Corporate insolvency is a complex and often sensitive topic that requires a careful and considered approach, both from the parties involved and legal specialists.
Whether you face insolvency as an individual or a company, the quality of the advice you receive can have a huge impact on the overall outcome of the process. Here we’ll explore what corporate insolvency is, what the signs might be that company is insolvent, and the process through which a corporate insolvency may be resolved.
What is corporate insolvency?
If a company’s liabilities and debts outweigh the value of its assets then it may be said to be insolvent. If such a situation develops, it will often mean that a company is unable to meet its debt repayment obligations. This is known as cash-flow insolvency.
A corporate insolvency situation doesn’t automatically result in a business facing liquidation. Many businesses do, in fact, recover from being insolvent and the process itself can be a catalyst for restructuring, personnel change and a new focus. To achieve this, decisive action by the company management or shareholders will need to be taken. It’s possible to return a business facing insolvency to a solid financial position, but it takes effort, difficult decisions and swift action.
What are the signs that a company may be insolvent?
Insolvency tends to creep up on companies over time as directors and senior managers are often too caught up in the everyday running of the organisation to spot the warning signs in time. They may, for instance, regard cash-flow difficulties as the result of a poorly run or inefficient department and may fail to take a broader look at company operations overall.
If a company has reached its overdraft limit and has been refused further borrowing, this requires immediate attention. If suppliers are also refusing a company credit and you don’t own enough assets to secure a short-term loan, then this is a clear indication that a company is heading towards serious financial difficulty. If company cheques paid to suppliers bounce then this may lead to them taking legal action.
If demands for payment are being repeatedly and more assertively made, then the overall financial position of the company should be immediately reviewed. A Statutory Demand from a secured or unsecured creditor may be swiftly followed by a winding-up order. The courts could then decide to liquidate the company.
There are often warning signals prior to this stage being reached. If it’s taking an increasing length of time for a company to make payments or more time is being spent on ‘firefighting’ complaints by creditors, then it’s clear that the financial situation at the company should be looked at very carefully.
When can a company declare itself insolvent?
If a company is being pursued by creditors and it has no realistic means of honouring debt repayments and other liabilities, then the company may be said to be insolvent.
Two tests which can be applied to assess if a company is insolvent are:
- Cash flow test
Is the company unable to honour supplier and debt repayments in a timely manner? If it is routinely late making payments, such as taking 90 days to pay an invoice that should be paid within 30, then it’s likely that the company is trading insolvently.
- Balance sheet test
A balance sheet test assesses the value of your assets compared to your liabilities. This should be undertaken by an independent specialist who can value your company assets correctly and take into account all of the company’s contingent liabilities.
What is corporate insolvency resolution process?
There are a variety of strategies that can be employed to try to resolve an insolvency situation. These include:
- Informal Creditors Arrangement
A company may begin by being honest with creditors about their situation and can then attempt to negotiate an Informal Creditors Arrangement. This involves negotiating a realistic repayment schedule with creditors, with the aim of lowering monthly payments and removing the risk of legal action.
- Company Voluntary Arrangement (CVA)
If the creditors are numerous, debt levels are high and the company relationship with them is becoming strained, then a Company Voluntary Arrangement (CVA) may be appropriate.
A CVA is a legally binding payment plan that an indebted company and its creditors enter into to lower the company’s monthly repayments. A CVA has to be approved by at least 75% (by value) of creditors.
Once a company has entered administration, a moratorium is granted that halts any legal actions being taken by its creditors. It offers an opportunity to rescue a company before it enters liquidation. After administration, a company may be sold, restructured and allowed to trade under the current owners, or may enter an alternative process such as a CVA or liquidation.
If the company cannot be rescued then placing the company into liquidation could be the best option. The process can be initiated by company directors using a Creditors’ Voluntary Liquidation (CVL). All of the company’s assets will be identified, valued and then sold with the proceeds distributed to creditors. The company will then be removed from the register held at Companies House and cease to exist as a legal entity.
What are the different types of corporate body?
High-profile insolvencies often concern publicly traded companies, but there are a range of corporate entities who could face insolvency proceedings. These are:
- Limited companies
- Limited liability partnerships
- Unregistered companies
- Community Interest Companies
If your corporate body is facing insolvency you should seek immediate professional advice. The earlier you act the more likely you are to achieve a positive outcome.
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