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How to deal with company insolvency

No company wants to be insolvent, but running a business can be tough, and sometimes things just don’t work out. Don’t give up though – company insolvency doesn’t mean the end of your career, or even the end of your business. There are several options you can consider.

What is insolvency?

Insolvency refers to a financial situation wherein a company cannot pay its bills or liabilities. This is why businesses should always keep a close eye on their solvency as it helps monitor the risk of failure. According to the Insolvency Act 1986, which outlines how insolvent businesses must act, a business’s insolvency is measured in the following way:

  • Cash flow: A company is unable to pay its debts when due

  • Balance sheet: A company’s assets are valued at less than its liabilities

  • Statutory demand: A company has received a written demand for an unpaid sum after 3 weeks of being due

If you are found to be insolvent, the company is placed on the insolvency register, a public record of companies available online. Your details will be kept active for three months after your case has cleared.

Are bankruptcy and insolvency the same thing?

Yes, bankruptcy and insolvency describe the same issue, but within different contexts.

Insolvency is a business’s status as unable to pay bills, but bankruptcy is the legal term given to companies or individuals which are declared bankrupt by court. As such, it is possible to be insolvent but not officially bankrupt.

It’s not always easy to know if a company is insolvent. For example, a business may, from time to time, fall behind on paying suppliers or bills. This isn’t a good sign, but it doesn’t mean failure is inevitable. In order to be legally declared bankrupt, you must owe a minimum of £5,000, with no clear ability to cover this debt.

You should consult a professional to help companies better understand your options and financial issues if you believe you are facing bankruptcy and insolvency, such as:

  • Citizens Advice Bureau

  • Solicitor

  • Accountants

  • Debt advice centre

My company has fallen into insolvency – now what?

The following routes should be explored:

  • Negotiate with your creditors

  • Chase up debtors for immediate payment

  • Sell off assets if possible

The above steps can also be put into action if you suspect insolvency is likely, and may help buy enough time to identify and correct the cause. If you are certain the business is insolvent, further options are available:

Enter a company voluntary arrangement (CVA)

This is when a company enters a legally binding agreement to pay back their debts over time. If 75% (by debt value) of creditors agree, then the company can continue trading while repaying its debts. A CVA doesn’t have to be made known to customers, so your company can continue trading without raising any alarm bells for incoming clients.

Put the company into administration

Going into administration means your company has the potential to continue, even after falling into insolvency. An administrator who is a professional insolvency practitioner, acting in line with the insolvency act, must agree to take control of your company and its assets, with the company footing the fees for this.

Going into administration, unlike a CVA, is a public act and must be made known to Companies House and published in The Gazette (the official public record of insolvency notices). You will also appear on the insolvency register. An administrator may enter into a CVA anyway, sell parts of your assets, sell the company on, or close your company completely. The administrator will be in control of all aspects of the business during their appointment, including any contracts you may have, and the employment/redundancy of staff.

During administration, you cannot face legal action, but this protection ends once the administration contract is over, usually after a year.

Wind up the company

Winding up a company means you go into liquidation. There must be a public notice of this act, as well as a court hearing. If the court issues a winding-up order, the company’s assets will be put up for sale in order to pay off debts. Winding up results in the end of a company, and it will be struck off the Companies House register.

Winding up a company is an option open to any business owner, even if a company is in no danger of insolvency, for example, if the director wants to retire. In this case, where it is used as an exit strategy, it is known as a members’ voluntary liquidation, while liquidation due to company insolvency is known as a compulsory liquidation or creditors’ voluntary liquidation.

After closing a company and meeting its debts, a director can start a new company with the same team, often referred to as a phoenix company. The company may need to take extra steps to get up and running, such as HMRC requiring a security deposit based on your previous company’s history of debt. You may also wish to wait until your entry on the insolvency register clears.

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GoCardless Ltd., Sutton Yard, 65 Goswell Road, London, EC1V 7EN, United Kingdom

GoCardless (company registration number 07495895) is authorised by the Financial Conduct Authority under the Payment Services Regulations 2017, registration number 597190, for the provision of payment services. GoCardless SAS (23-25 Avenue Mac-Mahon, Paris, 75017, France), an affiliate of GoCardless Ltd (company registration number 834 422 180, R.C.S. PARIS), is authorised by the ACPR (French Prudential Supervision and Resolution Authority), Bank Code (CIB) 17118, for the provision of payment services.