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When is a Business Insolvent

when is a business insolvent cash flow-01

Insolvent companies are threatened by closure. Furthermore, directors that continue trading while a company is insolvent can be accused of wrongful trading and may be banned from barred from setting up or running another company for a period of up to 15 years.

Insolvent companies are threatened by closure. Furthermore, directors that continue trading while a company is insolvent can be accused of wrongful trading and may be banned from barred from setting up or running another company for a period of up to 15 years.

When the stakes are high, it is critical that directors know exactly when a company is insolvent, so they can cease trading and take corrective action.

A company is insolvent when it can’t pay its debts. This can mean that it can’t pay bills as and when they fall due or when the total liabilities outweigh total assets on a balance sheet.

Regularly testing a business’s cashflow and balance sheet is a good idea if you believe a company is teetering on the edge of insolvency. If you need help with this, speak to a professional today.

When a company is insolvent, you have a legal responsibility to put creditor interests before the interests of the firm. Failure to do this could result in personal liability for yourself and other directors.

Your options when a company is insolvent

Whether you want to continue trading or close down a company, there are options when a company is insolvent.

The first thing you should do, is seek professional advice. A variety of organisations and charities can explain and evaluate the various options for your company. They include:

  • Citizens Advice Bureau
  • Debt charities
  • Licensed insolvency practitioners

If you want to continue trading

Directors have three options if they want to continue trading.

Reach an informal deal with creditors

If your business is struggling with small debts to one or two creditors that it has good relations with, then you may be able to reach an informal deal with creditors to avert liquidation and/or bankruptcy.

However, because these deals are not legally binding, there is nothing to stop creditors backing out of the deal and petitioning to ‘wind up’ your company.

Apply for a Creditor Voluntary Arrangement (CVA)

A CVA is a formal agreement between an insolvent company and its creditors. The insolvent company will offer to pay creditors over a fixed period. And if 75% of creditors agree, the insolvent company will be able to carry on trading.

A CVA has to be drawn up by a licensed insolvency practitioner, who will create an arrangement covering the amount of debt to be paid and a payment plan. They will also send it to creditors for approval.

Put the company into administration

Putting a company into administration offers some temporary respite from creditor action. Administration blocks any creditor winding up petitions, giving a business time to put a restructuring plan in place or selling property to allow the business to continue.

An insolvency practitioner will act as a company administrator and will take control of the business to handle restructuring.

If you want to close the company

For some businesses, carrying on may just be prolonging an inevitable failure. Some directors prefer to cut their losses and close an insolvent company.

Creditors’ Voluntary Liquidation

A Creditors’ Voluntary Liquidation is one of the most popular ways of closing an insolvent company. It involves hiring an insolvency practitioner to sell company assets, pay company creditors, deal with any ongoing affairs and close the company.

Any company debts that are still outstanding will usually be written off as losses. But if a director has given a personal guarantee, for example for a bank loan, this will need to be paid by the individual.

You and any creditors that are owed more than £750 can also apply to a court for compulsory liquidation.

Is your business insolvent? Get free professional help today from www.umbrella.uk

Call: 0800 611 8888.