What Is Insolvency?

A business becomes insolvent when it cannot meet its obligations to its creditors. There are two simple ways to tell if a company may be at risk of insolvency. The first consists of an examination of the business’ cashflow. A short-term cash flow issue is one thing, but if the company is constantly struggling to pay its bills on time (or at all) over a long period, it is likely to be insolvent. The second method consists of an analysis of the business’ balance sheet. If all of the financial assets of the business, including outstanding payments due to be received, are outweighed by the obligations owed to others (in other words, its liabilities), then the business is likely to be considered insolvent.

Knowing whether your business is insolvent is extremely important, as the obligations of a business owner and director change as soon as this is the case. Upon insolvency, the legal obligations of a director are no longer to the health of the business, but rather to fulfilling the liabilities of the business. In other words, the director must now act in the interests of the creditors, and not the company as a whole. Many entrepreneurs are unaware of this, but continuing to act as if the health of the business were the most important thing can open a director up to personal financial liability. In extreme cases, such behaviour can even be viewed as criminal.

If your business is insolvent, it is important to seek professional advice immediately. A number of options will be open to you, with the most positive being the use of either traditional or innovative methods to raise more funding. If you cannot do this, then entering into a Company Voluntary Agreement may be possible. A CVA is a legal agreement which allows a business to make an arrangement with its creditors, governing how the outstanding debts and liabilities will be dealt with, and allows the directors to remain in control of the business. 75% of the creditors must vote for this arrangement, however, and it may be that they cannot be persuaded to do so.

If you find yourself unable to raise additional money or to enter into a CVA, then administration or liquidation are likely to be your only remaining options. Administration entails the handing over of the running of your business to an administrator, who is an officer of the court. An administrator has the power to do anything that will reduce the liabilities of the company, and works in the interests of the creditors. Liquidation, on the other hand, skips the appointment of an administrator and simply winds up the company, distributing its assets to secured creditors first, and then to those without any security. Liquidation can be either voluntary or compulsory, but no business wants to get to that stage! Make sure you look out for the warning signs early, and you may be able to solve your problems before insolvency strikes.

We can offer you financial solutions to help keep your cashflow healthy. Request a quote now to find out how much invoice finance can save you.

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