Does your company lack the cash to pay its creditors on time? If your company runs out of cash, doesn’t have enough cash flow to pay its debts or has assets worth less than its liabilities, it’s likely insolvent.

Becoming insolvent is an extremely significant event for any company that requires an immediate response. By law, you need to stop trading if your company becomes insolvent and work to ensure the interests of your creditors are prioritised.

Insolvency is often the result of a creditor delivering a statutory demand – an official demand for payment of a debt – to your company. This can place a short-term strain on your company’s finances that affect its ability to meet its liabilities.

Businesses can also become insolvent via balance sheet insolvency. This is when a company’s liabilities exceed its assets, even if it’s capable of paying its next bills to creditors when they become due.

In either situation, you need to stop trading and seek the advice of an insolvency expert to determine the next step for your company. There are numerous options available for companies that become insolvent and need financial help.

These include Company Voluntary Arrangements, administration, loans and other financing options. Insolvent companies can also close through liquidation, either voluntarily or through compulsory liquidation initiated by a creditor.

Are you concerned about your company’s finances or worried that it could become insolvent? Read on to learn more about insolvency and the options that are available to protect your business against court action from its creditors.

Quick facts about insolvency

• There are two ways a company can become insolvent. A company is cash flow insolvent when it can’t pay its debts on receiving a statutory demand, and balance sheet insolvent when its debts exceed the value of its assets.
• Companies often become insolvent after receiving a statutory demand from a creditor requiring immediate payment of a significant debt. This puts a strain on cash flow and prevents the company from being able to trade.
• Disruptions to normal cash flow, such as the loss of an important customer or a settlement from a lawsuit, can also put a strain on a company’s finances and cause it to become insolvent.
• If you fail to take action when your company becomes insolvent, you could be charged with wrongful trading under the Insolvency Act 1986. Other serious legal risks include fraudulent trading, which is less common.
• Although insolvency seems like a hopeless situation, there are a surprisingly large number of options available for your company. These include loans and financing, as well as insolvency solutions such as a CVA.

What is insolvency?

Insolvency is when your company lacks the cash to pay its bills when they become due. Companies can become insolvent due to poor cash flow, or due to their debts becoming greater than the total value of the company’s assets.

In most cases, insolvency is the result of a lack of liquidity within a business. It’s possible for a business to have assets that are worth a significant amount of cash, but still become insolvent due to insufficient liquidity to pay its debts.

In some cases, insolvency is caused by a company failing to account for a significant liability, such as a settlement or penalty. This can result in the company becoming insolvent via its balance sheet, even if it can make its next payments to creditors.

Is your company insolvent?

Can your company afford to pay all of its creditors on time? From time to time, most companies experience periods of steady cash flow and excellent profits in addition to periods of weak cash flow and few or no profits.

When your company’s cash flow affects its ability to pay its creditors, it may receive a statutory demand. This is a ‘last warning’ notice from a creditor to pay your debts or face the possibility of the company being wound up.

If, upon receiving a statutory demand, your company can’t afford to pay its creditor, it’s insolvent. While insolvent, your company is at a serious risk of being subject to a winding up petition.

Could your company become insolvent soon?

Although insolvency might seem like an impossible situation for a profitable, cash-rich company, it can often occur unexpectedly. If your business model is too risky or your company has limited assets, it could become insolvent surprisingly easily.

Some of the most common danger signs of impending insolvency include poor cash flow that causes panic whenever your company’s bills are due, excessive borrowing and dependence on credit and a general lack of funds within the company.

Other insolvency risk factors can be slightly more hidden. If your company depends on a large customer for a significant amount of its monthly or quarterly income, the loss of this customer could lead to the company rapidly becoming insolvent.

What are your duties as company director?

When your company becomes insolvent, you need to act. As company director, you are required to carry out certain duties, as per the Insolvency Act 1986. One of these duties is to stop trading without any intention to pay some or all creditors.

You also face several restrictions on your conduct as director. When your company is insolvent, for example, the sale of assets – particularly at low prices below what they are worth – could be reversed to recover funds for creditors.

As company director, you are legally obligated to take action with the interests of your company’s creditors first. When your company becomes insolvent, the wisest step is to contact an insolvency expert to learn about your company’s options.

What happens if you ignore your directors duties?

If you ignore your directors duties, for example by signing new contracts and taking on new business while your company is insolvent, you face the risk of being charged with wrongful trading under the Insolvency Act 1986.

Should you seriously mislead or defraud creditors regarding the financial condition of your company, you could also face a charge of fraudulent trading – a very serious criminal offense that can lead to significant fines against you personally.

In both cases, there is a serious risk of you, and other company directors, being held personally liable for some or all of the company’s debts. Directors may also face the possibility of being barred from directing any UK companies for a period of time.

