When creditors, the bank, or HMRC is threatening to wind up your company or take other legal action it is essential to know whether or not you’re already trading insolvently. Once the business is deemed insolvent it can be brought to court or forced into administration, receivership, or compulsory liquidation, all of which would most likely lead to the end of the company.
Many business owners and managers make the mistake of thinking that debt does not equate to insolvency, and that they’ll have plenty of time to recover from the hole they’re in. Unfortunately, if any of your debts are secured by a fixed or floating charge or a debenture then you could face difficulties a lot sooner than expected. In fact, within a week of receiving a winding up petition from a creditor your company’s bank accounts could be frozen and the liquidation could begin.
We explain what business rescue options are available to you as the business owner, and it is you as the director who stays in control and decides what route to take. It makes no sense for our client directors to feel pressured into something that they believe does not favour them.
There are two main issues that indicate a company is operating insolvent under UK law:
The combined value of all the company’s assets is lower than the value of its debts/liabilities. When this happens it would no longer be possible to liquidate some of the assets to repay creditors as a whole, as even selling the entire business wouldn’t cover the cost of paying off the creditors.
You may need a professional appraisal to accurately value your assets before coming to a conclusion on this matter, but as a general rule of thumb, if the value of your assets is anywhere near the sum of your debts then your company is either already insolvent or is on the verge of it.
Your company regularly lacks the cash flow needed to meet its financial obligations in a timely manner. This is usually the first sign that the business is heading downhill and if steps aren’t taken to correct the lack of funding then a turnaround is unlikely.
In addition, a company is considered to be insolvent if:
- It has failed to pay a debt of more than £750 within 21 days of being served a statutory payment demand notice; or
- It has failed to satisfy any type of judgement or court order.
If you’re dealing with any of the issues above, consider these options:
If you’re simply waiting to collect invoice payments from clients you may be able to get cash advances using invoice discounting or factoring. After assessing your situation we can refer you to a compatible financial service provider who will offer the best terms.
If you have some equipment, inventory, property, or other assets, we may be able to help you sell them or use them as collateral to obtain a secured loan or line of credit. This would give you the funds needed to escape debt and pay down your creditors.
A company voluntary arrangement (CVA) would protect your company from being wound up as long as you adhere to the terms of the new agreement.
A company administration would put control of the business in the hands of an experienced insolvency practitioner who would act as the administrator working to negotiate with creditors, sell assets to raise the funds needed to make repayments, or trade as normal with the goal of reducing debts and helping the business escape debt. Once administration has been applied for all pending legal actions being taken against your company (i.e. – receivership, compulsory liquidation etc) would be stayed while the administrator works out a plan to deal with the creditors.
In a pre-packaged administration sale, the administrator would pre-arrange to sell the assets of the business to one or more of the company’s members or directors. This would allow you to move the company’s equipment, work in progress, contracts, property, and even employees to a new business that starts over with a clean slate.
If you’re not sure whether you company is insolvent and you’d like some professional guidance on the matter, feel free to call us at 0800 644 6080 for a free consultation. We can help you conduct a preliminary company insolvency check to determine whether you should pursue an arrangement with creditors, seek additional financing, or take action through a formal recovery procedure.
Friday 2nd December, 2016 Written by Keith Tully
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Every day we help companies just like yours turn things around against seemingly impossible odds, regardless of your situation we can help. Find your nearest office today.