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What is insolvency and how to deal with it

A company is usually insolvent if it cannot afford to pay its liabilities and can see no way of being able to pay them in the near future. To check if your business is insolvent, there are three simple tests: the cash flow test, balance sheet test and legal action test. The outcomes of these tests will usually give you a further indication of your company’s financial outlook.

If you discover that your business is insolvent or you are worried that it may be then you should get in touch with us without delay. We will be able to provide you with the advice you need and point you in the right direction to deal with your business’s financial problems.

How to deal with insolvency?

How you deal with your insolvent business is dependent on the circumstances that surround your business currently. Whatever your business’s circumstances, there is an option out there available to you.

Your business is insolvent but there are options available to save the business or close voluntarily including – creditors voluntary liquidation (CVL), company voluntary arrangement (CVA) and administration

Each of these options has its benefits and drawbacks but at least one of them may be the solution that is right for your business. While two focus on saving and restructuring the current business, the other will close the business voluntarily which can be the best solution in some circumstances providing you with a fresh start.

  • CVL – This is when you voluntarily decide to liquidate your company as you cannot see a way to sufficiently pay off your debts to get your business back on track or you may think it is easier to close the business and move on. A CVL gives you the opportunity to close the company and provide some sort of return to your creditors.
  • CVA – This is a voluntary arrangement where your company pays what it can afford to its creditors over a specific period of time, usually five years. We will help you put forward a proposal to your creditors and if accepted by 75% of your creditors by value, your company will enter into the arrangement.
  • Administration – This procedure provides a company with protection against legal action taken or threatened by their creditors. The IP, acting as administrator, will take control of the company and will formulate a plan to restructure or sell the business and assets. The protection an administration provides creates ‘breathing space’ until a way forward can be planned and implemented.

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You are insolvent but have been issued with a winding-up petition leaving you with limited options – compulsory liquidation

When you have been served with a winding-up petition, it is important to get in touch with us as soon as possible to try and rescue your company. Once publicised, the issue of a petition will result in bank accounts being frozen, effectively preventing the company from trading so it is of the utmost importance to move quickly in this situation.

A compulsory liquidation will be forced upon you as a result of the petition and the official receiver (OR) will be appointed to wind your company up unless you take immediate action.

In a compulsory liquidation, the running of the business will be taken away from you, staff will be made redundant and all assets will be sold. The realising of money from these assets will be shared between creditors offering them some return for the debts they are owed.

If your company is solvent but you would still like to close your company, there are options available to you – members voluntary liquidation (MVL) and dissolution

If you are looking to close your solvent company, you can use an MVL or a dissolution to do this. Both of these procedures will help you close your company, tie up any loose ends and distribute money in the business to shareholders.

We can help and advise you on all these procedures so if you are insolvent or you are wanting to close your solvent company, get in contact with us on 0800 901 2475 as soon as possible. Our professional initial advisers will provide you with all the information you need confidentially and free of charge.

Authored by Phil Meekin

Phil Meekin

Senior Consultant

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