Knowing that your company could be insolvent can certainly be a stressful experience. Many times, Directors feel pressured by creditors, suppliers, and employees to either attempt to save their company or close down the business.
Fortunately, insolvency is not always an automatic end to the business. Early action may allow Directors to pursue a number of recovery/rescue options that would not otherwise be available had the company allowed the issues to deteriorate further.
In this article, we will outline what constitutes insolvency, common signs and symptoms, and what to do if your company is insolvent.
What Does It Mean For A Company To Be Insolvent?
Generally speaking, a company is classified as insolvent when it cannot meet all of its debt obligations as they come due, or when the total amount of liabilities exceeds the value of its assets.
Insolvency is usually caused by ongoing financial issues which have been developing for months or years. As such, recognising the early warning signs of insolvency is essential.
Early Insolvency Warning Signs
Some of the more common insolvency warning signs for a company that may be experiencing financial distress include:
- Persistent cash flow problems
- Increased pressure from creditors
- Late supplier payments
- Dependence on overdrafts/short-term lending
- Payments to the business are not being made on time
What To Do If Your Company Is Insolvent
Ignoring problems associated with a potential insolvency is not only foolish but also dangerous. Delaying resolution of your problems nearly always results in you having increasingly limited routes for recovery until it’s finally too late. Always make sure you’re acting early and attacking the problem as best as you are able.
Directors who suspect their company may be insolvent should immediately assess the current state of the company’s finances. Collect and review current financial data, including current cash flow forecasts, outstanding creditor and debtor balances and finance agreements currently outstanding with lenders. Understand precisely where your business currently stands financially. Then, get in contact with a business rescue professional to get advice based on this information. This initial work allows you to proceed intelligently to decide how best to address the company’s financial crisis.
Option 1: Company Voluntary Arrangement (CVA)
A Company Voluntary Arrangement (CVA) is among the most popular forms of business rescue mechanisms available to insolvent firms. A CVA is a legally enforceable arrangement between a company and its creditors whereby the company will repay debts to them over an agreed term via affordable payments. If the creditors agree to this, it provides relief and reduces the pressure exerted by current debts owed to creditors.
A CVA could be suitable when:
- The business remains fundamentally viable
- Cash flow problems arise from previous debts
- The directors wish to remain trading
- There is likely to be support from creditors for a repayment plan
The benefits of implementing a CVA include:
- Continued trading
- Increased cash flow
- Protection against creditor harassment
- Preservation of employment and customer relations
Option 2. Place The Business Into Company Administration
In certain circumstances, business failures can be resolved through operational restructuring rather than purely because of failure due to insolvency. This can be achieved through a company administration process, which will also put a pause on any legal action from creditors while the appointed administrator assumes control of the business.
Should the administrator deem it impossible to rescue the business, they will instead set about company liquidation, with the priority of securing the best possible result for the company’s creditors. However, the earlier you act, the more likely it is that rescue will still be viable.
Option 3. Creditors Voluntary Liquidation (CVL)
Not all businesses can be saved. If debts incurred by a firm cannot be reasonably paid back, and no recoverable plan exists for such debts, then a Creditors Voluntary Liquidation (CVL) would represent the most reasonable course of action.
A CVL is a statutory insolvency procedure instigated by directors who recognise that their company is unable to discharge its liabilities. The assets of the company are realised; the rights of creditors are dealt with in accordance with insolvency law; and the company is eventually wound up.
A CVL is usually most appropriate when:
- No viable method exists for recovering the company
- Debt levels continue to rise
- Cash flow collapse occurs
- Pressure from creditors escalates
- Directors wish to avoid the dangers and risks involved with continued trading while insolvent
Taking early action through a CVL will show that Directors have acted responsibly, and in the best interest of Creditors once insolvency became obvious.
If you believe that your company is insolvent, do not automatically accept that liquidation is unavoidable. Obviously, in some cases, closure may become the sole realistic possibility for failing businesses; many can be recovered through restructuring or by way of alternative recovery methods, including company voluntary arrangements or similar recovery processes.
If you have serious reservations concerning your company’s financial situation, speak with us. At Ballard Business Recovery, we have extensive experience in both company rescue and liquidation. We will be able to advise you on what to do if your company is insolvent and work closely with you to secure the best possible outcome from your financial hardship.
