Warning Signs of Insolvency

Spotting early signs of insolvency:

1. Concerns about whether staff wages and salaries can be paid on time.
2. Company owners not taking regular income.
3. Company owners using their own funds to help the company pay invoices and meet debt payments.
4. Using personal credit cards to fund business expenses.
5. Being unable to pay tax due to HMRC.
6. Insufficient bank balance or unplanned overdrawn balance.

 

Insolvency. What to Do?

If the company is in this situation because it is generating insufficient funds to make payments then the directors should take advice from a specialist insolvency practitioner. If the company is viable an insolvency practitioner may be able to implement procedures to turn the company around.

There are two types of insolvency, cash flow insolvency and balance sheet insolvency. The first, cash flow insolvency, is when a company does not have sufficient cash to pay debts as they fall due. The second type of insolvency, balance sheet insolvency, is when total debt is greater than the total assets of the company.

It is important that directors of companies act quickly if they know that the company is at risk of becoming insolvent. If a situation deteriorates to the point that a company is forced into liquidation by its creditors, the liquidators will be required to examine how the directors acted.

A company is not permitted to take any action that can be to the detriment of its creditors, if this is found to have been the case, then the directors can be charged with wrongful or fraudulent trading. If wrongful or fraudulent trading is proven the directors can be liable for some or all of the company’s debts.

If the company directors sense that the company is at risk, the earlier they act the more alternatives are available. If action is taken early enough a company can be saved and liquidation can be avoided.

Insolvency practitioners do not only liquidate failed companies, they also have the power to implement procedures which are legally binding on creditors and can buy time to rescue the company.

 

Company Rescue

Options for rescuing a company can include:

Company voluntary arrangement (CVA)

Company voluntary arrangements are special procedures which only insolvency practitioners can implement. The CVA process includes a moratorium period which prevents unsecured creditors from taking action and gives the insolvency practitioner time to prepare proposals to restructure the debts while the company continues trading as normal. See more about company voluntary arrangements.

Company Administration

The insolvency practitioner will look at all aspects of the company to see whether part or all of the company is viable. Where necessary part of the company or its assets may be sold to repay creditors as much as possible. See more about company administration.

 

Company Failure

If the directors leave the situation worsening, eventually one of the creditors may lose faith in the company’s ability to pay and could issue a winding up petition. Once a petition has been filed the options for turning the company around are reduced, and it also becomes a race against time to prevent the courts issuing a winding up order.

Once a winding up petition is placed other creditors may be alerted, for example we provide a free monitoring service which monitors your customers and sends an email alert whenever adverse information is filed so you can immediately stop further credit.

 

See also corporate insolvency:

Administration

Creditors' Voluntary Liquidation (CVL)

Winding Up Petitions and Winding Up Orders

Members’ Voluntary Liquidation (MVL)

Receivership

Company Voluntary Arrangement (CVA)

Liquidation

Company Insolvency Procedures

Warning Signs of Insolvency