Fearing Insolvency? Here Is How You Can Make the Best of the Situation

published Aug 28, 2019
2 min read

Insolvency and Debt

Insolvency, for an individual or a company, is a case when the value of their assets is less than the money they owe, and they cannot pay their debts on time. In the case of insolvency, the entity that owes money is known as the debtor, whereas those who are owed money are known as creditors. The different types of insolvency include personal insolvency and corporate insolvency. The first being of an individual occurrence, while the latter relates to businesses and companies.

Any company that falls under insolvency under Section 123 of the Insolvency Act 1986 is unable to pay bills by their due time and gains more liabilities than assets on their balance sheets. When such a situation arises, any company’s directors must follow a particular set of rules to avoid personal backlash further down the line.

In the UK, Insolvency Practitioners are to be hired and appointed as per the law to perform specific duties during formal insolvency cases. They are tasked with sorting and helping individual cases, or corporate insolvency cases with sole owners, multiple owners, partnerships of limited liability and limited companies.

They can be hired to provide guidance and advice for personal finances, or under a formal role recognised by the law. A London Insolvency Practitioner would be an accountant or lawyer by profession who holds a license recognised by UK law.

In insolvency cases, the priority is to distribute funds correctly between different creditors. They’re to receive an equal percentage of what they are owed. All the laws regarding insolvency should be followed. IPs are not only hired by individuals and companies but also by banks to investigate and review a business’s credibility. They are also utilised to provide a review by a company or individual going under insolvency before the formal process begins.

Company Insolvency is a difficult point in a company’s life, but it does not mean that the company has failed. An insolvent company can survive, and it could be that the company still generates viable business but cannot pay its bills because they have fallen on hard times by third parties.

Buy Yourself Some Time

What you would need to survive insolvency are time and determination. Always contact your creditors immediately and inform them of the circumstances, further options can be explored afterwards. Time is what you would need most, and forming an informal agreement is the best option, which is mostly 12 months long.

Invest Money by Personal Means

It is common to invest own money into a business or company when it becomes insolvent. If you do not have such funds or savings, you could always go for loans. It may seem like an easy strategy, but it is quite risky. You could also mortgage or sell company shares within family and friends for cash.

Form an Informal Agreement or a CVA

If your company is falling under insolvency and you cannot pay your creditors by any means, then attempt to form an informal agreement with creditors. An informal repayment agreement is a contract between your company and the creditors. It may not be an easy task, but you might be surprised by how most creditors are more willing to give time rather than take immediate legal action.

You could also form a Voluntary Company Arrangement (CVA). This type of agreement is formal and binding. It binds the creditors and debtors for a more extended period (usually five years) for the payment of the debt. The trading and investment of the company are halted until the CVA is agreed to by at least 75% of the creditors of the company.

Alternate Finance Options

Some companies or businesses can face stunted growth due to low cash flow. On balance sheets, having a small amount of debt looks good, but it could also mean that you are low on cash to pay employees, suppliers and other parties.

Getting a loan may help your company if you have a small debt and get you out of a tricky situation. Alternate finance providers are a good option if the amount of debt is quite significant. Mortgaging or selling shares could affect your ownership of the business so you should explore other options before choosing to sell or mortgage.

Hold Fast to Good Customers

Customers are never the same. As a business owner, you will face different types of customers with prominent differences. There may be the customer who is late with payments and is very demanding, but then there may also be a customer who always pays on time but doesn’t create unnecessary work.

In the case of insolvency, it is best to focus on your reliable and steadfast customers. These customers may be your ticket out of a sticky situation due to generating a steady cash flow. It would also be better not to engage new customers since you will be unaware of their conduct. Engaging with existing customers only could reduce sales, but it would undoubtedly help cash flow and investment.

Restructure and Reorganise

The structure of a business may be the culprit behind insolvency too. Restructuring and reorganising your business will help bring a change. The reorganisation of a company from the lowest to the highest level could solve many internal issues that hinder the progress of your business.

Handover to an Insolvency Practitioner

To survive solvency, you could also obtain an administration order according to which you would have to hand over all finances and control to an administrator, i.e. an insolvency practitioner. You can easily find a London insolvency practitioner who will then act as an administrator. During this time, your creditors cannot take legal action. The administrator will survey and review the company, creating proposals for the survival of the company. If all hope is lost, then they would attempt to sell off the business to pay the creditors the full amount owed to them.