Insolvency: 10 burning questions answered!

You may have recently seen many articles and news reports referring to insolvency and the changes in the law surrounding it. These adjustments have been brought about by the fallout of the COVID-19 epidemic and the economic impact it has caused globally.

These are difficult and unchartered times for us all. Society is adapting to this new way of life in line with the effects of the Corona pandemic, and we are now uncovering the financial impacts this virus is having on commerce.

This is a confusing time for many of us, with frequent changes in social structuring and job roles. There is much turmoil around what we are being allowed to do. Moreover, it is understandable that you may feel overwhelmed or frustrated by ongoing events.

Read on further for a rundown on what you need to know about insolvency and everything you were ever afraid to ask!

What is insolvency?

The primary definition of insolvency is when a company or person is not in a suitable financial situation to pay monies owed on time.

In reality, being insolvent is not the same as being bankrupt, and it is essential not to confuse the two or use them interchangeably.

There are two main forms of insolvency: cash-flow insolvency and balance-sheet insolvency.

Cash-flow insolvency

You may be familiar with the term “asset rich but cash poor” – and cash-flow insolvency is essentially that!

It is when a person has enough assets to pay what is owed but lacks a suitable form of payment. In other words, they may have an expensive car or home, but not enough liquid assets to make a payment when the debt is due.

Balance-sheet insolvency

This can also be termed as technical insolvency. It means that a company or person does not have enough assets to pay all of their debts when due.

They may have the means to pay part of their debts, but this could result in further financial ruin.

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Causes of insolvency?

Many factors can lead a person or organisation to become insolvent.

These can include:

Staffing:

A company hiring inadequate accounting or human resources personnel.

An Increase In Costs:

A rise in running costs meaning that a business must pay increased prices for goods or services. These hikes in costs then result in either a financial loss for the company or a loss of trade.

Lawsuits and Damages:

Large payments for compensation or damages awarded to customers or associates may result in a company having to downscale operations or restructure. This, in turn, can lead to a loss of income and unpaid bills.

Changes In The Marketplace:

A company not evolving to fit the consumer needs can result in customers taking their business elsewhere. A lack of trade means that expenses exceed revenue, which leads to unpaid bills.

Difference between insolvency and bankruptcy?

Insolvency is when the total amount owing exceeds the total assets. This financial distress results in a person or company not being able to pay their bills when due.

Bankruptcy is when an actual court order depicts how an insolvent person or company will pay off their debts or creditors or how their remaining assets will be arranged to make payments.

A person or company can be insolvent without being bankrupt. Nevertheless, without insolvency being handled correctly and promptly, it can lead to bankruptcy.

What are the impacts of insolvency?

If your insolvency situation is not managed correctly, this can result in legal action being issued.

Legal proceedings can result in County Court Judgements (CCJ) – the instruction of bailiffs to remove assets or statutory demand. However, if left unhandled, this can then lead to bankruptcy.

If you own a limited company, insolvency could result in the creditors petitioning for the company closure.

On the other hand, if you are an insolvent individual who owes more than £5,000, your creditors could enforce an application for bankruptcy.

What can I do about insolvency?

While we understand any financial concern is a worrying time – try not to panic. Owing money does not necessarily mean that you or your company are insolvent.

If you are concerned by your financial situation, even if you think your position may be temporary, then it is imperative to act straight away.

In the first instance, you should seek professional advice from one or more of the following:

• A reputable litigation lawyer
• The Citizens Advice Bureau
• A qualified accountant
• An authorised insolvency practitioner
• A financial advisor
• A debt advice centre

My company is insolvent – What can I do?

The first thing to remember is that being insolvent does not mean that this is the end of the road for your business.

There are three main options to enable an insolvent company to continue trading.

1. Contact your creditors to try and reach an informal agreement.
2. Enter into a Company Voluntary Arrangement (CVA)
3. Put the company into administration. This will allow some respite from creditor action enabling the business to continue and or property to be sold.

Can I still trade if I believe my company is insolvent?

Many companies may initially be making a loss or tentatively insolvent. For instance, if a customer invoice has not been paid on time or there has been a hold up in order fulfilment.

If you (the director) believe that your company will recover, it is improbable that there will be an allegation of wrongful trading if you continue to trade.

A director of an insolvent company that knowingly will never be able to pay its creditors, in a timely fashion, may be guilty of wrongful trading. If the level of creditors is allowed to increase, there can be harsh penalties for the directors.

Can my insolvent company be saved?

It is vital to realise that being insolvent does not necessarily mean this is the end of the road for your business.

If your core business model is robust, financial hiccups can still be ironed out.

It may be possible to still save the company by seeking advice from a licensed insolvency practitioner, or litigation solicitor, who will guide you through the best course of action.

The most beneficial insolvency arrangement will depend on whom the debts are owed to and how much monies are owed. A licensed expert will also look at whether it is possible to maintain control of the company or whether a restructure would be necessary.

Based on individual circumstances, insolvency agreements could result in a Company Voluntary Arrangement (CVA) or an Individual Voluntary Arrangement (IVA).

Contact our Commercial Law Solicitors today to find out whether voluntary liquidation may be a better solution for you going forward.

My insolvency has gone too far: What happens now?

Unfortunately, it is not always possible to save every company via agreements or arrangements. Some businesses have accrued debts too large to recover from reasonably. It only makes more sense to wind the business up.

In these instances, you will need to apply for a Creditors Voluntary Liquidation (CVL) order. For most, this is a preferable option to having the company forced into compulsory liquidation upon being served with a winding-up petition. Choose a commercial lawyer to assist you in this process.

How to liquidate an insolvent company?

‘Winding up’ essentially means the company will stop doing business and employing people.

A liquidator oversees liquidation, and they will ensure all required steps are covered. This will include:

• Ensuring that all contracts (both company and employee) are finalised, transferred or terminated
• Legal conclusion of the company’s business
• Settlement of any outstanding legal disputes
• The selling of any assets
• Collecting outstanding monies owed to the company
• Arranging payment of any funds to creditors where necessary
• Repayment of share capital to relevant shareholders

Key Takeaway

These are challenging times for individuals and businesses alike. There is no stigma in facing financial problems. We urge you to reach out and talk through your issues.

If you find yourself struggling with individual or business debt, you have been approached by a creditor, or you are worried about insolvency or bankruptcy, then we recommend that you act as soon as possible.

The quicker you do, the sooner you can put your finances into survival mode and reduce any stress or anxiety.

Contact a lawyer online, telephone or book a video consultation today to receive specialist advice from one of our many commercial lawyers.