Insolvency can be a confusing subject. We take a look at the different types of insolvency and the processes for dealing with them.
At Witans Solicitors, we have extensive experience in helping individuals and businesses through difficult times. Having expert advice will help you deal with your situation in the right way. It is sometimes possible to restructure a business and return to profitability. If this is not an option in your case, proper legal assistance can ensure that the insolvency process is dealt with efficiently and compliantly, reducing the risk of personal liability.
Types of Insolvency
Insolvency is the inability to pay debts when they are due. It can apply to both individuals and businesses, but the term is mainly used in respect of businesses. The two types of business insolvency are:
- Cash flow insolvency; and
- Balance sheet insolvency
Cash flow insolvency occurs when there is insufficient cash available to pay debts. The company may have more than enough capital, but if this is tied up in the business, for example, in property and machinery, it may not be possible to cover debts.
Balance sheet insolvency occurs when the obligations of a company surpass its assets. The business may still be able to pay some debts in the short term.
Cash flow insolvency could cause balance sheet insolvency if it means that a business has to cease trading.
If you are concerned that your business may be insolvent, you are strongly advised to seek expert help as soon as possible. It may still be possible to find a way to manage debts and give your organisation a chance to recover.
The Different Types of Insolvency Proceedings
Insolvency proceedings for individuals include:
- Individual voluntary arrangements
- Bankruptcy
Insolvency proceedings for companies include:
- Administration
- Receivership
- Company voluntary arrangements
- Moratoria
- Voluntary liquidation
- Compulsory liquidation
If you or your business is in financial difficulty, it is important to choose the correct way forward. If you ask us to advise you, we will talk through your situation with you and establish what you want to achieve. We will provide practical advice and give you an honest appraisal of your circumstances and the options open to you.
Individual Voluntary Arrangements
An individual voluntary arrangement (IVA) is an agreement made between you and your creditors over the repayment of your debts. An insolvency practitioner will work with you to establish what is affordable. Details of your assets and liabilities will be provided to your creditors and they will be asked if they are able to agree on a repayment schedule. If those holding 75% or more of your debts agree, the IVA will be put into place and your creditors will not be able to take action over your debts while it is in force. If payments lapse, the insolvency practitioner will cancel the IVA and can make you bankrupt.
You can either declare yourself bankrupt or someone else can apply to make you bankrupt. They can do this if you owe more than £5,000 and cannot pay your debts or if you break the terms of an IVA.
If you are made bankrupt, a trustee in bankruptcy will be appointed to manage your finances. They will take charge of your assets and can sell these to pay off your debts. Some items can be kept, including a vehicle or tools if they are needed for your job and household items.
You will also be subject to a range of financial restrictions.
Going into administration gives a business some breathing space to arrange a rescue of the business or the selling of assets. The process is overseen by an administrator who will set out proposals for dealing with the administration.
Receivership involves the appointment of a receiver by a creditor who holds a floating charge such as a bank. They will sell either the company’s assets or the business as a whole. In some circumstances, the receiver may decide that it is in the best interests of the creditor for the business to continue to trade in the short term.
Unlike Administration, there is no attempt to rescue the business. The receiver has wide authority to remove directors and employees, sell property and other assets, grant leases and collect rental income.
Company Voluntary Arrangements
A company voluntary arrangement (CVA) is agreed upon between a company and its creditors. It is a formal agreement and an application must be made to the court for approval of the arrangement.
The agreement will set out how it is proposed to repay debts. It will give the business time in which to negotiate with creditors. The business will continue to be able to trade and creditors will not be able to take enforcement action against it while the CVA is in place.
A moratorium is granted by the court on the application of a company’s directors. Once it is in place, creditors cannot take formal proceedings to recover debts. It will give a business breathing space to consider its next steps. It will generally last for 28 days.
Directors will need to propose a nominee such as a registered insolvency practitioner to oversee matters during the moratorium.
Voluntary liquidation can be initiated by either members or creditors. The process will be dealt with by a licensed insolvency practitioner who will identify and sell or liquidate all of the company’s assets. The business’s creditors will then be paid in order of preference.
Compulsory liquidation takes place after the court has made an order that a company be wound up because it is unable to pay its debts.
The winding-up order will be published by the government and will be a matter of public record.
The official receiver will be responsible for liquidating the company’s assets until an insolvency practitioner is appointed. Assets will be sold or liquidated and creditors paid in order.
Stages of Insolvency and Winding Up
Each type of insolvency has a process which will need to be followed. It is important not to breach the rules as this could result in personal liability for the directors.
If you are facing insolvency, you should make sure you have advice and representation to ensure that you are compliant with insolvency legislation and that the correct procedure is followed throughout.
How Long Does the Insolvency Process Take?
The length of time taken to deal with an insolvent company can vary widely depending on the course of action to be followed. If breathing space is needed and a rescue plan or restructuring is arranged, this can take several months. If a company is wound up, it can take from around six months to two years.
If you would like to ring us, we can discuss your situation, the options that may be open to you and the potential timescale involved.
For more information on our services, see our insolvency and bankruptcy page.
Contact Our Insolvency Solicitors
If your business is encountering financial challenges, it is highly recommended that you promptly seek the guidance of an insolvency solicitor. Taking immediate action can provide a measure of protection and allow your organisation the necessary time to assess the most advantageous path forward.
We can advise you of the options available to you and take urgent action to protect you and your business where necessary.
To have a conversation with one of our skilled insolvency lawyers, please contact us via email at info@witansolicitors.co.uk, or complete our contact form. We will carefully assess your situation and discuss the ways in which we can provide assistance.