Can creditors wind up your insolvent company?

Creditors can take action to wind up an insolvent company if they believe it simply isn’t capable of paying its debts. After receiving a statutory demand, your company has 21 days to pay its creditor before the creditor can take serious legal action.

After this point, a creditor can file a winding up petition against your company due to its non-payment. A winding up petition will result in the closure and liquidation of your company if it’s ignored, making it an extremely serious threat.

If you fail to take action after a winding up petition has been filed, your company is likely to be liquidated and closed. Luckily, there are options available that you can use to protect your company from liquidation and possibly produce a recovery.

What options are available for companies that are insolvent?

Becoming insolvent doesn’t mean that your company is out of options. Although it’s essential that your company works to achieve the interests of its creditors, there are several means that your company can pursue.

If your company is viable – meaning that it has a realistic prospect of recovery and a long-term plan for trading – it can use the following insolvency solutions:

Company Voluntary Arrangement

A Company Voluntary Arrangement is an agreement between your company and its creditors to pay some or all of its debts in the form of a monthly payment, typically over a period of two to five years (although some CVAs can be longer).

Proposing a CVA means that any legal pressure against your company, including a winding up petition, are paused. This gives your company time to prepare the CVA proposal and ensure it can maximise creditor interest throughout the CVA period.

If your company has a realistic chance of recovering and a good plan for improving its finances, creditors are far more likely to respond positively to a CVA. In an ideal situation, a CVA allows creditors to recover more cash than any other option.

As part of a CVA, your company may be able to write off some of its debt to make the process of repaying its creditors easier. You may be able to spread payments over an extended period to ensure that the strain on company cash flow is minimised.

Creditors don’t have to approve a CVA, and your CVA won’t be accepted unless over 75% of your company’s creditors agree to it. However, if your company has a strong future and the terms of the CVA are reasonable, this is an excellent recovery option.

Administration

When your company becomes insolvent, creditor pressure can increase and the risk of your company being wound up becomes significantly greater. Administration is a type of insolvency solution that protects your company from being wound up.

Entering into administration results in all legal actions against your company, such as a winding up petition, being stayed. An administrator is appointed to manage the company throughout the administration in order to create liquidity for creditors.

During the administration, the administrator will make decisions regarding assets owned by the company to raise cash for creditors. In some cases, administration is likely to lead to liquidation, particularly for businesses that just aren’t viable.

However, administration could also result in your company recovering and trading again in the future. In some cases, the administrator may propose a CVA to creditors to end legal pressure against the company and allow for a resumption of trading.

Although administration requires you to give up control over your company, it can often be the most effective option for improving relations with creditors and putting your company back on track.

Loans and Financing

Your company may be able to raise cash using a loan to pay its creditors and reduce the risk of a winding up petition being filed. Although borrowing options are limited for struggling companies, there are some options available.

If short-term cash flow issues are preventing your company from paying creditors, an option such as invoice factoring – which involves working alongside a factoring company to generate immediate cash flow – is an effective choice.

If your company needs to borrow a significant amount of money, it may be able to use an emergency loan. Lenders that specialise in loans for distressed companies can review your company’s situation and possibly provide some level of finance.

Both of the above options depend on your company being viable. Companies that are seriously financially distressed and unable to recover are unlikely to access a financing arrangement that allows them to repay their creditors.

Creditors Voluntary Liquidation

Insolvency can often be the result of serious issues with your company’s business model or strategy. If your company isn’t capable of recovering, the best option may be to close the company and sell its assets to pay creditors.

Creditors voluntary liquidation, or CVL, is an insolvency procedure that involves voluntarily liquidating your company’s assets in order to raise funds and ensure creditors receive some of the cash they are owed.

Many company directors choose a CVL as an alternative to compulsory liquidation, which is typically the result of a creditor filing a winding up petition in response to non-payment of a debt.

Entering into a CVL significantly reduces your risk of facing wrongful or fraudulent trading charges as company director. A CVL also avoids the court process involved in putting a company into compulsory liquidation.

Get expert financial help

Is your company insolvent? Are you concerned about your company’s finances? If your company is running out of money or just doesn’t have enough cash to pay its creditors, you need to take immediate action to ensure it’s protected.

There are several options available to protect your company, from entering into a CVA to using a cash flow solution such as invoice factoring to raise cash and ensure your company can restart its payments to creditors.

Every company is different, and the best way to discover the right solution for your company is to speak with an insolvency expert. We can explain the options available to your company to help you achieve the best possible outcome.

Contact us to speak to an insolvency expert and learn more about the options that are available if your company is insolvent. We can provide help and assistance to ensure your company isn’t put into compulsory liquidation by its creditors.