Understanding Company Insolvency

Dealing with company insolvency can be difficult, whether you are the director, a partner, or an employee of a company.

It is a time when you will be confronted with difficult and daunting decisions, and there is by no means a guarantee of a happy resolution at the end of it.
In some cases, a business may be turned around, or bought out, or otherwise piloted to an eventual recovery. In others, liquidation may be the only viable option, resulting in the ultimate dissolution of the company and the loss of jobs.

What is important is to equip yourself with all the facts, seek professional advice and take decisive and informed actions that best suit the reality of the circumstances — even if in the final analysis that means handing control of the business over to an administrator or a liquidator. 

What is insolvency and what are the causes?

Company insolvency is, simply, the situation that arises when a business is unable to repay its debts. There might be any number of contributory factors, but most often a temporary or ongoing constriction of cash flow has left the company in a position where its available cash is insufficient to repay monthly outgoings to its creditors (whether that be banks or other lenders, or vendors and suppliers with which the company has a line of credit).

Cash flow problems, similarly, can have many root causes ranging from overall economic issues, reduced income from direct customers (for example seasonal variation in product demand), to defaulted or late payments from the company’s own debtors.

The legal definition of insolvency is more exacting, and can include:

• cash flow insolvency — where it can be proved to the satisfaction of a court that a firm is not capable of repaying its debts, or

• balance sheet insolvency — where it can be shown that a company’s liabilities are greater than the value of its total assets.

It is possible for a company to be insolvent under only one of these measures — for example a business may be in a position of cash flow insolvency while still holding a positive overall net value comprised of unrealized assets.

Where can I find help and advice about insolvency?

UK company insolvency rules are readily available online, from sources such as the government’s Insolvency Service (www.bis.gov.uk/insolvency) and Companies House (www.companieshouse.gov.uk). These sites offer associated services such as company insolvency search for disqualified directors, Official Receivers or Insolvency Practitioners. Company insolvency register searches can be conducted via Companies House, which clearly displays the status of companies in liquidation on their live register.

If your company is experiencing difficulties in repaying debts, it is highly recommended that you seek the advice of a qualified Insolvency Practitioner, many of whom provide specialist business recovery services. An Insolvency Practitioner can review your company’s financial position, and provide impartial and legally sound advice as to the best course of action.

Company insolvency can be a serious matter, but it is important to remember that professional help and advice is out there.

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