Can A Company Survive Insolvency?

If your business is struggling financially and can no longer balance its books and pay its bills, you could be facing the very real threat of insolvency.

Insolvency occurs when a business can no longer pay its debts as and when they are due. This state of affairs can lead to the total closure of the company if directors fail to act quickly to solve it.

Luckily, a company can survive insolvency. There are a number of insolvency tools available to distressed companies including company voluntary arrangements, while experienced insolvency practitioners can provide expert financial advice.

In this article, the team at Irwin Insolvency answers the questions, ‘What does insolvent mean in business?’ and ‘Can a company survive insolvency?’ If your company is struggling to pay its bills, here’s everything you need to know about surviving insolvency.

What does Insolvent in Business Mean?

Insolvency in business is said to occur when a company is no longer able to pay its debts as and when they arise. If your company is struggling to keep its books balanced and has creditors chasing you for late payments, it’s likely that you could be facing insolvency.

In the UK, over a thousand companies officially register their insolvency with the government’s Insolvency Service every month. Insolvencies are primarily governed by the Insolvency Acts 1986 and 2000, which established an official definition of insolvency and a set of formal legal procedures that need to be followed when a company becomes insolvent.

The Insolvency Acts 1986 and 2000 set out two ways in which a company is deemed to be insolvent. These are cash flow insolvency and balance sheet insolvency. Both amount to an inability to pay creditors, but there are very important differences to consider if we are answering the question ‘what does insolvent mean in business?’

Cash Flow Insolvency

Cash flow insolvency is the most common form of insolvency, and it’s also the most likely form of insolvency to survive. A company is said to have an insolvent cash flow when they have more money going out than they have coming in. This can happen if you have many unpaid bills, or if you are waiting for your own clients to pay before settling with your creditors.

Importantly, a company is only considered to be cash-flow insolvent if they also have enough assets to cover the costs of their debts. This means that, in theory, assets can be sold in order to raise money to pay the debts, although it may not need to amount to this if the company can raise more money or funding elsewhere to cover its debts.

Balance Sheet Insolvency

Balance sheet insolvency is a much more serious form of insolvency. It only occurs when a company does not have enough assets to pay off the debts it owes.

This means that if the company were to sell all of its assets, it would still not be able to pay its creditors. If this is the case, the company is legally bound to cease trading immediately and begin insolvency measures.

Balance sheet insolvency can occur to a company that has very few assets, and so has little to sell. It can also occur to companies that are asset rich, but have large debts to pay.

How Can a Company Become Insolvent?

While the simplest definition of insolvency states that a company becomes insolvent when it can no longer pay its debts, there are in fact many ways for a company to become insolvent. The reasons for insolvency can be tied to a single, economic event (the recent worldwide pandemic being the most prominent example), or it can be the result of complex decisions or market forces.

Some of the most common reasons for insolvency include:

  • Poor financial management
  • An excess of overheads or costly investments
  • Lack of investment in development or diversification
  • Poor decision making on the behalf of directors
  • Declining sales or lack of interest in the product or service
  • A loss of customers to the competition
  • A loss of markets, as occurred during Brexit
  • Unprecedented economic or political events, such as Covid-19

Commonly, insolvency will result from a range of different factors. Some of these factors will have been within the control of the directors to influence. Others will have been political or economic, over which the directors may have little say. Either way, avoiding insolvency is a process that takes careful solvency planning, long-term strategising and prudent financial advice.

If you believe or know that your company has become insolvent, it’s important to speak to a licenced insolvency practitioner immediately. They will be able to recommend the best course of action for your company to take in order to survive insolvency.

How to Tell if a Company Is Insolvent?

If your company can no longer pay its bills, then it’s become legally insolvent. However, it can be difficult for company directors in charge of complex businesses to know exactly when they have become insolvent. This problem is exacerbated if the company has multiple departments, streams of income or is a multinational.

The most immediate indicator of insolvency is that your company is being chased by its creditors for unpaid bills. If bills remain unpaid, then you may receive a statutory demand for payment.

This is an immediate cause for concern because the Insolvency Acts 1986 and 2000 state that a creditor can begin formal legal procedures against a company that owes them £750 or more. In extreme circumstances, this can lead to the company being forced into liquidation in order for the creditors to be repaid.

There are however many ways for you to tell if your company is on the verge of insolvency or has become insolvent. These include:

  • You have a negative cash flow
  • Sales are decreasing
  • Supplier costs and overheads are increasing
  • You are losing customers or markets
  • Creditors are chasing you for unpaid debts
  • You receive a statutory demand for payment

How to Avoid Insolvency in Business

Before it gets to this point, there are ways to avoid insolvency. After all, the best way to survive insolvency is to stay solvent. However, this takes careful financial planning and strategising.

