Company insolvency occurs when a company cannot afford to pay its debts. A company can be placed into formal insolvency proceedings by its directors, shareholders, creditors or the court. If a company falls into insolvency, its directors have a legal obligation to cease trading immediately.
There are two main types of company insolvency:
Cash Flow Insolvency
when a company does not have the cash available to meet its financial obligations (to pay suppliers, rent, tax etc.)
Balance Sheet Insolvency
when a company's liabilities exceed the value of its assets.
If a company is at risk of insolvency, or if it already has fallen into insolvency, the future of the business could be under threat. Company directors must seek help and advice from a licensed insolvency practitioner to begin formal insolvency proceedings.
The Warning Signs of Company Insolvency
There are a number of 'red flags' that can indicate when a company may be falling into insolvency:
Poor Cash Flow
If a company struggles to get enough cash together each month in order to cover the basic operating expenses of the business, then the company is likely to become insolvent soon, if it is not already.
If suppliers, the bank, HMRC, lenders, credit card companies, or other creditors have been chasing payment for unpaid debts over a period of time, then the company could soon receive a formal demand for payment or winding up petition.
If a business has been borrowing the maximum limits allowed amounts from the bank and/or suppliers, this is known as ceiling borrowing. It is a common indicator that a company is on the brink of insolvency.
Unable to pay directors
If company directors are not being paid as the funds are not available.
If your company is experiencing any of these warning signs of company insolvency, you should contact us immediately. If you let these issues continue, creditors could apply to the court for a winding up petition, which could lead to a winding up order and the compulsory liquidation of your company. With business finance issues, it is best to take action as soon as you notice that there is a problem, as this gives you the best possible chance of saving the business.
As experienced insolvency practitioners, we can advise you on your financial circumstances and guide your company through a number of company rescue procedures which could save your company from insolvency and make it a viable business once again. Simply contact us ASAP via telephone, email or online live chat for more information.
How To Identify That A Business Is Currently Insolvent
There are also a number of indicators that indicate that a company is already insolvent:
- If a company is unable to meet its financial obligations, such as paying suppliers on time and paying its tax bill, and is making late payments regularly.
- If the amount of money the company owes in current and contingent debts and liabilities is greater than the fair market value of all of the company's assets (eg. bank account funds, debtor book, equipment, vehicles, property etc.)
- If a creditor has already issued a statutory payment demand against the company that has gone unpaid for longer than 21 days, or obtained a County Court Judgment (CCJ) against the company.
If any of the above conditions apply to your company's current situation then your company could be in danger of having a winding up petition issued against it. If a creditor has already taken legal action, by obtaining a CCJ against your company, issuing a statutory demand for payment, or a winding up petition, then you must act immediately by contacting us for help.
You can contact us at any time via telephone, email or online live chat for expert advice. As we have nationwide coverage, we can meet you at your office – wherever you are in the country – to assess your company’s situation and determine the best course of action to save the business form insolvency.
What Are The Consequences of Company Insolvency?
If a company falls into insolvency and its directors take no action, it can put into motion a series of events which can have serious consequences for the company and the directors.
After repeated attempts at chasing payment for unpaid debts, creditors may issue a 21 day statutory demand for payment. If this legal action is not met, the creditor can apply to the court for a winding up petition against their debtor. If company directors still take no action, or insolvency measures fail, the court may issue a winding up order against the company. At this point, there is nothing that can be done to save the business. The court will appoint a liquidator to put the company into compulsory liquidation. Company assets will be sold off to pay debts, the company will be removed from the register at Companies House and it will cease to exist.
Loss of reputation
As part of the legal process of the court issuing a winding up petition, it is a requirement that a notice is placed in The Gazette advertising the winding up petition against the insolvent company. This leads to the bank freezing the company’s accounts, preventing any further trading. This also notifies rival companies of the insolvent company's financial situation, so the company and its directors could face a loss of reputation within their industry. This advertisement also allows other creditors to be made aware of the winding up petition against your company, so they would also be able to come forward to claim the debt that they are owed.
