Everything you need to know about insolvency

Everything you need to know about insolvencyThe prospects of insolvency can be stressful but you don’t have to undergo this process alone. Our insolvency practitioners can help you.

For business owners, the word ‘insolvency’ can be associated with several negative emotions and thoughts such as fear, worry and shame. This is completely understandable as insolvency is not exactly what anyone had in mind when they set out to launch their business. Nevertheless, if you have chosen to read this article, there is a good chance that you run a business that is either on the cusp of or is going through the insolvency process. So in this article, we aim to discuss:

  • What is insolvency?
  • Can your business avoid insolvency?
  • Are you personally liable for your company’s debts?
  • What are the insolvency procedures?

Defining company insolvency

When a business is insolvent, it means the company is unable to pay its debts and enters into a voluntary arrangement or goes into administration to deal with the debts that the business cannot pay.

The process of insolvency is to ensure that liabilities do not increase while assets do not decrease during this period of time. In some cases, the goal is to return the business to solvency, although the objective is always to guarantee that creditors can maximise their return on any owed monies.

During the process, an insolvency practitioner will be appointed to take control of whatever remaining company assets that are in place, so that all its creditors experience fair treatment. This person will also report on the conduct of the company’s directors to the Department of Trade and Industry (or DTI).

It must be noted that bankruptcy is different from insolvency. Bankruptcy only applies to individuals and not companies. For companies, they can go into administration, administrative receivership or liquidation (closing a company). However, a company can also enter into what is called a ‘company voluntary arrangement’ (or CVA) with its creditors to enable the repayment of either part or all of the debt that is due over a fixed period of time.

Can your business avoid insolvency?

If your business is struggling with debt, you may be led to believe that insolvency is your only option – but is it? Let us discuss this point in detail.

The tell-tale signs that your business is heading towards insolvency are when your business cannot pay its debts and its employees and it has no cash to continue the operation. If this is the case, it is wise to take a moment to consider the following options:

  • Improve your cash flow by cutting overheads, reducing your inventory and chasing after payments
  • Sell assets or refinance
  • Negotiate with creditors by setting up a payment plan
  • Restructure your company by using debt for equity swaps
  • Borrow from family members
  • Talk to an insolvency expert like our team at Berley to discuss your options

Keep in mind that you are not alone when it comes to dealing with insolvency. In 2018, there were 16,106 cases of company insolvency but only 3,140 of them were compulsory liquidations. Our insolvency experts will help to demystify the process so you feel more in control of what will happen next.

Am I personally liable for my company’s debts?

If you are a sole trader or have a partnership, chances are you will be liable for the debts that your business has occurred. Most people opt to apply for bankruptcy in this instance, however, as bankruptcy can affect your financial future, please talk to our insolvency experts first by calling 020 7636 9094.

If you have a limited liability company, then your company is a separate entity from any director or shareholder. As a director in the company, it is your responsibility to look out for the interests of the company – as well as its employees, shareholders and creditors. This is known as a ‘duty of care’. As long as you have kept in line with this duty of care for your company, you are not likely to be held liable for any of the company’s debts as a result of the protections offered to company directors under limited liability.

However, there are exceptions to this general outcome. You may be made personally liable if:

  • You owe income tax on cash that you have taken from the company.
  • There are outstanding National Insurance and PAYE payments.
  • You benefitted from a transaction at the expense of creditors. For example, you paid below the market value for a business asset. This is referred to as ‘misfeasance’ and it is a breach in your duty of care to the company.
  • There are liabilities that have arisen out of the company after the liquidation process has begun and you are guilty of wrongful trading. There was also no reasonable chance of avoiding the liquidation process.
  • There are liabilities arising out of fraudulent activities while you were in charge, like account manipulation.
  • You gave personal guarantees on behalf of the company – often to financiers, banks, landlords and creditors. This happens if you signed an agreement saying that if your business is not able to pay back the money, you will become personally liable for that debt.

Even if you are found not to be personally liable for the debts, you may still end up being disqualified as a director. If you are deemed unfit to be a company director, you can be disqualified for up to 15 years from being a director in any UK company or an overseas company with a UK connection, or involved in the formation, running or marketing of a company.

What are the insolvency procedures?

The process of insolvency does not mean your company cease to exist overnight. In reality, your company is likely to follow one of the following procedures – the first three of which allow your company to stay open while the last one (liquidation) is about ceasing to exist.

1. Administration: A rescue procedure designed to protect the company from legal actions taken by its creditors. In this instance, an insolvency practitioner (the ‘administrator’) will be in charge and may propose to:

  • Restore the company’s viability
  • Come to an arrangement with the creditors (through a CVA)
  • Sell the business as a going concern or realise more from the assets than in a liquidation
  • Realise assets to pay a preferential or secured creditor

The creditors will decide if they want to accept the proposal.

2. Receivership: This occurs when a secured creditor appoints an administrative receiver to sell the company’s assets to pay off the secured debt. Being the company’s director, you have little options when receivership happens. As soon as you realise the company struggles to pay off any secured loans, you need to contact an independent insolvency practitioner, like us, right away to discuss your options.

3. Company Voluntary Agreement (CVA): A legally binding agreement between the company and its creditors that often leads to reduced and/or rescheduled arrangement of debt repayment to allow the insolvent company to survive. Often this can come about as a result of the administrative process.

4. Liquidation: The insolvent company is ended through a creditors voluntary liquidation (when directors know that all options of a possible turnaround are exhausted and the best route forward is to wind up the company voluntarily) or a compulsory liquidation (when one or more creditors petition to the court and force your company into liquidation). When liquidation happens, all assets will be converted into cash and distributed among the creditors.

Berley can help you get through the insolvency process

At Berley, we believe that every business owner is a superhero in their own right, but even superheroes can’t handle every challenge alone. If insolvency is on the cards for your business, let Berley’s insolvency practitioners be your trustworthy and knowledgeable sidekicks. We will explore options with you and implement a plan that gets your business back on track.

One crucial note is time is of the essence here. The sooner you talk to us, the better it is for you to explore all options and be in control. We have seen many cases where the company directors waited too long to act, and by the time they wanted to talk, the harsh realities of insolvency had become inevitable.

Insolvency is a way of life in the corporate world. At Berley, our professional insolvency practitioners understand what it takes to succeed against the odds, and we are here to support you and seek out the most satisfactory solution. To get in touch with our specialist corporate insolvency professionals today, simply call us on 020 7636 9094 or use our Free Online Enquiry form to get in touch.

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This post is intended to provide information of general interest about current business/ accounting issues. It should not replace professional advice tailored to your specific circumstances.