The prospect of insolvency isn’t something any business owner ever wants to encounter, but sadly it’s one that cannot be ignored. Should you believe your business to be facing insolvency, ignoring your problems is only going to make them worse, and put your brand in jeopardy. Here is some advice from Jamie Playford, insolvency specialist on what to do if you find your company facing insolvency.
What is Insolvency?
A company is classed as insolvent under British law if it is unable to repay its debts to its lenders. This inability to repay could be a result of cash flow. If your company is, or will be, unable to repay financial debts when bills are due, or as a result of having an unbalanced amount of assets and liabilities. Alternatively, a business can also be classed as insolvent if a lender, owed more than £750 has delivered a formal demand to your office and not received payment within three weeks, or if a judge’s demands or court order is not met.
Either way, there are a number of reasons for your business being classed as insolvent, and not all of them will be glaringly obvious to you or your financial team. Be sure to stay aware of any lending or financial agreements your business may be engaging in, and keep lines of communication with your creditors and financial team honest and open. Insolvency and financial difficulty are far easier to deal with if you know about it in advance.
If your business has been classified as insolvent, then it is important to know the possible financial options and future of your company as soon as possible. For this reason, it is important to create and maintain a good professional relationship with your appointed insolvency practitioner. They will be well educated and informed on all of the standard procedures available to you should you need them, and will be on hand to answer any necessary queries you may have throughout the procedure.
Know your options:
When faced with insolvency, there are a few options available to you and your company. Each of these are dependent on a number of factors that your insolvency practitioner will be able to explain to you, but it is important to be aware of what they may entail before procedures begin.
After it has been established that your business has become insolvent, the options available to you will be set out and explained. One of the more well-known procedures is administration, which can be established through a court order or by personally filing a notice in court. The desired outcome of a company going into administration, is essentially to do all that is possible to save the company. However, if this is not possible, the process can also work towards achieving the best possible outcomes for preferred, if not all, creditors. This is usually achieved through the process of selling the company and dividing the proceeds amongst lenders.
2) Administrative Receivership
Within administrative receivership, an individual or organisation with a floating charge pre dating September 2003, most commonly a bank sets up a manager to recoup the maximum amount of financial gain from the sale of the company’s assets, in order to achieve the best possible repayment for secure lenders.
In the case of non-secure creditors, an administrative receiver has no legal obligation to repay these lenders. This could in fact be more detrimental to a company as it could necessitate the liquidation and sale of a higher number of the company’s assets.
3) Company Voluntary Arrangement
Another option available to you and your business is a company voluntary arrangement. Loosely explained, this involves a legally binding agreement being set up between creditors and your business, aiming to either reduce or reschedule repayments. These are typically set up to allow your company adequate chance to financially recover, and can be used in conjunction with other financial procedures.
4) Scheme of Arrangement
An agreement very similar to a Company Voluntary Arrangement, a Scheme of Arrangement is usually put in place to help much larger companies. They are appointed by the court and once again are put in place to reorganise and re-schedule the repayment of debts to ensure that the best possible financial outcomes for both creditors and businesses are achieved.
Another option available to a company facing insolvency is liquidation, where by a company is ended and the cash value of its assets is distributed. The behavior or conduct of business directors will be taken into account during this process, and money will be distributed amongst either shareholders or lenders.
Order of payment
When it comes to dividing the value of your insolvent company amongst lenders and creditors, and determining who gets paid first, there is an order of hierarchy to be followed. Ensuring that all debts are correctly repaid, and that no further financial difficulties are incurred throughout the insolvency process. When repaying creditors, cash should be distributed in the following order.
- Secured creditors claims.
- Expenses incurred as a result of the insolvency or liquidation process.
- Insolvency practitioner’s charges and fees.
- Preferential creditors’ claims, including those made my employees.
- Prescribed part, an amount set aside for non-secure creditors, asset dependent and up to the value of £600,000.
- Secured creditors.
- Unsecured creditors.
- Shareholders, although it is very unlikely that these will apply otherwise the company would be unlikely to face insolvency in the first place.
When faced with insolvency, it is understandable to automatically want to hide away and ignore your impending financial problems, but this undoubtedly the worst way of reacting. By staying well informed, and communicating with your company and creditors, you’ll be able to minimise the amount of damage caused by your company becoming insolvent. At the very least ensuring your creditors are adequately repaid, if you are not able to save your company itself.