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The warning signs of company insolvency

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Updated: 29th January 2020

How to tell if your company is insolvent

If your company is currently insolvent you have a legal obligation to cease trading immediately, so if the business is already insolvent and is struggling with pressure from creditors then it is important for you to establish whether or not your company should continue to trade. The following guide will help you assess if your company is insolvent and what to do in the event that it is. If however you feel you would like to take further advice from one of our licensed insolvency practitioners you can call 0800 644 6080 for free confidential advice about company issues you may be facing.

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If you have a specific question and you don't feel like reading the lengthy guide below feel free to send us an email or call us on 0800 644 6080 for free advice.

Business Insolvency

Insolvency is a term used to describe a state of business operations in which a company is unable to meet its financial obligations and has debts and liabilities that exceed the combined value of all its assets. However, the exact definition of insolvency according to UK Law is a bit more complicated. Section 123 of the Insolvency Act 1986 summarises the legal definition by essentially stating that a company is deemed insolvent if it cannot pay it's debts as they fall due (the "cash flow" test) or if its liabilities exceed its assets "(the "balance sheet test).

How Can You Tell if Your Business Is Currently Insolvent?

It is likely that your company is insolvent if:

  • The business is unable to keep up with financial obligations and is regularly late making payments to creditors and HMRC

  • The amount of money your company owes in current and contingent debts and liabilities is greater than the fair market value of all of the company's assets (i.e. - bank account funds, debtor book, equipment, property, etc.)

  • A creditor has already obtained a County Court Judgment (CCJ) or has issued statutory payment demand against the company that has gone unpaid for longer than 21 days.

  • If any of the above conditions apply to your company's current situation then you could be at danger of having a winding up petition issued against the business. If you've already received a petition you must act immediately to avoid going out of business – if the petition is advertised there may be no time left. 

Warning Signs That Your Company Could Soon Be Insolvent

  • Lack of Cash Flow – If the company has been unable to afford investments and lacks the cash needed to cover basic operating expenses then the company will likely become insolvent soon if it is not already.

  • Frequent Creditor Pressures – If your bank, HMRC, lenders, mortgagors, credit card companies, or other creditors have been chasing or calling or sending emails requesting immediate payment for a debt due then you probably aren't far from receiving a payment demand or winding up petition if nothing is done.

  • Ceiling Borrowing – If your business has been borrowing the maximum allowed amounts from the bank and/or suppliers this is known as ceiling borrowing, and it is a common indicator that a company is on the brink of insolvency.

  • If the directors are not being paid as there is insufficient funds.

What are the Consequences of Insolvency?

If you fail to cease trading, notify creditors and HMRC, contact an insolvency practitioner, and act in the best interests of your company's creditors, then you could face serious consequences. It is imperative to note that as the directors of limited company in the UK you are legally obligated to act in the best interest of your creditors as soon as you're aware of the fact that the business is insolvent.

Failure to meet this obligation could lead to accusations of wrongful or fraudulent trading, and if you're found guilty of such offences you could face penalties such as being ordered to personally contribute to company's assets and even the possibility of being disqualified from acting as the director of any limited company in the UK for a period of 2-15 years.

Even if you, or the other directors of your company, are not accused of misconduct, insolvency will eventually lead to the liquidation and dissolution of the business if the underlying issues are not addressed and it is for this very reason you must seek professional help from a UK licensed insolvency practitioner.

What are the Options That an Insolvent Company Can Use to Return to Solvency?

Fortunately, just because your company is currently insolvent does not mean that it has has to go out of business consider the following options you have for getting the company finances back on track:

  • Informal Creditors Arrangement – Before attempting a formal process you may want to try negotiating with creditors over the phone or via email to agree a manageable repayment term for outstanding debts. This option could give your business lower monthly payments and keep creditors satisfied in order to avoid legal actions being taken against your company.

  • Company Voluntary Arrangement (CVA) – If creditors are already threatening action or have begun the process of taking you to Court then you may want to resort to formal negotiations in the form of a CVA. If approved this would give the company one monthly payment.

  • Administration – In administration you would appoint a licensed insolvency practitioner to act as the administrator of your business with the aim of bringing about a turnaround through a variety of means. This procedure would instantly halt any legal actions being taken by creditors and could allow you to rescue a business from the brink of liquidation in order to continue operating as a going concern.

  • Asset-Based Financing – If you have assets that are particularly valuable you may be able to use them as leverage or collateral in obtaining some form of secured financing. These funds could then be used to make repayments and/or contribute towards essential payments.

  • Invoice Discounting and Factoring – If you have outstanding invoice payments from clients that have a reliable payment history you may be able to get an advance on these payments, or even setup an ongoing credit agreement, with a factoring or invoice discounting company.

  • Pre-packaged Administration – If liquidation seems imminent and you'd like to preserve some of the company's assets then a pre-pack may allow you to do so by giving a third party the ability to purchase some of the assets and transfer them to a new company.

If you're interested in discussing any of the above recovery options, or if you'd like to know more about business insolvency, feel free to ask one of our expert insolvency practitioners or call us today on 0800 644 6080. With 78 offices stretching from Inverness down to Exeter, Real Business Rescue can offer unparalleled director advice across the UK.

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