What is insolvency?
The term insolvency is one that can be used for both companies and individuals but is more generally used to describe companies. A company becomes insolvent when its debts outweigh its assets or when a company can no longer pay its bills.
There are two ways to test how solvent your company is, first to examine your balance sheet to see if your company debts outweigh its assets, and secondly, by assessing your cash flow and whether you can pay your bills on time.
If you think your business is becoming insolvent you should seek advice from a licensed insolvency practitioner. They can guide you and it doesn’t necessarily mean the end of your business if you tackle the issue head-on straight away.
An insolvency practitioner can be appointed by a company’s creditors, the court or its directors. The person initiating the insolvency process will be responsible for the insolvency fees.
Administration is a process whereby an administrator takes control of the company for a period of time in order to assess its viability and decide what the future options are. This gives the company a breathing period and protection from legal action from its creditors. The process can result in the company being restructured, sold or liquidated.
Liquidation is where a company is closed and all of its assets are liquidated in order to pay its creditors. This can be in the form of Creditor’s Voluntary Liquidation which the directors do or a compulsory liquidation which the company is forced into.
What is an insolvency practitioner?
An insolvency practitioner is someone who is licensed and authorised to act on behalf of an insolvent person or company. They will have passed insolvency examinations and have experience in doing insolvency work and they are monitored by regulators to ensure standards are met.
An insolvency practitioner can undertake bankruptcy, liquidation, administration, voluntary arrangements and receiverships.
The insolvency practitioner’s role varies depending on the role that they are undertaking but they will provide advice and guidance to insolvent businesses. They also provide negotiation services with creditors; they will seek valuations of assets and they can assist in the disposal of those assets. They are tasked with finding the best solution for the business’ creditors and getting the most for the creditors out of the business.
What is the Insolvency Service?
The Insolvency Service is a government agency that is sponsored by the Department for Business, Energy and Industrial Strategy. They provide services to those that are in financial distress, tackling financial wrongdoing and trying to maximise returns to creditors.
They look after insolvency matters for individuals including bankruptcy and debt relief orders. They also assist in the insolvency process for businesses which includes:
- Examining companies in liquidation and reports on director misconduct.
- Investigating active companies and where action is needed to wind them up and disqualify directors if misconduct is found.
- Can act as liquidator or trustee if an insolvency practitioner is not appointed.
- Disqualify directors when found unfit.
- Investigate and prosecute any breaches found of company or insolvency legislation and other criminal offences.
They also provide impartial information on insolvency and redundancy as well as advising BEIS ministers and other departments on these subjects. They also publish an Individual Insolvency Register, a list of insolvency practitioners, and register of disqualified company directors.
What is involved in insolvency?
The service that an insolvency practitioner provides is not just about closing down businesses and liquidating assets to pay creditors, they can also offer businesses support through showing a variety of options that are available to them that could result in saving the business.
When a business is first seeing the signs of insolvency they should seek advice from an insolvency practitioner who can:
- Make an initial assessment of the business and its circumstances.
- Outline suggested routes available to take such as administration, liquidation, financing or sale of the business.
- They can help you in putting the chosen route of insolvency into motion and run this smoothly and correctly within legislation.
- They will take over the control of your business and the communication with your creditors which can take a lot of pressure and stress from you.
- They will ensure that they do the best for your creditors and employees.
- They will investigate what was taken place and make a report to the Insolvency Service which will show whether there were any wrongdoings in the business that resulted in the business becoming insolvent. This will help clear directors of any wrongdoings and allow them to continue as a director of another company or a new company.
What might the outcomes be from seeking advice from an insolvency practitioner?
There are many routes that your business could take to become more solvent or resolve your insolvency which include:
- Making an informal agreement with creditors to pay the debt on new terms in order to keep the business afloat. This normally applies to businesses who have short-term financial difficulties and legal action is not imminent.
- Company voluntary agreement is a binding agreement with the company’s creditors for all or part of the debts over an agreed period.
- Administration where the insolvency practitioner becomes the company’s administrator and will seek out the best solution for the creditors which includes restructuring the company, agreeing to a company voluntary agreement, selling the business, or liquidating it. This requires the creditors’ agreement to progress the administrator’s plans.
- Administrative receivership is initiated by an organisation that has a floating charge against the business which is normally a bank and they do this to recover the money owed to them.
