Whether a Sole Trader or a Limited Entity, a business is said to be insolvent if it is unable to pay its’ bills as and when they fall due or if the accounts show liabilities outweighing the assets. If a business is cash flow insolvent or balance sheet insolvent it can be an offence to continue trading but this doesn’t necessarily mean the end of your business.
Sometimes with experienced help a business can be turned around by restructuring or through creative financing solutions that will enable you to trade out of a temporary crisis but even if all seems lost there are a number of options available to business owners.
This procedure allows a financially troubled company to reach a binding agreement with its creditors about payment of all, or part of, its debts over an agreed period of time. A CVA can be proposed by the directors, the Liquidator or the administrator, but not by creditors or shareholders. A report on the proposal is submitted to the court, but otherwise it is not usually involved.
Once the CVA has been carried out, the company’s liability to its creditors (who had notice of the meeting of creditors) is cleared. The company can continue trading during the CVA and afterwards. A CVA can be set up when a company is in liquidation or in an administration, as well as at any other time.
This procedure allows an insolvent company to put itself into liquidation. It is started by the directors (not the creditors) calling a meeting of shareholders who agree to wind up the company. The shareholders may nominate an IP to act as Liquidator, but the final choice is made by the creditors. The procedure does not usually involve the court.
This procedure allows a solvent company to put itself into liquidation where, for example, a family business is sold off or the purposes of the company have come to an end. The members (shareholders) appoint their own choice of IP as a Liquidator. Creditors do not have to be notified. The company must be able to pay its debts in twelve months. If the Liquidator considers that this will not be possible, a meeting of creditors must be held and the liquidation becomes a creditors’ voluntary liquidation.
This procedure is begun by a court order and can be used to save a company facing financial problems; to reach an arrangement with creditors or approval of a company voluntary arrangement; or to achieve a better realisation of assets than in a liquidation. A petition can be presented by the company, its directors or its creditors.
The administrator (an IP) puts forward proposals for consideration by the creditors to restore the company’s viability, to come to an arrangement with the creditors, sell the business as a going concern or obtain a better realisation of the assets in a liquidation.
This is the result of a holder of a floating charge (usually a bank) appointing an administrative receiver (an IP) to recover money (secured by a charge) owed to it. The court is not usually involved. A company in administrative receivership is also said to be “in receivership”.
The administrative receiver’s task is to recover sufficient money to pay (i) his or her costs, (ii) the preferential creditors and (iii) the floating charge holder’s debt. An administrative receiver does not make payments to unsecured creditors.
If your company has fallen on financial difficulties and you have no plans to continue to trade, in the absence of any winding up petition members may elect to deal with the matter under Section 1003 of The Companies House Act 2006. This is a simple procedure, whereby we are required to notify all creditors of the position and provide a copy of the application made.