Insolvency - What is it

What is Insolvency?

Insolvency is a state of financial distress in which companies can no longer fulfill financial obligations to creditors. Insolvency is typically caused when a company’s arrears exceed the company assets or if the company has fallen into financial hardship and cannot meet their financial duties to creditors.

The process of Insolvency is referred to as ‘Insolvency Proceedings’. This term encompasses any and all of the legal procedures within the Insolvency Process (Winding Up, Administration, Liquidation, etc.).

What is an Insolvency Practitioner/Liquidator?

An Insolvency Practitioner is a registered and licensed professional who is appointed to manage proceedings for insolvent companies.

IPs are regulated by a number of professional bodies and industry regulators, ensuring that only licensed and registered individuals can act on behalf of companies during the insolvency process or any company rescue procedures.

Do I need an IP?

If a company enters a situation of financial distress, it is important to remember that IP’s do not act only as Liquidators. They are the best resources to consult when considering your options be it insolvency or a rescue attempt they will offer the most appropriate guidance based on the company’s unique circumstances.

IPs must be appointed for a company to proceed with any Insolvency, Liquidation or rescue and recovery procedures. It is a legal requirement and pursuing these processes without appointing a licensed IP will result in legal repercussions.

Is my Company at Risk of Insolvency?

If you are worried about your company and its financial position, there are a number of checks you can do to take stock of your situation. It is important to recognize the signs of financial trouble before this becomes severe, limiting the damage to the company and enabling your company to consider a wider range of recovery options.

These are some examples of tell-tale signs to watch for:

  • Consistent Arrears with HMRC
  • Staff Concerns or High Staff Turn-over.
  • Threatening Letters or Court Orders
  • Noticeable Decline in Profit
  • Consistently failing or delaying payments to suppliers

If you feel you are experiencing these troubles, please get in touch. Our no-obligation consultations allow us to offer the best advice to your company based on the information available to us.

What does Insolvency mean for Directors?

Directors are responsible for responding to any concerns with immediate effect. The different recovery solutions will affect you, as a Director differently, making it important to understand your options.

If pursuing liquidation, the appointed IP/Liquidator must assess the actions of all Directors leading up to insolvency. This makes it critical for Directors to respond to any concerns with immediate effect, reducing their risk of being charged with wrongful trading and fraudulent conduct.

Company Insolvency, if addressed appropriately should not affect Directors personal progression, allowing them to remain Directors of other companies or take up positions in the future.

As a Director you must be aware of the consequences of certain actions and how to act appropriately. Consider these key details to ensure that your responsibilities as a Director are being met:

  • Creditor debts must be settled prior to personal guarantees associated with the company. If you are found to be manipulating the situation to use assets against personally guaranteed debts this will cause major legal complications for the relevant Directors.
  • Shareholder responsibilities and Director responsibilities differ greatly. As a Director you are responsible for the operation of the company, inclusive of all financial obligations being managed. As a Director of a Limited Company the survival of this company and the lawful running of this entity are your main priorities. Should the company become insolvent this changes. Decisions will then have to be made in order to protect assets and enable creditors to be paid. Should you fail to do so, you will be liable for any wrongful trading, which can cause legal and financial repercussions for you personally.
  • Increasing company debts once Directors have recognized potential financial trouble can worsen a situation for the Directors. Seek advice immediately if you feel your company may be at risk of insolvency.
  • Employees are treated as Preferential Creditors. If the Liquidated assets fail to generate sufficient revenue employees are covered within the Government scheme guaranteeing payment of salaries, sick pay, notice pay, etc.

Is Insolvency the same as Bankruptcy?

Company debt and personal debt are two different things.

This is equally true of Insolvency and Bankruptcy. Insolvency refers to a company which can no longer fulfill its financial obligations, and as such is entering voluntary or compulsory Liquidation.

Bankruptcy is the term which refers to personal debt resolution. This may be a result of the Insolvency Proceedings but is not a term used to describe business debt or insolvency.

What Should I do?

Upon reaching a state of insolvency it is absolutely crucial that Directors seek expert advice immediately. A consultation with licensed Insolvency Experts will offer Directors guidance on the best options based on the unique position of their company, including the rights and responsibilities as Directors or Shareholders.

Liquidation may not always be the answer, as there are several options for relief and rescue when a company becomes insolvent. Discussing these options with an IP (Insolvency Practitioner) will clarify the most appropriate process for Directors and companies to follow.

If you feel your company is insolvent or at risk of insolvency, get in touch with us today. Our team of Business Recovery Specialists and Insolvency Practitioners can offer you the best advice for your circumstances, allowing you take action when you need to most.