Accurate accounting is often the best way to tell if you have more money going out than coming in. If your company can manage its books well, then you can better plan to stay solvent. For example, if your books show a decline in sales, you know it’s time for a marketing push to increase sales in the long run.

Businesses need to stay competitive and stay one step ahead of the competition. In this respect, it’s an excellent idea to regularly audit your products and services or to regularly ask customers for feedback in order to improve your business.

If your business has become outdated, too complicated or too expensive to run, then you may need to consider making changes, streamlining operations and cutting costs before you become insolvent. Equally, it may take further investment to improve your business to keep it competitive and to stay solvent.

A licenced insolvency practitioner can assist with solvency planning to help you to avoid insolvency. The team at Irwin Insolvency can offer impartial and expert advice that will help your business to stay solvent. We provide the following services, all of which can help your business remain profitable:

  • Business advice for directors
  • Solvency planning
  • Business turnaround plans
  • Corporate reconstruction

What to Do If Your Company Is Insolvent?

If your company has become insolvent, it’s incredibly important to understand that you now have legal obligations to comply with.

It may be tempting to try and continue trading your way out of debt, but this could be illegal. In fact, the first thing to do when your company has become insolvent is to stop trading. This is a requirement under the Insolvency Acts 1986 and 2000, which stipulates that it’s illegal for any company to knowingly continue trading while insolvent.

Any directors deemed to have undertaken insolvent trading can be fined, disqualified or held personally liable for any further debts that may be accrued as a result of this. In extreme cases, insolvent trading can lead to fraudulent trading, which can carry a prison sentence in the UK.

The second thing to do if your company is insolvent is to contact a licenced insolvency practitioner. Insolvency isn’t the end for a company, and there are many ways to survive and become profitable again in the future. To start with, an insolvency practitioner can recommend a range of informal and formal insolvency proceedings.

Information Insolvency Proceedings

If a company is facing cash-flow insolvency and is struggling to pay its bills, there may be opportunities to make informal insolvency arrangements with creditors. Not all insolvent companies are automatically in danger of being liquidated, and it may simply be the case that you need a little breathing space, an injection of cash or a reorganisation of debts.

Informal insolvency proceedings often involve an insolvency practitioner arranging for payment deadlines to be extended or for interest rates on loans to be halted. They may also be able to source new loans or investments to cover cash flow shortfalls.

Informal insolvency proceedings require all parties involved to come to an agreement, which may not work if debts are extensive or if there are multiple creditors to persuade. They also have no legal backing, but can be an excellent way for businesses to come to financial arrangements in the short term.

Formal Insolvency Proceedings

If your company has large debts, multiple creditors or is facing balance sheet insolvency, then there are a number of formal insolvency proceedings that may be suggested by an insolvency practitioner.

These are legally binding proceedings that can offer a company respite from creditors and buy time to reorganise debts or streamline operations. The goal is to survive insolvency and to put the company in a position where it can become profitable again.

The most effective formal insolvency tools are administration and company voluntary arrangements.

Administration

When a company enters into administration, it places operational control of the business into the hands of an administrator.

The administrator – generally a licenced insolvency practitioner – then attempts to save the company by reorganising debts and streamlining the business.

An administration period is usually 12 months, after which the company’s insolvent position can be reassessed. If successful, control of the company then returns to the directors.

Company Voluntary Arrangement (CVA)

A company voluntary arrangement (CVA) is a formal legal agreement between the company and its creditors.

The details of a CVA vary from one situation to another, but will generally involve an extension of repayment deadlines, a consolidation of debts and a lowering of interest rates.

A CVA usually lasts for 12 months, during which time creditors cannot chase the company for payments.

What Happens When a Company Files for Insolvency?

When a company files for insolvency with the Insolvency Service, they do so after having entered into formal insolvency proceedings, including administration of a company voluntary arrangement.

At this point, the insolvency becomes public knowledge, and the directors may come under the scrutiny of the Insolvency Service. If the business cannot survive insolvency, then the final step is liquidation.

Liquidation is the total closure of the company, with any remaining assets sold off in order to pay creditors. The company is then struck from the Companies House Register. For an insolvent company, there are two types of liquidation that can occur, compulsory liquidation or creditors’ voluntary liquidation.

Contact Irwin Insolvency Today for Your Free Consultation

Is your company facing insolvency? Then the expert team at Irwin Insolvency is here to assist.

We provide a comprehensive range of company insolvency services for struggling businesses, and we can help your company turn things around or wind down operations smoothly.

If your company is struggling financially, contact Irwin Insolvency today for your free consultation.

Contact Irwin Insolvency today for your free consultation

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0800 009 3173

About the author

Gerald Irwin

Gerald Irwin is founder and director of Sutton Coldfield-based licensed insolvency practitioners and business advisers, Irwin Insolvency. He specialises in corporate recovery, insolvency, rescue and turnaround.