Overview of insolvency

A company is insolvent when it cannot pay its debts and its assets are less than its debts. Unless you can find a way to pay off those debts pretty quickly then the insolvency may lead to your company being wound up. 

Insolvency: what happens next?

If your company becomes insolvent, there are a number of options open to you. The actions you take will depend largely on how much trouble your company is in and how aggressively your creditors are chasing their cash. Some procedures can be initiated by you, others by your creditors or the court. 

Informal arrangement

Before formal procedures begin, a company might want to get in touch with its creditors, tell them about the situation and try to reach an agreement about how it is going to pay off its debts.  

Company voluntary agreement

A company voluntary agreement is similar to an informal arrangement but a registered Insolvency Practitioner (IP) - who specialises in advising failing companies - is brought in to negotiate with the creditors. The IP will call a creditors’ meeting to present your repayment plan and if 75% (by value) of creditors vote for the arrangement, it is binding on all parties. Once agreement is reached, it is formalised by the court.  

Administration

A company can apply to the court to suspend the need for it to pay its creditors for a certain amount of time. During this period, the company will be administered by an IP whose priority will be to rescue the company if possible. If this isn’t feasible, the IP must try and get as good a deal for the creditors as possible, which may entail selling off the business, or its assets, to pay off the company’s debts. 

Administrative receivership

An administrative receiver is an insolvency practitioner who a secured creditor can ask to be appointed to claw back the money owed to them by a limited company. The receiver takes control of the business and may sell the assets off, or sell the entire business as a going concern to pay off the secured creditor and cover the costs of the receivership. 

Liquidation

This is where the assets of a company are sold off to try and pay off creditors. There are various types of liquidation:

• Compulsory liquidation. In this situation, a creditor or a group of creditors who are owed more than £750 can go to court to apply for a winding up order. If successful this means the official receiver is appointed to wind up the business which owes the money and must then take steps to sell off its assets to pay the creditors.
• Creditors' voluntary liquidation. A director can propose a creditors' voluntary liquidation if a company becomes unable to pay its debts and no arrangement or period of administration is likely to save it. The company must pass a resolution that the company cannot continue and then call a meeting of the creditors. The creditors will appoint a liquidator who will carry out the winding up of the company.
• Members' voluntary liquidation. In this situation, the company has enough assets to cover its liabilities but the shareholders decide to put the company into liquidation anyway, often because they are not confident of the longer business’s future prospect and opt to cut their losses.

Directors’ duties

If a company is facing insolvent, its directors have a duty to decide early on whether the company should continue to trade. If you’re company is having financial problems, you need to be sure the company has reasonable prospects of avoiding liquidation, before taking the decision to continue trading.

If you get the decision to stop trading wrong, you can be found personally liable for wrongful trading (trading while the company is insolvent), if the company goes into liquidation. You can also be held personally liable for any personal guarantees made and criminally and personally liable for fraudulent trading, deceiving creditors, if the company goes into liquidation. Make sure therefore, that you get legal advice early.