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What does insolvency mean?

What does insolvency mean? – Insolvency applies to both companies and individuals.

For individuals though, insolvency refers to the term “Bankruptcy“.

Within corporate status, Insolvency rather than Bankruptcy applies.

What Happens When Entering Insolvency In The UK?

Once you realise your insolvency, you should speak immediately with a licensed insolvency practitioner, such as ourselves. We can explain the process, as well as your rights and responsibilities moving forward.

Insolvency doesn’t mean the end.

Options exist in the form of company rescue and turnaround.

For directors, speaking with an IP will help you understand how to protect yourself from insolvent trading, accusations of wrongful trading, and potentially personally liable for any company debts.

The goal of any insolvency remains to realise the maximum return for creditors. To this end, the appointed insolvency practitioners have several tools and processes, which we explain later in this article.

If you’re concerned you’re not able to afford the insolvency practitioner, note most liquidations can pay from the realisation of corporate assets, or directors, redundancy claims.

What does insolvency mean – Test for Insolvency.

Known as the acid test or quick ratio, two simple tests to assess the solvency of your company?

Of these two insolvency tests, the cash-flow test is probably the most important, as you can have all the assets in the world. If you cannot pay your bills on time, you may see your company ordered into liquidation. Irate creditors (someone you owe money to) require you to be indebted for £750+ to commence proceedings to place your company into liquidation. They use a winding-up petition to carry out this process.

(1) Test – Balance Sheet.

Do your company’s debts outweigh its assets?

That’s the essential question posed by the balance sheet test. List all your company’s assets in one column, and the contingent and prospective liabilities in another. If the value of the assets remains lower than the liabilities, you face insolvency.

(2) Test – Cash-flow. 

This test accurately maps the amount of working capital you have available at any given time. Comparing forecast sales with payments due.

Potential Insolvency Signs?

  • Paying suppliers late consistently
  • Debts building up with HMRC
  • Staff leaving due to concerns over job stability
  • Directors lackadaisical about accounts and bookkeeping
  • CCJ against your limited company
  • Creditors Letters
  • Bailiff Threats
  • Declining profit margins

How Does Insolvency affect Company Directors?

As the director of a limited company, you should understand how insolvency proceedings affect you. Some insolvency processes keep the company afloat so that it may live another day.

Once you have liquidated your company, your company remains closed and struck off the register at Companies House. Any assets then liquidated to pay off creditors.

As a director, you may become the director of another company, and assuming there’s no wrongful trading or misfeasance, the closure should not impact your personal finances.

Summary.

Of course, every case is different, but the main point is that insolvency is there to provide legal solutions for debt-ridden companies. In most cases, this hugely reduces stress for company directors when they realise there is a solution to seemingly insurmountable problems.

Key Points for Directors.

  • Avoid building the company’s debts once informed that the company is insolvent.
  • You cannot simply pay off personal guarantees through the sale of assets to reduce your personal debts whilst neglecting the creditors, as this can cause more complications for you.
  • Do not assign assets to a newly formed company as possible severe indications to you individually.
  • Employees considered preferential creditors and covered by the Government scheme if the company has no funds to pay.
  • HMRC is responsible for more forced liquidations than any other creditor out there.
  • Company shareholders own the company. Company directors operate the company, and are responsible for health and safety, company accounts maintenance, ensuring accounts filed at companies house, and all company taxes paid.
  • A limited company remains a separate entity. Having its own rules and regulations, and as a director, you act as an officer of the company. Therefore, it is important to understand your responsibilities to ensure that the company’s interests are maintained when making decisions. This changes when a company becomes insolvent. You must place the creditors’ interests at the heart of your decision making. Failing to do so or making the wrong decision can create serious financial penalties. Therefore, it’s important to understand insolvency.

What’s the Difference Between Insolvency and Bankruptcy?

Bankruptcy only refers to personal debt, not company debt.

So, insolvency is the correct term to refer to a limited company with liabilities exceeding assets, or which cannot pay its bills when they fall due.

Insolvency Proceedings?

Insolvency Proceedings – the collective term for all official legal mechanisms of the Insolvency Regime, which include winding up, liquidation, company administration, receivership and, for individuals, bankruptcy.

What is an Insolvency Practitioner, and do I need one?

Often (but not always) accountants or solicitors, an IP qualified and authorised to act on behalf of insolvent companies or individuals.

