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If you can’t pay your business debts when they become due or if the
assets of your business are less than your debts, you are insolvent.
Insolvency can be a confusing subject involving many technical terms.
Use this guide to demystify the jargon and understand:
Does insolvency mean the end for your business?
The options for dealing with corporate insolvency
How to manage personal insolvency
How to manage personal insolvency
Corporate
insolvency.
• Dealing with corporate insolvency.
• Administration.
• CVA’s.
• Liquidation or winding up.
Corporate insolvency
Does insolvency mean the end for my business?
No, but you must act quickly to make sure your situation doesn’t get any worse. First, prepare a cashflow forecast with the help of your accountant.
If the business has good prospects, identify ways of improving your cashflow by:
• obtaining more finance
• improving the way you manage your working capital
• leasing the assets you need and selling the ones you don’t
If the business is unlikely to survive you should:
• stop trading
• consult an insolvency practitioner (IP)
• try to pay your debts
Note: companies and partnerships that carry on trading when there’s no hope of recovery can be held liable for wrongful trading.
See also:
Monitoring your cashflow Exiting a failing business
Dealing with corporate insolvency
The aim of an insolvent business is to pay back as many of its debts as possible. There are several ways of doing this:
• administration
• company voluntary arrangement (CVA)
• liquidation or winding up
Administration
Use this route if you hope to save your business. Who can put a company into administration?
• the company
• the directors
• anyone who holds a floating charge over the company
• any creditor by court order
How administration works
An IP will be appointed to act as administrator. They will run the business and negotiate with creditors. They will try to rescue the company as a going concern, but may take another course such as selling the business as a whole if that will mean a better result.
If there’s no alternative, the assets of the business will be sold to pay secured and/or preferential creditors. As the owner, you’re protected from any further action by creditors to recover their debts while in administration.
How long will administration last?
Administration shouldn’t take longer than a year, but this can be extended if creditors agree or a court orders it.
Company Voluntary Arrangements (CVAs)
You can use this route to reach agreement on paying your debts.
How CVAs work
An insolvency practitioner (IP) will help you to prepare a proposal on how you’ll repay your debts. There’ll be a meeting with your creditors to negotiate the terms. If at least 75% of the creditors (by value) at the meeting agree, all creditors are bound by the arrangement. The IP will collect funds from you and distribute them until the agreement ends. As owner, you’re protected from further action during a CVA.
Liquidation or winding up
Use this route if there is no hope of saving your business. There are two ways to end the life of a company:
• creditor’s voluntary liquidation
• compulsory winding up
Creditors Voluntary Liquidation
• The directors pass a resolution stating that the company can’t continue.
• A meeting of the creditors is held.
• The creditors appoint an IP as liquidator to sell the business’s assets and repay any debts.
• The directors wind the company up.
Compulsory winding up
• A creditor owed £750 or more makes an application to court for a company to be wound up.
• A receiver will call a meeting of the creditors and appoint an IP to liquidate the company.
• The official receiver will wind the company up.
Personal
insolvency.
• IVA
• Administration order
• Bankruptcy.
Personal insolvency
How to manage personal insolvency
There are several options for repaying your debts:
• individual voluntary arrangement
• administration order
• bankruptcy
Individual voluntary arrangement (IVA)
You can use this route to reach agreement on paying your debts.
How an IVA works
An insolvency practitioner (IP) will help you to prepare a proposal on how you’ll repay your debts. A meeting will held with the creditors to negotiate the terms. If at least 75% by value of the creditors at the meeting agree all creditors become bound by the arrangement.
The IP will collect funds from you and distribute them until the agreement ends. As owner you’re protected from further action during the CVA. But if you break the agreement, the IP can apply to have you made bankrupt.
Administration order
Use this route if your debts are less than £5,000 and at least one of your creditors has a county court judgment against you.
How an administration order works
• The court puts together a plan for the repayment of your debts.
• You pay the court a series of instalments.
• You’re protected from further claims while the order is in place.
Bankruptcy
Use this route if you have no alternative. Who can make a person bankrupt?
• The person themselves.
• Any creditor owed £750.
How bankruptcy works
The person applying for the bankruptcy makes an application to court. The court will declare bankruptcy. An official receiver will take over your affairs and responsibility for paying your debts.
An insolvency practitioner (IP) may also be appointed to help sell your assets. When assets are sold the money will be paid over to the IP or receiver to settle your debts.
You’ll be allowed to keep assets necessary for your basic domestic needs or business. You won’t be able to borrow more than £500 without declaring your bankruptcy. You may need to contribute some of your income to pay your debts.
You can’t be a company director while bankrupt.
How long does bankruptcy last?
• You will be referred to as an undischarged bankrupt for one year.
• After this, the receiver can continue to sell your assets if your debts aren’t paid.
• You might need to carry on contributing income for another two years.
• Your credit rating could be affected for many years.
Useful links
Business Link advice on insolvency and bankruptcy The Insolvency Service
Companies House information on liquidation and insolvency Insolvency Service guides
Business Link advice on alternatives to bankruptcy
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