Insolvency is a complex area, from understanding exactly when a business is insolvent to choosing the right course of action. We explain how to identify insolvency and the options open to you, including the administration process and entering into a company voluntary agreement.
While insolvency is a serious situation, it does not necessarily mean the end of a business. Taking expert advice will help you explore ways in which you may be able to restructure or take other steps to save your operation. However, it is crucial to tackle matters promptly and effectively. Dealing with issues as soon as possible will give you the best chance of a positive outcome.
What is Insolvency?
A business is insolvent when it is unable to meet its debts. This could be because there is insufficient cash available to pay bills when they are due, or the liabilities on the company’s balance sheet outweigh the assets.
Can You Continue To Do Business While Insolvent?
Company directors must not continue to trade if they know or should know that the company is insolvent. This is wrongful trading and it is an offence under the Insolvency Act 1986. If a director is found to have wrongly traded, they could face personal liability for debts incurred as a result, as well as disqualification from acting as a director for up to fifteen years.
If a director knowingly does business while insolvent to defraud creditors, this is fraudulent trading. This is a serious offence and carries a maximum prison sentence of ten years.
Company directors should always be aware of the business’s current financial position and take extreme care if they believe they are approaching insolvency.
How Should a Business Deal with Insolvency?
If you suspect that your company may be insolvent, you are strongly advised to take advice from an expert insolvency lawyer. It is essential to avoid liability for trading while insolvent. In addition, taking legal advice early on will give you the best chance of resolving matters efficiently and, in some cases, saving your business.
For insolvent businesses where restructuring is not an option, there are five main options:
- Administration
- Administrative receivership
- Company voluntary arrangement (CVA)
- Compulsory liquidation
- Creditors’ voluntary liquidation (CVL)
Administration
Putting your business into administration means that it will be protected from winding-up orders and legal action from creditors during the administration period. An insolvency practitioner is appointed to deal with the administration, and they will take over control of the company and its assets.
The administrator can take steps to try and save the business from being wound up. They will prepare a statement setting out the action they intend to take, and this will be shared with creditors, employees and Companies House.
Options include entering into a CVA, in which case the business will continue, selling the business or its assets or closing the business.
Administrative Receivership
Administrative receivership occurs when a secured creditor who holds a floating charge over a company’s assets takes steps to secure outstanding debts from the business. The creditor will appoint an administrative receiver, and the company will no longer be able to deal with the assets that are subject to the floating charge.
The administrative receiver’s duties are to recover money for the secured lender. They will have the same authority as the company directors and will replace them in managing the company, although the directors remain in office and are liable for the company.
The administrative receiver will try to recover the money owed to their instructing creditor by selling the assets or running the company and using the profits to pay the debt.
The company could still face legal action from other parties who also wish to recover debts.
Once the administrative receiver has obtained full payment for the floating charge holder, they will withdraw from the company. A business will often be liquidated at this point.
Company Voluntary Arrangements
If enough creditors agree, an insolvent company can enter into a Company Voluntary Arrangement. This is an agreement whereby creditors are paid over a set period. An insolvency practitioner is appointed, and they will calculate the amount the business is able to repay.
They will then draw up a repayment schedule and send it to the company’s creditors, asking if they are prepared to accept the proposal. If the holders of 75% or more of the debt agree, then the CVA will be implemented.
The insolvency practitioner will arrange for the regular payments to be made to the creditors until all debts are repaid.
Compulsory Liquidation
If a creditor is owed £750 or more and attempts to recover the money have repeatedly failed, the creditor can serve a winding-up petition. In reality, the debt will usually be much higher than this. If the courts agree, they will make a winding-up order. This is a major step, and creditors will generally try other methods of recovering a debt first.
If you receive notice that a winding-up petition has been lodged at court, you should speak to an expert insolvency solicitor immediately. You only have seven days in which to respond. In addition, the petition will be published in The Gazette, and banks and other institutions will become aware of the situation and accounts and lines of credit will generally be frozen.
Compulsory liquidation can only be stopped if the creditor is paid in full or they agree to a repayment schedule (provided that no other creditors come forward to carry on the winding-up process) or if the debt is disputed, in which case there will be a reprieve while this is decided.
If a business can demonstrate to the court that there is a realistic prospect that it will be able to pay the creditor within a number of weeks, the court may adjourn the petition to give the business this opportunity.
If a winding-up order is granted, the Official Receiver will take over as the company liquidator or, where the creditors agree, an insolvency practitioner can be appointed.
The company is then wound up, with assets sold and creditors paid in order of priority.
Creditors’ Voluntary Liquidation
A Creditors’ Voluntary Liquidation may be possible if shareholders with at least 75% of a company’s shares agree on this course of action.
It is a way of ending a business while protecting creditors’ interests and complying with the legal duties that directors have.
If the shareholders decide to follow this option, creditors are provided with details of the licensed insolvency practitioner who is proposed as the liquidator. The creditors can then agree with this choice or nominate a different liquidator.
Creditors are also provided with a statement of affairs detailing the company’s assets, liabilities and creditors.
Once a liquidator is appointed, they will deal with the winding-up process, liquidising assets and paying creditors in order of preference, as follows:
- Secured creditors with fixed charges
- The liquidator’s fees and expenses, and other costs of the liquidation
- Preferential creditors
- A prescribed part fund for unsecured creditors
- Floating charge holders
- Unsecured creditors
- Interest due on debts
Dealing with Insolvency
If you believe your business may be facing the threat of insolvency, speak to an insolvency lawyer at your earliest opportunity. Having help and support will ensure that you get through a difficult time in the best way possible and that your duties and obligations are met. It is important not to make mistakes during insolvency, as directors’ actions are routinely investigated, and errors could mean that you face penalties.
For information on our services, see our insolvency and bankruptcy page.
Contact our Insolvency Solicitors
If you have questions about the insolvency process, we will do all we can to assist.
To speak with one of our experienced insolvency lawyers, you can call us on 0330 173 3041, email info@witansolicitors.uk, or complete our contact form. We’ll take the time to understand your circumstances and explain the ways we can support you.
