Insolvency is a reference to a company’s inability to pay its debts and is defined as follows:
Cash Flow Insolvent – A company is unable to pay its debts (including future debts) as and when they fall due.
Balance Sheet Insolvent – The value of the company assets is less that its liabilities.
A company is likely to face an insolvent scenario if it is not generating enough cash to meet its trading parameters. There can be complex reasons for this dependent on the individual circumstances of each business concerned.
If your business is faced with a real prospect of insolvency and there is potential for recovery subject to an element of protection there are options available to assist:
A Company Voluntary Arrangement
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.
Pre–pack Administration occurswhen a proposed administrator negotiates the sale of assets prior to the company entering administration which is concluded immediately on his appointment. This can ensure elements of the business are preserved and it continues to trade.
In the event recovery is deemed not possible the insolvency options most frequently used are:
Creditors Voluntary Liquidation
If the directors and/or shareholders decide that a business is no longer viable and cannot continue to trade, then they can pass a resolution to place the company into a Creditors Voluntary Liquidation. A licenced insolvency practitioner will then be appointed to oversee an orderly realisation of available assets.
There are cases where directors or shareholders cannot agree to place an insolvent company into voluntary liquidation. One of the company’s creditors may decide to pursue their demands for payment via a winding up petition lodged at court. If their petition is successful, the business will be subject to a winding up order and will cease to trade.