Staying afloat in stormy seas
In times of economic downturn, many businesses may be forced to confront insolvency issues., either in the context of seeking advice on their own financial situation or dealing with customers or clients who may be insolvent or in liquidation.
When is a business insolvent?
If a company cannot pay its debts, or if a company’s assets are less than its debts, then that business is insolvent. Unless those debts are paid quickly, then the insolvency will lead to winding up.
Avoiding winding up
With banks and lenders applying a more rigorous approach to credit and lending, it is important to focus on core issues such as cashflow and debt recovery. Consider the following:
- Ensure your debts do not exceed your assets.
- Keep a tight rein on your cash flow.
- Consider a change in business structure.
- Create and maintain good credit-control procedures.
- Avoid personal guarantees for business loans.
If a company’s assets are only equal to the amount of its loans and debts, then it risks having its capital reduced or even wiped out. If creditors realise that their money is at risk, they could pursue the company more actively, forcing it to become insolvent.
Therefore, ensure your capital is maintained. Keep capital up by holding back profits where possible.
Effective cash flow provisions should ensure that debts can be met on time avoiding insolvency. A young business may take on too much debt while chasing new business. Avoid “over trading” by sensible budgeting and financial controls.
What are the alternatives?
- Voluntary arrangements - A company may be able to avoid winding up by entering into an arrangement with its creditors. Advice should be taken from a lawyer or a licensed insolvency practitioner. Creditors meet and vote on a proposed arrangement. The company will put its proposal forward and if this is accepted, then all creditors are bound by it.
- Receivership - An administrator or administrative receiver may be appointed to help a company get back trading, if at all possible. If not, it can sell the company’s property to pay creditors. An administrator's primary goal is to rescue the company as a going concern. If this isn't possible, the administrator will try to get a better result for the creditors than would be possible if the company was wound up. If neither of these is possible, the administrator will sell the company's property to make at least a partial payment to one or more secured or preferential creditors, such as employees or the bank.
- Administrative receivership - If a company borrows money, the lender will usually take security over the company's assets. If the company defaults, the lender may appoint an administrative receiver, an insolvency practitioner, who may sell the assets or the business as a going concern.
- Winding up and liquidation - If no arrangement or period of administration can be made, then a company can propose a creditors' voluntary liquidation (CVL). The company will call a meeting of creditors and will appoint a liquidator to carry out the winding up of the company. Or a company may be wound up by compulsory liquidation under a court order when a liquidator will be appointed. Note that a company can be forced into liquidation by a creditor if that creditor is owed more than £750 by the company.
I am owed money by a company that is in liquidation
If you are owed money by a company in liquidation, the Official Receiver (OR) will normally notify you (within 12 weeks of the date of the court order) whether a meeting of creditors will be held (a meeting will normally take place if a company has significant assets available that can be realised for the benefit of creditors). If you have not been contacted by the OR, you should write to him (or insolvency practitioner (IP) if the case has been handed over to one), advising that you are a creditor. A search of the Register of Companies at Companies House will show which companies are in liquidation.
So if you are in financial difficulty or owed money by a company or individual that you believe cannot pay, it is prudent to seek advice promptly. Many a good business can be salvaged by prompt and appropriate action but delay or inaction can prove fatal to a company’s long term future.
To discuss insolvency issues, please contact us on 020 7420 7020 or enquiry@sethlovis.co.uk.