Corporate Insolvency – Know Where You Stand

Corporate insolvency is difficult to deal with for everyone involved. Employees are unsettled and worry about their jobs, while directors suffer stress steering the company to recovery or placing the business in the hands of a liquidator.

As with any business decision, the first step in dealing with debt is taking an honest view of the facts. Then take advice from qualified professionals and act quickly and decisively to find a solution.

What is insolvency?

There are subtle but important differences between the broad definition of insolvency — an inability to repay your debts — and the legal definition under the Insolvency Act 1986.

A company can experience short-term debt problems, but continue to trade and turn around the business to a stable position.

However, if a company is legally insolvent, the directors must cease trading — continuing to trade while in corporate insolvency can lead to investigation by the government’s Insolvency Service.

The directors might face a ban from any involvement in running a company for up to 15 years.

Generally, three indicators show if a company is insolvent:

• If a company cannot repay debts as they fall due - this is sometimes termed cash flow insolvency

• If a company cannot pay a debt of £750 or more within three weeks of receiving a statutory demand for payment by a creditor

• If the value of a company’s assets is lower than the total debts - sometimes called balance sheet insolvency

Conducting an internet search for “corporate insolvency wiki” will take you to the Wikipedia page that explains more about insolvency in UK law, which is one of many insolvency information sources online.

The Insolvency Service web site at www.bis.gov.uk/insolvency, is another independent and comprehensive resource.

Who can help?

While it can be helpful to ask for initial advice from your company’s accountants or legal advisers, the complexities of insolvency — and the harmful consequences of taking the wrong course of action — mean that your best source of advice is often a qualified insolvency practitioner.

Insolvency practitioners, either individually or as part of a business recovery consultancy, can provide specific advice that may not always be obvious, like the requirement that companies in corporate insolvency register their situation with the London Gazette.

They also have the legal authority to manage corporate insolvency like Company Voluntary Arrangement or liquidation. 

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