- Closing, winding up or liquidating the business is often the final option when the company cannot be saved. This will mean that it will cease trading and will be removed from the Companies House register. It will then go through either a creditors voluntary liquidation or compulsory liquidation where assets will be sold, and creditors will be paid.
How long does insolvency last?
The length of time it takes to go through the insolvency process will vary depending on the circumstances of the business and the route it takes. The typical timescales for each route are:
- Liquidation can take a few weeks to go into, but the completion time will vary depending on the assets involved and how long it will take to sell them.
- Administration can be completed in any time scale from a few weeks to a year typically. Normally an administrator would not run the company for longer than six weeks.
- Company Voluntary Arrangement can be put together in a month and then voting needs to take place by the creditors which can take up to four weeks.
What are the business insolvency costs?
The cost of insolvency processes can vary depending on the process and the insolvency practitioner. They can charge a fixed fee, an hourly rate or a percentage of the amount raised. For example, administration can be charged based on a percentage fee, fixed fee or a combination of both, but this will be decided by the creditor’s committee. A Creditor’s Voluntary Liquidation is one of the most common forms of liquidation and the charge is likely to be a fixed fee of around £5,000. The fee will be negotiated before liquidation is started.
Insolvency charges are normally the responsibility of the person who starts the insolvency process, however, the insolvency practitioner costs will be taken from the business’ assets before the creditors get their dividend pay-out.
What is the difference between insolvency and bankruptcy?
The difference between insolvency and bankruptcy is that bankruptcy refers to an individual and not a company. Insolvency is a broader term that includes a range of processes such as bankruptcy, administration, voluntary arrangements and receiverships. These both cover individuals and businesses. Generally, the terms insolvency is referred to more as a business term rather than something for individuals.
How are directors impacted by insolvency?
Apart from potentially losing their job and their investment into the business, directors are not necessarily adversely impacted by the company going into insolvency. It does not prevent the director from being a director at another company now or in the future unless there was evidence of them acting improperly and a Court Order was sought to ban them from being a director. A ban of this kind can last from two to 15 years.
What are the benefits of insolvency?
- Once your company has gone into liquidation there will be no more debts which mean that directors no longer and they can move on to new ventures.
- It will prevent any legal action taking place against the business and it will draw a line the business allowing the directors to move on.
- Liquidation costs are relatively low and the insolvency practitioner’s fees are taken from the sale of the business’ assets so the cost to directors is minimal.
- Although it won’t seem like it for your employees, it might be the best option for them as they will be able to claim redundancy, arrears in their salary and accrued holiday pay from the company or from the Insolvency Service if there are insufficient funds to cover this.
- Removes the pressure and stress on directors that creditors can cause as the insolvency practitioner will take over all communication with these creditors.
- It allows leases to be broken without penalty charges and any arrears owed will be claimed through the insolvency practitioner.
- Directors can take voluntary liquidation which prevents them from being forced into compulsory liquidation. This allows directors to have more control over what happens to the company and can reduce the risk of wrongful trading accusations.
- It is positive for creditors as the directors are no longer in charge who would have the shareholders’ interests first, but during insolvency, the creditors are put first by the insolvency practitioner. They will ensure that the most money will be made from the company’s assets and communication should improve with them about the repayment of the debt.
What are the disadvantages of insolvency?
Putting a company into liquidation has a lot of disadvantages as it is not a position that anyone wants to be in as it’s the last thing you would want to do, but often circumstances leave no other choice. The disadvantages are:
- Directors that have signed a personal guarantee in a financial agreement will be liable for that amount and not only will they lose their business and income, but they could also lose their home or required wealth.
- There could be accusations of wrongful trading that led to the company becoming insolvent. There will be an investigation into the circumstances to see whether any wrongdoings have occurred which may lead to directors being banned from becoming a director again for two to 15 years. This could affect the reputation of the director now and in the future.
- All company-owned assets will be sold to pay the creditors.
- Any loans made to directors will be collected as part of the liquidation process to pay the creditors. In some circumstances, arrangement might be possible to allow the repayment to be made in instalments or at a reduced rate if they are unable to repay the loan in full straight away.
- All employees will be made redundant which can be very upsetting and disruptive to all involved as they lose their income and lifestyle as well as the working relationships that they have formed over time.
How many insolvency practitioners are there in the UK?
There are over 1,700 registered and licensed insolvency practitioners in the UK, however, not all of these practitioners may be practising. This also includes some lawyers who may give advice but do not practice as insolvency practitioners, so it doesn’t accurately reflect the number of people that are available to support businesses through insolvency.