Potential legal action against company directors
As part of the liquidation process, the liquidator is required to investigate the insolvent company and actions taken by the directors leading up to insolvency. Under the Company Director Disqualification Act, 1986, a company director could be penalised for various types of director misconduct, including wrongdoing, trading whilst insolvent and fraudulent trading.
The consequences for a director if they are found to have acted wrongfully or fraudulently could include:
- Disqualification from running another UK company for a period of up to 15 years.
- Directors could be held personally liable for company debts.
- Fines for trading fraudulently
- Prison sentences for serious fraudulent activity
So if a company becomes insolvent and the directors fail to cease trading, fail to notify creditors and HMRC, fail to contact an insolvency practitioner for help, or fail to act in the best interests of the company's creditors, then they could face serious consequences.
How To Save a Company From Insolvency
There are a number of company rescue procedures that can be carried out by a licensed insolvency practitioner to offer a life line to insolvent companies. These processes can help by paying the company’s debts outright, by coming to an agreement on more manageable payment terms, or by entering into a formal company insolvency process. There is no ‘one size fits all approach’; the best option for a company depends on the individual circumstances of the case.
As licensed insolvency practitioners, we can offer advice and assistance on all of these company rescue procedures and more.
Company Voluntary Arrangement (CVA)
A Company Voluntary Arrangement (CVA) is a payment plan that can we can negotiate with your creditors on your behalf. A CVA sets out payment terms which allow your company to repay all or part of its debts over a period of time, via monthly instalments. A CVA can help an insolvent company to recover from its debts by making the debt much more manageable and allowing the company to continue trading in order to work through to solvency. We would look into your company finances to determine what your company can afford to pay back over a fair period of time, in order to give your CVA proposal the best possible chance of being approved by your creditors. We would then draft a proposal and negotiate with your creditors on your behalf to come to an agreement.
Time To Pay Arrangements
A Time to Pay Arrangement is an agreement we can negotiate with HMRC on your behalf, if your business is falling behind with its VAT, PAYE and other business tax obligations. A Time To Pay Arrangement gives your company extra time to make these tax payments, so that you can pay your business tax bill via monthly instalments over an agreed period time. We would assess your case, build your proposal and negotiate directly with HMRC on your behalf, to give your Time To Pay proposal the best possible chance of being approved.
Company administration is a procedure where we would take over control of your business, with the aim of rescuing it from insolvency and maximising the value from business assets. We may decide to restructure the company, to close down underperforming business streams, or to sell off business assets, in order to pay off debts and bring the company back to solvency. One of the major benefits of company administration is that once a company is put into administration, all legal proceedings against the company are halted. This immediately halts legal pressure from creditors and allows us the time and space to work so that we can make the business viable again.
Pre-Pack Administration involves all or a part of the business and its assets being sold to another company, in order to raise the funds needed to pay debts to creditors. The company’s current directors are allowed to purchase the company’s assets under a new company. We would value the business and its assets, and arrange for the sale of the assets to another entity. Then once we put the company into administration, the business assets are immediately sold to the new entity.
Business Finance Solutions
We can advise you on a number of ways that your company could raise cash in order to pay off its debts. These business finance solutions can include invoice factoring, crowd funding, asset finance and private investment. We can assess your company’s situation and determine which finance option is best for you. Through our range of industry contacts, we can put you in touch with recommended companies that can offer these financing services.
More Information & Advice on Company Insolvency
If your company is struggling with its finances, it is important that you contact us ASAP in order to give you the best chance of success with company rescue procedures. The longer you leave it, the more limited your options will be. If you leave it too long, you will be left with no options to rescue the company at all.
You can contact us at any time via telephone, email or online live chat. We can arrange to meet at your offices on very short notice, to look into your case further and assess your options.