk through your case, or for some free, initial advice.