Company insolvency is more common than you might think. According to data released by the Insolvency Service, there were over 1,500 registered company insolvencies in England and Wales in February 2022.
When companies find themselves in this unfortunate situation, they have to make decisions regarding how they’re going to resolve it. And with the number of people entering into dangerous repayment plans at an all-time high, it’s more important than ever that the decision made is the right one.
To that end, we’ve written this guide on insolvency. We’ll discuss what it is and what options are available to an insolvent company in the UK.
What is insolvency?
Simply put, a company is “insolvent” when it can’t pay its debts. This can happen in a couple of ways, namely:
- The company has more liabilities than assets on its balance sheet
- The company isn’t able to pay its bills when they’re due
The biggest risk for insolvent companies is that they have to close down. Yet, there are some options available that, if taken, may be able to prevent this from happening.
If your company has financial problems, the first thing to do is get advice from experts. Speak to qualified accountants, financial advisors, or insolvency and restructuring solicitors who can give you accurate advice.
What options are available?
When a company is unable to pay its debts, the creditor – the party to whom the company owes money – will take action to recover the debt. This could mean getting court judgement or issuing a statutory demand.
But if they aren’t able to recover their money by either of these two methods, they will likely apply to “wind the company up” – that is, close it down.
Before this worst-case scenario takes place, companies have a number of options available to them that may prevent the necessity of them winding up. So, what are they?
Informal agreements: If the debt is short term and the creditor is lenient, they may agree for the company to repay them on an unofficial basis. This option isn’t legally binding, which also means that the creditor can withdraw it at any time.
Company voluntary agreements: Often abbreviated to CVA, this option is a legally binding agreement for the company to repay its debt to the creditor over an agreed time period. The company can continue trading during the CVA period and after.
Administration: In this scenario, an insolvency practitioner becomes the administrator of the company. While they are in charge, the creditor is unable to take action to recover their debts or wind the company up without the permission of the court.