What are the options if a company is facing insolvency?

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Insolvency is something no business owner or company director wants to have to deal with.

But it’s unfortunately a reality for many businesses and it’s always better to understand what can be done to salvage the company before having to resort to liquidation. In this article, we’re going to give you some of the options that are available if your company is faced with insolvency.

What are the Main Ways to Deal with Insolvency?

You have three main options available in case your company finds itself in a situation where it can’t pay its debts. The first step should be to contact your creditors to see if you can work out an informal agreement. You can also take things a step further and enter a company voluntary arrangement with your creditors. You can also protect yourself from creditors’ actions and put your company under administration. That will allow the company to either continue trading or be sold to a new owner.

If all else fails, then you’ll have to consider liquidating your company’s assets to repay your creditors and close the company.

Can Action be Taken Against My Company?

If your company is insolvent, there are a few things your creditors can do to try and get their funds back. They can issue a statutory demand or winding up petition against your company. Once this is done, there are a few things that can be done to help the company. 

If your company is in serious debt and receiving creditor threats, it would be wise to seek professional advice from a qualified professional. One example can be seen through Company Rescue who actually offer free advice on their website through the hundreds of guides and case studies available which will help you figure out what steps to take.

Once you have developed your understanding of insolvency, you can then reach out to the company.

They will be able to give you information on what you can do to prevent compulsory liquidation and deal with your creditors. For instance, a compulsory liquidation order can be stopped, which will allow you to take action on your own, whether that is putting the company under administration or entering a company voluntary arrangement.

What Steps will Allow the Company to Continue Trading?

One of the best things you can do if you want to prevent legal action is to get into an informal agreement with your creditors as soon as possible. This is the best way to prevent issues from escalating and is the right recourse when you’re experiencing minor or temporary difficulties or when there are no imminent threats of legal action from your creditors.

You should contact your creditors and strike an agreement as soon as you notice signs that you may be on the way to insolvency. But make sure that you understand what your new repayment plan will entail as well as any additional costs or interest that might have to be paid. Note that these types of agreements are not legally binding and can be withdrawn at any time by either party.  So you must make sure that any repayment plan is achievable and realistic.

Another option is to enter a CVA, or Company Voluntary Arrangement. Unlike informal agreements, CVAs are actually legally binding. They allow you to agree to repay all or part of your debt to your creditors according to set terms.   The unsecured creditors need to vote by a majority of 75% by value for the proposal.  This will allow the company to keep operating while repaying its debt. 

Then there is putting your company into administration. In this case, you company will be handed over to an insolvency practitioner which will act as the administrator. One of the main advantages of putting your company under administration is that it protects your company from legal action from your creditors; they can’t get an order against you or ask for compulsory liquidation unless they have court permission.

The administrator will then draw up proposals to get the company back to viability, enter a CVA with the company’s creditors and realise some of the company’s assets to repay creditors or sell the business completely.  

The insolvency practitioner will need to be satisfied that putting the company into administration will mean a “better result” than a liquidation as is required by the Insolvency Act 1986

What if I Need to Close the Company?

Liquidation will legally terminate, or “wind up” your limited company. The company will be erased from the Companies House directory and will effectively cease to exist. Note that both solvent and insolvent companies can be liquidated at any time by its directors.

If the company happens to be insolvent, this can be done through a compulsory liquidation or a CVL (creditors voluntary liquidation). If the company is still solvent, it can be done through a members’ voluntary liquidation.

Note that directors cannot liquidate the company themselves and that the process will be handled by a liquidator, which will either be a Licensed Insolvency Practitioner or the Official Receiver. They will be in charge of ceasing the company’s operations, making employees redundant, collecting any monies owed to the company, selling assets, and redistributing funds to creditors.

While insolvency isn’t easy for everybody, there are plenty of things that can be done to prevent the worst. Make sure that you seek professional advice and act as soon as possible if you want to prevent legal action and allow your business to recover.