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Insolvency's Effects

The effects of insolvency

If your company is unable to pay its debts or its liabilities are greater than its assets, it is "insolvent", and continuing to trade regardless of the risks can lead to serious consequences for its directors if it goes into liquidation.

If your company becomes insolvent, you need to decide quickly on the best way forward. In certain cases, where insolvency seems inevitable, you might decide to cease trading and voluntarily wind up the business. If you do decide to initiate voluntary liquidation proceedings, it can help protect you from allegations of wrongful trading. Alternatively, you might seek new funding or other type of rescue package allowing you to carry on trading, or you might agree a compromise with creditors in the form of a company voluntary arrangement (CVA). Under a CVA, creditors agree to be paid over a fixed period to allow your business to try to resolve its financial difficulties and fully repay its debts.

If your company owes more than £750 to any creditor, they can send you a statutory demand asking for payment of your debts within 21 days, failing which they can ask a court to put your company into liquidation.

A creditor can send a statutory demand to you if you are a sole trader, i.e not a company, if you owe the creditor more than £5,000, and if you do not pay that debt within 21 days, they can begin bankruptcy proceedings against you. 

As a sole trader, you might agree a compromise with creditors in the form of an individual voluntary arrangement (IVA). Under an IVA, creditors agree to accept regular payments to pay off your debts over a period. An IVA can give you more control over your asest than bankrputcy. 

If you are a sole trader, The Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 might assist by prohibiting a creditor from taking any step to seek payment from you. See Appendix B of Guidance Note: Debt Recovery and Legal Action under "Related Documents" below. 

Identify any difficulties and take action early on to get your business back on track. It may help to have a conversation with the relevant creditors about possibly agreeing a breathing space to repay debts. It is generally in creditors' interests to give your business the chance to succeed - it is often their best chance of getting paid.

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