What happens when my business is Insolvent
The most common question we are asked is: What happens when my business is insolvent?
If a company is insolvent, the business has either:
- insufficient cash to pay the bills as they become due, or
- its assets are below its total liabilities, including those that may arise in the future.
So what happens when a business (limited company) becomes insolvent, and what should the company’s director do?
When a limited company is insolvent
Once you realise your business is insolvent, you must take immediate action to reduce losses to creditors. So, this is the first step to protect you personally from the company’s debts.
This means you might have to stop trading immediately, but creditors should keep trading in some cases. This is a grey area, and you’ll need to talk to a licensed insolvency practitioner to ensure you’re not in breach of your responsibilities as the director of an insolvent limited company.
Talking to a professional will help you appreciate reasons businesses become insolvent and advise you on what to do. Depending on the situation, you might rescue the business via formal debt restructuring, for example.
What happens when my business is insolvent and is liquidated?
Once a limited company commences liquidation. The liquidator appointed assumes control of the company, realises its assets, and distributes the funds to creditors. As a limited company, which remains a separate legal entity from its directors, you are protected from personal liability unless certain circumstances arise.
Part of every liquidation requires the office-holder to investigate the reasons for the failure of the company. They pay particular attention to the period leading up to the failure. The liquidators finding is reported to the Secretary of State in every case.
However, the insolvency of a limited company does not automatically mean the company is condemned. Subject to the financial status of the company, along with its future viability prospects. Then the company, if viable, can consider rescue options to protect the company while carrying out the rescue alternatives, such as:
Rescuing an insolvent limited company
- Other finance
- Invoice finance, asset funding.
- Arranging a Time to Pay with HMRC;
- Company Voluntary Arrangement (CVA) is an agreement to repay the company’s debts over time.
- Company Administration Larger companies can opt to enter administration, which gives the company a break from legal action. At the same time, the administrator figures out a plan.
What happens when my business is insolvent, and the only option is liquidation?
Should your company remain no longer viable and can’t be refinanced, then a company liquidation is the only option available to the directors. The directors may wish to consider a voluntary choice and seek advice from an Insolvency Practitioner regarding whether Creditors’ Voluntary Liquidation (CVL). Remember, only consider a CVL if you wish to close your business forever.
If your company employed you and you held the office of a director, with a contract of employment and paid through the PAYE company scheme? You may be eligible for a redundancy payment.
What happens when my business is insolvent – Following the closure of an insolvent company
Once the liquidation of an insolvent company completes. Then the liquidator strikes the company of the register at Companies House. So as long as the liquidator finds no wrongdoing, you can start a new business.
However, restrictions remain on setting up a new limited company and the use of an insolvent company name.