Rescuing a Limited Company.

IP’s do not just liquidate limited companies. They though always seek to rescue the company, if a viable proposition?

A structured debt management plan. Known as a Company Voluntary Arrangement, represents an excellent chance to find permanent debt relief.

While the task is always to find the best deal possible for any company creditors, it may well be that processes such as administration or voluntary company arrangement offer the best chance of doing so.

Who Regulates Insolvency Practitioners?

At the highest level, it’s the Secretary of State who regulates the industry. Although practical, it is the Insolvency Service. Also, several recognised professional bodies, which remain authorised to licence their members to act as Insolvency Practitioners. Once licensed, the individual practitioners remain regulated by their professional bodies.

Will my Company List on an Insolvency Register be liquidated?

A government search tool exists, which lists companies in liquidation. All insolvencies remain advertised on the official public record in the London Gazette. 

What are the Key Pieces of Insolvency Law?

  • Insolvency Act 1986;
  • Insolvency Rules 1986;
  • The Company Directors Disqualification Act 1986;
  • Employment Rights Act 1996 Part XII;
  • Insolvency Regulation (EC) 1346/2000.

Key Processes.

Company Voluntary Arrangement.

With the help of an insolvency practitioner, a company may propose a CVA to its creditors, a formal agreement to repay monies over a period of up to 5 years. It is at the discretion of the creditor to agree to this, and assuming they do, the CVA can be a helpful method for a company to continue trading and find its feet.

Company Administration.

Administration – A company rescue process that allows larger companies to take advantage of a protective ring-fence that prevents legal action from creditors. At the same time, an insolvency practitioner restructures the company. An administrator is usually appointed for no longer than a year (although renewable) to rescue the company, or if this isn’t possible to achieve a better return from creditors than if the company were liquidated. Administration may also realise property that can be distributed to secured creditors.

Liquidation.

Unlike a CVA or administration, company liquidation as a terminal process, which means the company will cease to exist. During liquidation, the IP is appointed to realise the company’s assets and distribute the proceeds to creditors. Two forms of liquidation exist:

Compulsory Liquidation?

When a court order (winding-up order) forcibly instructs the company into liquidation – due to being unable to pay debts.

Voluntary Liquidation?

Split into two subtypes known as creditors voluntary liquidation and member’s voluntary liquidation. Both must be commenced by the shareholders, but where is in MVL is usually used by a retiring director who wishes to close the company in a tax-efficient manner formally. CVL is usually used by directors who sense an impending compulsory liquidation and wish to choose a process to give them more control over the outcome.

Evading Director’s Disqualification.

As soon as a company enters insolvency, directors have a legal obligation to act in the best interests of the creditors. Failure to do this can result in charge of wrongful trading that can have serious consequences, including director’s disqualification. When facing insolvency, the primary responsibility to cease trading immediately, and to stop paying anything out of the business bank account until you have spoken with a qualified professional.

What Happens after Insolvency?

Once insolvent, the following may happen:-

  • Your company bank accounts were frozen;
  • Lenders start to advise you about security held and require payment;
  • CCJ’s, Statutory Demand or Petition to Wind up Your Limited Company;
  • Suppliers close accounts and attempt to take back supplies;
  • Clients/Customers cancel;
  • Directors behaviour is under scrutiny, with the possibility of being personally liable for company debt if there is evidence of wrongful or fraudulent trading;

Difference Between Liquidation and Insolvency?

Insolvency means a financial state of affairs, and does not always mean the company ends up in liquidation.

It’s certainly a crunch point.

Strong decisions needed about the way forward. So an insolvency practitioner can help you by making recommendations based on experience and your situation.

You may restructure your company and avoid liquidation altogether. Often, liquidation remains the most suitable commercial option to stop pressure from creditors.

Free Advice.

There’s no risk in speaking with HBG Advisory.

We offer free insolvency advice and the first meeting with our company, insolvency specialists. So please contact HBG and find out how an Insolvency Practitioner may help your business during the Coronavirus Pandemic.

HBG Advisory assures you that you will have a clearer direction at the end of our meeting with you.

We provide you with a free report on your insolvency options in writing based on information provided by you. Important.

Forward an email, or if you would prefer to get some advice from one of our insolvency consultants over the phone, call us on 0800 612 5448.

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