Keeping your business running becomes a great challenge in the competitive landscape today. Unfortunately, some companies may face circumstances as dire as insolvency. Your business is essentially considered insolvent if the total value of liabilities is more than the asset value.
The reasons may vary from over-investment in equipment to the customers not paying up on time, administrative mismanagement, or more. Whatever may be the reason, you should have a contingency plan in place to deal with the circumstances if they arise. Here are some questions about insolvency answered to help you understand what it is all about and how it needs to be handled.
Q1. What are the warning indications of insolvency?
For a business, it is important to be prepared well in advance. The first sign that indicates insolvency is that your bank, creditors, and suppliers start chasing you for payments that are overdue. Bouncing cheques is another sign that you should look out for. Letters from the court, Revenue and Customs and lease companies are something that you should take seriously. When such indications are there, it is better to be realistic and start thinking about a plan to bail your business out.
Q2: Is there anything I can do to reduce the risk of insolvency?
The best way to reduce the insolvency risk is by ensuring the financial health of your business. While this involves making sure that you have enough assets to cover your liabilities, exercising control over your cash flow is equally important. Discuss these issues with your financial advisors and banking partners on a regular basis and consistently monitor the assets, liabilities and cash flows. Building a trustworthy relationship with your bank and creditors helps as they are the ones who can help you during crisis situations.
Q3: What should I do if insolvency seems impending?
If things do not look good for your business, you should initiate an action to minimize the loss of the creditors rather than leave things unresolved. Acting in time can even save you from the worst. Licensed Insolvency Practitioner Antony Batty says that businesses that are beginning to experience financial difficulties should get help from professionals before they get too deep into debt. They can guide you on the best course of action, whether you can try to save your business by arranging additional funds or simply move with the insolvency proceedings.
Q4: How can insolvency proceedings be started?
Any of the creditors who are owed at least a specific amount of money by your business can start the insolvency proceedings against your business. Known as compulsory insolvency, this is done by approaching the court to give orders for winding up your business. Before doing so, creditors first send a statutory demand to your business and move to the court if you fail to pay up within 21 days. On the other hand, you can opt for voluntary liquidation by declaring that you will not be able to pay off your debts and insolvency is the only alternative.
Q5: What happens after a business is declared insolvent?
Once a business becomes insolvent, it ceases trading and the assets are sold to settle the creditors. This process of distributing the proceeds of assets amongst the creditors is called liquidation. The process is supervised by a liquidator who is a licensed insolvency practitioner specially appointed for the task. After being appointed, the liquidator gets all the powers that were with the director or owner of the business previously. Once liquidation is complete, the business ceases to exist.
Q6: Is there any option to save the business after insolvency?
Yes, a business can be saved if it is just technically insolvent but otherwise sound. Technical insolvency refers to the condition when insolvency is based on the cash flow and balance sheet rather than the actual financial condition. Restructuring your business can be a good option if you want to save it from closing up. This is usually done by a voluntary arrangement with the creditors who agree to accept reduced payments over a longer time frame. However, you should proceed only under the professional guidance of insolvency experts.
Undoubtedly, insolvency is something that no business would want to face but it still happens. The best thing to do is to take a practical approach and do what you can to repay as much as possible to your creditors. At the least, you will be able to save your reputation which would be helpful if you want to start afresh in the future. Seeking professional guidance from an insolvency lawyer is another thing that you must absolutely do.