There are a number of definitions but let’s start with “if you are unable to repay your debts on time, you are classed as insolvent”.
There are also a number of debt solutions available if insolvency rears its somewhat frightening head.
Another view of insolvency is where what you owe – credit cards, loans, HP on the car and your mortgage – is greater than the value of what you own – personal belongings, vehicles and your home. Insolvency can apply to both individuals, partnerships and companies.
Most people go through life occasionally being in an insolvent state – like when you are up to your overdraft and credit card limits the week before payday – or even worse the week after payday. If it is more serious and a long-term problem then other signs of insolvency are when legal action is taken against you in respect of unpaid bills. These may be county court judgments (CCJs) or bailiffs calling or even a statutory demand – which if ignored can result in bankruptcy for an individual or a winding-up petition that can lead to a winding-up order in the case of a limited company or LLP.
I’m an individual. How can I tell if I’m insolvent?
It’s simple. If you have debts which you can’t afford to repay on the date they are due, you are insolvent. If it’s a “one-off” situation and you can see a solution in the near future, then it’s just a temporary inconvenience. But if the debt has built up over a period and you cannot see it improving or if the situation is deteriorating you are insolvent and need to take proactive steps to address it.
I own a company. How can I tell if it is insolvent?
As mentioned above, there are tests you can run to tell whether or not your company is insolvent.
- Firstly, grab your balance sheet. Look at your liabilities figure – money that is owed out (and take into account future liabilities). Is the value greater than that of the company’s assets – such as plant and equipment, stock, money owed in, etc?
- Next, take a look at your cash flow situation. Does the company have debts it is unable to repay as they fall due?
- Has the company had CCJs or a statutory demand?
If you answered ‘yes’ to any of the tests above, your company is unfortunately insolvent.
If I am insolvent what is the worst case scenario?
For individuals, you may be made bankrupt – the procedure is governed by the Insolvency Act 1986. If you’re insolvent, you can only be made bankrupt by a court order which must follow the presentation of a bankruptcy petition. It is issued by any creditor to whom you owe at least £5,000, or you can present a petition yourself. If you only have very limited income and assets and owe less than £20,000 a debt relief order would be an alternative to bankruptcy.
Similar to bankruptcy, corporate insolvency can be instigated by the company in question, a creditor, the shareholders or the court where the debt is at least £750.
What are the consequences?
All cases are unique, but you’ll doubtless be wondering what are the possible consequences? We’ve picked out three of the most prevalent in both cases.
As an individual, bankruptcy may affect you in the following ways:
- Your credit rating will likely plummet for six years, but it can be rebuilt.
- This will make it both difficult and expensive to borrow money.
- The details of your court filings will be made public, available to anyone.
- Depending on the type of debt, you may risk losing your property.
- There are restrictions during bankruptcy including not being allowed to be a company director.
For companies, corporate insolvency will manifest itself in the following ways:
- Company liquidation leads to the company ceasing to exist.
- All assets will be sold and contracts terminated.
- If you’re a director of the company and have not fulfilled your duties, you may be disqualified from holding office
- In the above circumstances, you may be personally liable for some company debts.
- If you have given personal guarantees for the company to such as a bank or a landlord you may be pursued in respect of unpaid liabilities.
How can I avoid bankruptcy or my company being wound up?
For both individuals and companies, there are other options. An individual voluntary arrangement (IVA) is available to individuals, which is essentially a proposal to pay back all or part of unsecured debt over a specific period of time.
Similarly, a company voluntary arrangement (CVA) can be a ticket out of insolvency for companies if creditors agree to new repayment terms. There may be other options which are more suited to the company’s circumstances. As no two situations are the same it is always advisable to discuss the situation with one of our advisers as soon as possible.