Both companies and individuals can find themselves facing insolvency, which is also known as bankruptcy. For a company, it can be called corporate insolvency and there are some differences between what happens as a company and as an individual. When your business may be facing insolvency, then licensed insolvency practitioners are the people to talk to and help you understand what your options are going forward.
What is insolvency?
Insolvency is termed as the situation where a company can no longer pay its debts – often referred to as ‘going bust’. There are two ways that a company can be determined as insolvent known as the cash flow test and the balance sheet test. In the first, if the company is unable to pay debts when they are due, it is considered insolvent. Under the second, if the value of the assets is less than the liabilities then the company is insolvent, taking into account uncertain circumstances and possible future liabilities.
To be deemed as unable to pay debts, a company may either have a court order or other judgement that has not been settled by the business. Or there is a debtor who is owned more than £750 by the company who has served a formal demand for unpaid monies and the debt hasn’t been paid for three weeks.
The insolvency procedure
A company can be placed into the insolvency procedure by the directors, the shareholders or by creditors as well as by the court. There are four main procedures that can be used to either wind down and distribute assets of the company to save it:
- A company voluntary agreement
- Going into administration
- Administrative receivership
- Liquidation – where the company is closed down
What an Insolvency Practitioner does
A company voluntary agreement or CVA is where you and your creditors agree to reduce or reschedule debt for a commitment for the company to restructure the business or to undertake a new business development strategy. This process involves the services of an Insolvency Practitioner or IP.
Administration is where the Insolvency practitioner is known as an Administrator and is appointed by creditors. Their role is to replace one or all of the company directors to rescue the company in the interests of creditors. Their aim is to achieve better results for the company and therefore its creditors while using good business judgement. Administrative receivership isn’t used much since changes in 2003 that meant it was mostly superseded by the use of an administrator.
Choosing an IP
If you are in a position to choose an Insolvency Practitioner for your business or for a debtor, then often working with someone in the local area can be beneficial. Therefore, if the business is based in East London, then an East London Insolvency Practitioner could be ideal. You can conduct face to face meetings with the IP and discuss the options or changes needed to get the business back on track. Using a local service means they may also have a unique viewpoint to local markets that can help restore the business to solvency.