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. This is known as cash flow insolvency.
A company can also be balance sheet insolvent.
This occurs when company’s liabilities exceed its asset value.
The factors leading to Insolvency can accrue over a long period, although an unexpectedly large tax bill or other form of repayment demand can quickly impact on a business’s solvency.
Insolvency requires proactive and timely measures to rescue a business or reduce any losses.
A qualified advisor will help guide you to solutions that may help your company recover with solutions to restore the business to growth and viability in the longer term.
What Causes a Company to Become Insolvent?
- A downturn in the market for products or services
- Working capital is eroded
- A breakdown in the business supply chain
- Customers fail to pay on time
- A failure of management
What Happens As a Result of Insolvency?
Some possible insolvency outcomes are:
- The company enters a Company Voluntary Arrangement
- The company directors decide to close the company
- The company goes into Administration
- Creditors Voluntary Liquidation
- Compulsory Liquidation
If an insolvency practitioner is appointed via either an Administration or Creditors Voluntary Liquidation they will be responsible for dealing with the realisation of assets and the agreement of creditor claims.
In the event the company is put into a Compulsory Liquidation the Official Receiver will be responsible for dealing with assets and liabilities. A Liquidator can subsequently be appointed should the majority of creditors wish or the Official Receiver considers it appropriate to do so.
In the event the company enters into a voluntary arrangement, control of the assets will remain with the company officers, subject to the terms of the proposals.
A company can to continue to trade if it becomes insolvent. However this should only be under the authorisation and guidance of an insolvency practitioner. Failure to do so can result in action being taken against the company officers personally.