Insolvent?

Don’t panic…but that’s not to say do nothing either.

Chances are that if you’re reading this article you have identified something about your business that isn’t working right now.

By simply starting to research insolvency and restructuring you’ve taken a major step towards turning your business around. The key thing now is not to wait too long to act as acting quickly can significantly increase the number of options available to you as your business will be under less severe pressure from its creditors and will have more money left to fund a restructuring package.

Is my Company actually insolvent?

Whether you want to call it being broke, bust, bankrupt or going under, it’s useful to understand exactly what insolvent actually means. Helpfully, the Insolvency Act provides a very technical definition of insolvency which includes a number of different criteria.  The 2 most relevant criteria are:

1. That the business’s liabilities exceed the value of its assets; and

2. That the business cannot pay its debts as and when they fall due.

It is important to understand what these criteria actually mean when applied to your business.

The first criteria is commonly known as the balance sheet test or balance sheet insolvency. What this is essentially saying is that if the total amount your business owes out (in debts such as loans, taxes and supplier arrears) is higher than the total value of its assets (such as plant, vehicles, debtors and cash).

The second criteria is known as cash flow insolvency. Whilst it is much easier to understand this criteria, it is important to note that if your supplier terms are 30 days and you can’t pay until 60 days then your business is technically insolvent. This probably seems a bit of an extreme definition to most small business owners but recognising whether your business is in this situation can provide you with an early opportunity to start to turn it around.

What are my options?

Having identified that your business has a problem and accepted that you need to act quickly to solve it, chances are that you will still have a number of different options available to you.

As all businesses are unique, it is impossible to predict what options might be available without looking into your Company’s specific financial position or without understanding your objectives for the business. With this in mind, it is important that you speak to an insolvency practitioner at an early stage as they will be able to give advice tailored to you and your business. Remember, insolvency practitioners are business turnaround professionals as well as just liquidators and will work with you to find the best solution for your business.

Some of the typical options (with links to our helpful guides) are:

• CVA (or Company Voluntary Arrangement). Is a formal arrangement to repay the Company’s debts over a period of time based on what the Company can afford rather than what it owes. These usually involve making monthly payments based on cash flow for a period of up to 5 years.

• Administration. Provides immediate protection for your business whilst a formal recovery plan is put together. Typically involves an Insolvency Practitioner running the business for a short period whilst the Company is either restructured or a buyer sought.

• Pre-Pack. Is a form of Administration where the sale of the business is agreed prior to the Insolvency Practitioner formally being appointed.  This is done to protect the value of the Company’s business and assets. Pre-Packs often involve a sale back to the directors as the business is usually of most value to those already involved with it.

• CVL (or Creditors Voluntary Liquidation). Is a Liquidation instigated by the directors using an Insolvency Practitioner chosen by you. The Insolvency Practitioner will be able to advise you on your duties whilst working to get the best value for the Company’s assets. Insolvency Practitioners have a duty to get the best price for the Company’s assets so you will be able to make an offer for them (and as with pre-pack, will often be the highest bidder)

There are numerous other formal and informal options that may fit your business but these options will diminish the longer your leave it to act.