A Quick Guide To Insolvency

A business is officially insolvent if it is unable to pay its debts when they fall due, or if it owes more in debts than it owns in assets.

Before 2002, insolvent businesses were almost always shut down, and their assets sold off to pay their debts. Nowadays, the government promotes the rescue of struggling businesses, and business insolvency laws have changed to make it easier for businesses to recover from insolvency.

Now, a business that has become insolvent has a number of options.

Basically, these include:

Going into administration

For any floundering medium or small business, administration can be a highly constructive process – it buys the business time to sort things out. During this time, creditors cannot take action against the business, and an administrator (who is a qualified insolvency practitioner) takes over the financial running of the business. The administrator’s primary goal is to achieve a successful business turnaround – ie. to get the business up and running profitably again. If this isn’t possible, the administrator will sell the company’s assets, aiming to get the best possible deal for the creditors.

Winding up the business

When a business has no chance of being rescued or sold as a going concern, liquidation (business bankruptcy) is the only option. The shareholders usually appoint a liquidator to realise the business assets and pay the creditors. In some cases, the creditors may themselves force the business into liquidation through the Courts.

Agreeing a Company Voluntary Arrangement

This is a payment scheme agreed between the business and its creditors – the business agrees to pay a proportion of its debt over an agreed period of time, and the creditor agrees to accept the payment in full settlement of the debt.

What are the long term consequences of business insolvency?

If you are the director of a business that becomes insolvent, you will not be restricted from acting as a director in a new business (unless you have been made personally bankrupt, or have specifically been disqualified from doing so as a result of misconduct). However, the director of a company that has gone into liquidation is restricted from being involved in a company of the same name for a period of five years.

For many a business, insolvency leads to change and restructuring that can have extremely positive long term effects. There are many valuable lessons that can be learned during a successful business turnaround, and improved business procedures can have an impact that goes well beyond preventing the original problems recurring.

What to do if you believe your business might be insolvent?

Make you sure you know what your options are. Learn as much about insolvency procedures and business turnaround as you can so that you are in an informed position when you have to make potentially business-saving decisions. But learn quickly – the sooner you take action, the more likely it is that the problems can be remedied and your business rescued.

Get professional advice

Seeking advice from an experienced professional is vital. With the right advice, you have a better chance of saving the business and limiting the personal liability of the directors.

At Touch Financial, we specialise in putting struggling businesses in touch with business insolvency experts. And it won’t cost you a thing to talk to a member of our team about your situation.

By understanding your circumstances, we can introduce you to the insolvency practitioner or SME business administration service that’s best suited to your requirements. If appropriate, we can also offer you exclusive rates from some lenders and trial Factoring and Invoice Discounting facilities.

Talk to Touch Financial for free. It’s the first step to getting the insolvency advice you need. It could make all the difference – 0845 388 9725.

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