When a company falls into financial difficulty, it may become insolvent. This can be a difficult time for employees, customers, and suppliers. If you are affected by company insolvency, it is important to understand what is happening and your rights. In this blog post, we will discuss the basics of company insolvency and what you need to do if your business is affected.
What is insolvency?
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‘Insolvency’ as a word is used to describe two things; the situation an insolvent company finds itself in, and also how this might be dealt with legally under the Insolvency Act 1986.
Whilst insolvency might be the correct option for a business, there are, however, three circumstances that allow an insolvent company to continue trading. Directors can:
- contact all creditors to see if they can reach an informal agreement regarding the payment of outstanding invoices
- enter into a company voluntary arrangement
- enter into administration, which gives some respite from creditors and allows for the business to be sold or some of the assets to be disposed of to raise cash.
It is also possible to liquidate your company. This means the company is closed and all assets are sold to pay creditors.
Insolvency, therefore, does not simply mean that the business has to close, it can mean that it is able to be rescued with a turnaround plan and that is where the services of an Insolvency Practitioner can help.
How can a company stay open if insolvent?
Enter into a CVA
A CVA is a legally enforceable agreement between a financially distressed firm and its creditors that guarantees payment of all or part of the company’s debts over an agreed length of time. During the CVA, the business may continue to operate. A CVA can only be proposed by the company’s directors, not by its shareholders or creditors.
Come to an informal agreement with creditors
You might be able to work out a deal with your creditors to pay off your debt at different rates. This is frequently used when you’re having temporary liquidity or cash flow issues and there is no imminent danger of formal action from any of your creditors. You should contact your lenders as soon as possible and discuss this option. Make sure you understand what happens if you default on this agreement
An informal agreement is not legally binding and creditors can withdraw from the agreement at any time, leaving the company immediately liable for the outstanding money.
Enter Administration
The administration procedure involves handing your company over to an insolvency practitioner (also known as the ‘administrator’). While the administrator is in command, your creditors will not be able to file legal claims or proceed with compulsory liquidation without court approval.
The administrator creates a plan to:
- make the company a viable trading entity again
- agrees on an arrangement with the creditors (a CVA)
- realise assets to pay a preferential or secured creditor
- sell the business as a going concern
It is up to the creditors whether or not they agree with the administrator’s suggestions. The goals of the plans may provide a better outcome for your company’s creditors as a whole than would be achieved in a liquidation.
Whilst this is by no means a comprehensive view of the entire process, we hope this blog post has been helpful in understanding the basics of company insolvency. If you are affected by company insolvency, it is important to seek professional advice as soon as possible. For more information and support, please contact Irwin Insolvency for impartial professional advice on your options.
