Insolvency Guide

Insolvency occurs when a company is in a position where it cannot pay its debts as and when they are due. This includes any future debt payments the company has committed itself to.

Facing the threat of insolvency can be a daunting prospect with the very real threat of legal action and the risk of a business going into liquidation. This can have a major impact not just on the directors and shareholders of a business but also its employees.

Limited Company Insolvency

If you run a limited company there are several options to consider when a business faces insolvency.

Informal

The first thing you may wish to consider is to try and come to an informal agreement with your creditors. The sooner this takes place the better as when creditors pursue their claim against you through the courts they are usually less willing to negotiate.

Before doing so you must ensure that any actions taken do not place the creditors in a worse position that they already are. Furthermore you will need to think carefully about the viability of the business and its ability to pay back any additional loans taken at this stage.

Finally an informal arrangement will not prevent any creditors from pursuing recovery of their debt via the courts.

Formal

CVAs (Company Voluntary Arrangements)

A CVA is an arrangement over a specified period agreed by creditors and subject to specific agreements which the company must adhere to during the course of the arrangement.

Having a CVA approved enables the company to continue to trade in most instances securing both on-going contracts and employees.

A CVA is organised via a licensed insolvency practitioner. A formal meeting is arranged between creditors and company directors aimed at agreeing a repayment plan.

Administration

A licensed insolvency practitioner is appointed by the court to act as an administrator of the company that is in financial difficulty. Subject to the terms of the proposals the administrator will either look to continue trading the business or look to maximise realisations from assets to ensure the best return possible for creditors.

Liquidation

Your creditors or the directors of the company can commence the liquidation process. The three types of liquidation are:

The shareholders/directors place the company into liquidation due to its inability to pay debts as and when they fall due.

The shareholders place the company into solvent liquidation to pay all creditors in full and enable a return on their investment if funds allow.

Company creditors apply to the court for a winding up order against your company.

  • Creditors voluntary liquidation
  • Members voluntary liquidation
  • Compulsory liquidation