These are challenging and unchartered times for us all. With the COVID-19 downturn, fundamental changes in consumer behaviour, supply chains, and market pathways are knocking off-balance organizations.
Now we are revealing the financial impacts this virus is having on commerce.
Read on further to know about insolvency and everything you were ever scared to ask!
What is insolvency?
Insolvency is the state whereby an individual or organization which is no longer being able to fulfil its financial obligations towards its lenders as debts become due.
All those people or Organizations in a stage of insolvency are called as insolvent.
There are two primary forms of insolvency: insolvency by cash flow and liquidation by the balance sheet.
You may be familiar with the term “asset rich but cash poor” – and cash-flow insolvency is essentially that!
Cash-flow liquidation is when a person or company has sufficient assets to pay what is due but does not have the appropriate payment method.
For example, someone has a luxury car but don’t have money for paying his expenses.
It is could also be called technical insolvency. It means a company or individual does not have sufficient assets to pay all of their amount overdue.
They might have the resources to pay half of their debts, but this could result in further financial collapse.
There are legitimate tests for each type of collapse. There are also several warning signs to look for, including:
- Creditors increasing pressure to pay, often with threats of legal action
- Company overdraft at its limit, signifying the company is not viable
- Applications for borrowing declined
- Directors taking a pay restriction
- Late payments to HMRC
As an administrator, you must be alert of all these signs. They may help you check business insolvency or alleviate the significances for you personally and for your company.
If you or your commerce are careworn with debt or owing money to help you reach an agreeable resolution, please contact our commercial lawyers for advice on insolvency law matters. Video consultations are also available:
Causes of insolvency?
Many factors can lead an organization to become insolvent.
These can include:
- An Increase in Costs
- Lawsuits and Damages
- Changes in the Marketplace
What action do I take about insolvency?
While we know that any financial alarm is a difficult period – but try not to be panic. In the first instance, you should seek out professional guidance from one or more of the following:
- A trustworthy litigation lawyer
- The Citizens Advice Bureau
- A qualified accountant
- An authorized insolvency practitioner
- A financial advisor
- A debt advice centre
My company is insolvent – What Steps can I take?
There are three primary choices to enable an insolvent company to carry on tradeoff.
- Communicate with your creditors and try to reach an informal agreement.
- Go into a Company Voluntary Arrangement (CVA)
- Put the company into administration. It will allow some respite from creditor action enabling the business to continue and or property to be sold.
Can my insolvent company be saved?
It’s essential to recognize that being insolvent doesn’t merely guarantee your business ends the road. If your core business model is reliable, you can still iron out the financial hiccups.
By seeking advice from a licensed insolvency practitioner or litigation solicitor, who will guide you with the best course of action, it may still be possible to save the company.
The most suitable insolvency arrangement will depend on whom the debts are owed to and how much dues are owed.
A licensed expert will also examine if it is the potential for maintaining company control or whether a restructuring would be necessary.
Insolvency agreements will also result in a Company Voluntary Arrangement (CVA) or an Individual Voluntary Arrangement (IVA), based on individual conditions.
What are the courses of action available for an insolvent company?
If the business has no chance of surviving, it will be best for its operations to be wound up. At the end of the liquidation, the company ceases to exist.
A licensed insolvency practitioner will be appointed as the company’s liquidator, to carry out and oversee this process.
If the underlying business of the company is sound, but it is technically insolvent (either on a cash flow basis or a balance sheet basis), it may be possible to restructure the company in such a way as to protect the underlying business.
The primary vehicle for achieving this is through an administration order or voluntary company arrangement, instead of liquidation. You must take professional advice on the best option in your circumstances.
My insolvency came too far, what’s going to happen 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 judiciously. It only makes more sense to wind the market up.
In these cases, you will need to apply for a Creditors Voluntary Liquidation (CVL) order.
For most, this is a better option to having the company forced into compulsory liquidation upon being served with a winding-up petition. Talk to a commercial solicitor to help you in this procedure.
If you catch yourself struggling with individual or business debt, you have been approached by a creditor, or you are worried about insolvency or bankruptcy. We recommend that you must act as soon as possible.
The earlier you do, the sooner you can put your investments into existence mode and diminish any stress or anxiety.