Business Insolvency

A business becomes insolvent when it can't keep up with the repayments on debts or when it has more debt than assets on a balance sheet.

Insolvent businesses are in danger of closing down, but there are some actions that directors can take to prevent this. If your business is insolvent and you want to avoid closing completely, even if you think the financial difficulties are temporary, it is important to understand your options.

This guide explains how insolvency happens, what options are available to directors and where you can seek additional support.

My company is insolvent, what can I do?

'Insolvency' is the term used to describe the financial situation that a business is in, as well as the numerous legal procedures there are for dealing with the situation. The legal procedures fall under the Insolvency Act 1986.

If your business is insolvent, there are 3 options which will allow you to continue trading. You can:

• Get in touch with everyone you owe money to see if you can reach an informal agreement for repayment.
• Enter the company into a voluntary arrangement.
• Go into administration which will allow you time to sell property and continue trading, whilst pausing creditor action.

You can also choose to liquidate the company. This would mean that you would close the business down and sell your assets with the proceeds being distributed to your creditors.

Can any action be taken against my insolvent company?

Creditors can choose to take action against your insolvent company to recover what is owed to them. They can do this by applying for a court judgement or statutory demand, which is a legal request for repayment. If this happens, you do have ways in which you can protect your company from a compulsory liquidation, which is where you are forced to close.

A compulsory liquidation occurs when a creditor can't recover the amount owed to them through a court judgement or statutory demand, applied to wind up the company. If this happens to you, you can apply to the court to restrain the order, which will give you time to take action yourself, such as entering administration.

How can I arrange an informal agreement with my creditors?

You may be able to reach an informal agreement with your creditors that will allow you to pay what is outstanding on different terms. This is usually the preferred solution if your financial difficulties are temporary and if your creditors will afford you the patience.

To organise an informal agreement, you should contact your creditors and discuss this option openly. Make the creditor aware that you are having financial difficulties and that you believe them to be temporary. Be sure of any costs that are involved in making new repayment arrangements and understand how your interest rate will be affected.

Informal agreements are not legally binding and so your creditor can change their mind at any time.

Company Voluntary Agreement (CVA)

A CVA is a legally binding agreement that can be drawn up between your company and your creditors which arranges for payment of your debts for a set amount of time. If you enter into a CVA, you will be allowed to continue trading during the agreement and afterwards. Only the directors of a company can propose a CVA.

Going into Administration

If your company goes into administration, you hand the business to an insolvency practitioner, who is known as the administrator. The administrator will become in charge of the company and creditors will not be allowed to take legal action to reclaim what is owed to them or to start compulsory liquidation unless they gain permission from the court.

The administrator's role is to:

• Restore the viability of the company
• Organise CVAs with creditors
• Sell the business or make more from the assets of the company than would be made through liquidation.
• Sell assets to pay secured debts or preferential creditors.

Creditors are not obliged to accept offers of repayment but often, these proposals will yield a higher repayment sum than would be achieved if the company was wound up.

Administrative Receivership

Your company could go into administrative receivership, which is more commonly referred to as being "in receivership".

A holder of a floating charge, normally the bank, will initiate receivership. To do this, they will appoint an administrative receiver to receiver the money owed to them and they can usually do this without a court hearing.

The administrative receiver's role is to pay:

• Their fees
• The debts owed to preferential creditors
• The debt owed to the floating charge.
• The administrative receiver will not make repayments on unsecured debts of the company.

Liquidation or Winding Up the Company

If your company goes into liquidation, it will be legally closed. This means you will have to stop doing business and cease the employment of any of your staff. The company will be struck off from the register at Companies House and this means that it no longer exists.

Directors can be the ones to put their business into liquidation. Alternatively, creditors can apply for voluntary or compulsory liquidation of insolvent companies.

The liquidation will be overseen by a liquidator who will be either the official receiver or the insolvency practitioner. Their job will be to:

• Ensure that all of the firm's contracts are completed, ended or transferred.
• End the company's business.
• Sell any assets.
• Settle any legal disputes.
• Collecting any money that is owed to the company.
• Repaying shares to shareholders.
• Distributing any available funds to creditors.

Where can I get additional support?

There are a number of organisations that offer specialised advice to people in your situation, some of whom are free. You should consider speaking to:

• The Citizens Advice Bureau
• Your solicitor
• An authorised insolvency advisor or practitioner
• Debt advice services
• An accountant
• A financial adviser.