Business insolvency means the inability of a business to pay off its debts. There are two type of business insolvency:

  1. Cash flow insolvency, this is where a business is unable to pay its debts when they are due
  2. Balance sheet insolvency is when a business has negative net assets, so in other words their liabilities exceed their assets.

When a business becomes insolvent, there are several options which include:

  • Administration
    Administration is a constructive process that aims to rescue your company; it is seen as a positive option for failing small to medium businesses. The process of administration includes putting the company’s debts on hold whilst protecting its assets. This gives the business some space to try and resolve the difficulties that it is experiencing. During this process, an administrator will take over the financial management of the business and will put in place appropriate business turnaround measures.
  • Winding up
    If it is not possible to rescue or sell a business, then liquidation is the only option. To initiate this process shareholders usually appoint a liquidator to sell the businesses assets and pay off the creditors. In some cases the creditors themselves may initiate this process by forcing the business into liquidation through the courts.
  • Company Voluntary Arrangement
    If a business has temporary cash flow problems and can demonstrate that it will be able to trade successfully again and repay its creditors over time then this is an option. A company voluntary Agreement is where an arrangement is negotiated with the company’s creditors in which they agree to accept a reduced payments for what they are owed over a period of up to 5 years. This enables the business to survive whilst the creditors receive what they are owed.

The consequences of business insolvency

If you are the director of a business that has gone into liquidation you will be restricted from being involved in a business of the same name for 5 years. However you can still be a director of a new business in a different name, as long as you have not been made personally bankrupt or you have not been disqualified for misconduct.

For many businesses going through insolvency and recovery means that the business and the way it operates is restructured. However in the long term this can be very positive for the business because the restructuring has actually improved the business.

What to do if your business might be insolvent?

If you think your business might be insolvent contact a business turnaround specialist or an insolvency practitioners for some advice. They are experienced in dealing with insolvent businesses and they will be able to explain all the options available to you, plus the risks and benefits of each choice, they will also be able to help you put your chosen plan of action in place.

To understand the whole range of options and to get help choosing the right one for your business contact us on 0800 597 4757 or enquire online using the form opposite.