Insolvency's Effects

The effects of insolvency


What is insolvency?

A business which is unable to pay its debts or whose liabilities are greater than its assets is considered insolvent. If your business is facing the prospect of insolvency, continuing to trade regardless of the risks can lead to serious consequences for any directors if the company goes into liquidation. In certain cases, where insolvency seems inevitable, it may be better to cease trading and voluntarily wind up the business.

What are the effects of insolvency?

If your company becomes insolvent, you will need to take quick action to decide on the best way forward. If you are able to find a new source of funding or other type of rescue package which allows you to carry on trading, that is likely to be the optimal solution. Failing that, you could try and achieve a compromise with your creditors in the form of a company voluntary arrangement (CVA). Under a CVA, the creditors will generally accept a reduced payment over a period of time in the hope that your business will eventually sort out its financial difficulties and pay back its debts in full.

If you are unable to obtain any new finance or achieve a compromise with creditors, the best solution may be to accept defeat and initiate voluntary liquidation proceedings. This will help to protect you from any allegations of wrongful trading. It’s also possible for one of your creditors whom you owe more than £750 to initiate winding up proceedings against you. They will first need to send you a statutory demand asking you to pay your debts within 21 days, failing which they can apply to a court to have your company put into liquidation.

How can I avoid insolvency?

The sooner you identify any difficulties and take action the better. If you owe debts which you’re having problems paying, it may be a good idea to have a conversation with the relevant creditors early on. It may be possible to extend or alter any debt repayment agreements, which could give you some breathing space to help get your business back on track. Most businesses which are owed money by you will understand that it’s in their interest as well as yours to give your company the chance to succeed, as that will often be their best chance of getting paid.
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