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How to Identify an Insolvency Scam

Whether you’re a company or an individual, insolvency ultimately leads to an individual voluntary arrangement, company voluntary arrangement, or bankruptcy. Any such end point will protect those in trouble from their creditors, and may result in the creditors losing some of the money they are owed.

Emotional Stress, Bankruptcy, Finance.

For those who have genuinely hit hard times, these are very worthwhile processes that can aid their financial rehabilitation whilst salvaging something for those they owe. Facing insolvency is not pleasant for most of us. For those less scrupulous, the end results may present an opportunity.

Fraudulent Practices

There are several ways in which the insolvency process is open to abuse. The most obvious is when a company attempts to trade while insolvent. Insolvency is a legal state when a company or individual’s liabilities outweigh their assets, and they’re unable to continue paying their bills. Whether or not insolvency has been officially declared, knowingly trading in those circumstances is unlawful. If it’s a company involved, the directors may become personally liable for the debts incurred.

Rise Like a Phoenix

Trading while insolvent is one thing, but there are those who would go to greater lengths to avoid their responsibilities. The mythical Phoenix is a bird that dies in flames, before being reborn out of its own ashes. A phoenix company operates in a similar way.

When a company runs into difficulties, the directors transfer assets and viable business into another company with a similar purpose, in order to continue business as usual. They leave the old company to become insolvent, taking all the debts with it.

The practice of forming a new company out of the ruins of the old is quite legal in the UK, but it can also be used by dishonest directors to avoid paying off creditors, or to sidestep employment legislation.

How to Spot It

Using a Phoenix company as a means of circumventing insolvency is fraud. If assets are removed from the original company shortly before it becomes insolvent, there are fewer resources available to pay off creditors and staff. If you’re owed money by a company that has been declared insolvent, there are things you can do to protect against this kind of action.

Do some research into the directors of the company that owes you money, and look out for any new companies that have been set up in their names. Don’t give up on your claim even if the phoenix company denies liability.

Another sign is if your company has given trade credit to a company that has declared insolvency within a short period afterwards. Be particularly wary if you’re owed money and nobody is responding to any communications you make. This suggests that everyone’s cleared out and moved elsewhere.

If such a situation arises, inform the Financial Conduct Authority or the Insolvency Service promptly.

Not So Sure?

Find out more about all aspects of insolvency by calling Irwin Insolvency. We offer good, impartial advice whether you’re facing difficult financial conditions yourself or dealing with customers who are insolvent.

What Is Insolvency?

Simply put, insolvency is the inability of a debtor to pay back money they owe.

Insolvency is the legal term for the state in which a company or individual is unable to service their debts in the immediate future. It may be that the combined worth of the insolvent party is more than sufficient to deal with the situation, but they simply can’t do it at the given time. This is reflected in the two broad forms of insolvency that are commonly recognised. They have slightly differing definitions: cash-flow insolvency and balance-sheet insolvency.

Cash-flow Insolvency

This is a slightly less serious form of insolvency, as it can usually be resolved through negotiation with creditors. Cash-flow insolvency is about liquid cash reserves falling short of requirements. A crisis of liquidity. The uncomfortable position from which you’re unable to stump up the cash to pay your outstanding bills at the end of the month, but with the knowledge that your assets are worth more than your debts. In other words you have sufficient valuable property that could be liquidated to pay your bills if necessary.

This is the type of insolvency that leaves you unable to pay your electricity bill, but you still own your house and car outright. If you were to sell those assets you’d have more than enough to pay off the outstanding debt, but it seems a little drastic as a response to a bad month’s business. This is where arrangements with creditors become possible, as those who are owed money know that it can be paid back ultimately, so they may be more prepared to wait.

Balance-sheet Insolvency

More difficult to deal with is balance-sheet insolvency. This is sometimes called technical insolvency, and occurs when a company or individual has insufficient assets to cover their debts. In other words, the balance sheet has a greater value in the liability column than it does under assets. So the insolvent business or individual has no means of raising sufficient money to cover all their debts. This is the position that can so often herald bankruptcy.

The paradox of balance-sheet insolvency for businesses is that, unlike the cash-flow variety, the company may have sufficient liquid funds to pay its next bill. The problem is that by law it would not be allowed to do so unless paying that bill would directly benefit all of its creditors. In other words paying a workforce to harvest a crop that could then be sold off as an asset is better value for the creditors than allowing the crop to rot in the fields. Paying to turn raw materials into a finished product would not be allowed, as the finished product may not sell, but the raw materials could command value as an asset in their own right.

In such a situation, bankruptcy or business rescue and restructuring are the most likely future courses. In the case of an individual, an Individual Voluntary Agreement or IVA might be the best course of action.

To find out more about insolvency or for advice if you’re having financial difficulties, contact Irwin Insolvency for impartial and understanding advice.