What To Do When Your Business Is Insolvent

Dave Beard

Written by Dave Beard on January 31, 2019

Updated May 24, 2019

man with business debt issues

Running a business is incredibly difficult, and sometimes, the worst happens. Sometimes, you can’t afford to pay your bills, and you find yourself in financial disarray. A company goes into what we call insolvency when they can no longer afford to pay their debts – debts referring to bills that are overdue and cannot be paid, or else when the company’s balance sheet defines more liabilities than it does incomings in the form of assets.

If this is the case for you and your business then understanding your options can aid you in making the correct and informed decisions to ease you out of difficulty and back onto a positive road, giving you the chance to save your business.

Contact your creditors and see if you can reach an agreement with them

If you know, for whatever reason, that you are unable to pay your debts, then getting in touch with your creditors and attempting to formulate an informal agreement with them may be your saving grace. Such an agreement will give you the breathing space to pay the money you owe on different terms to those that you agreed when you first took out credit with them.

If your creditors agree to give you this much-needed breathing space, then you may find that additional charges or fees are added to the money you owe them – remember, however, that an informal agreement with a creditor is not, unfortunately, legally binding and they can choose to revoke the agreement whenever they wish.

If your company cannot pay its debts, then your company can be liquidated – this is where the assets attached to the company are sold off to pay the company’s debts – and any money left over after all debts have been repaid goes to shareholders. After a company has been liquidated, it will no longer exist and will be struck off the companies register at Companies House.

Enter into a Company Voluntary Agreement

A Company Voluntary Agreement, or a CVA, is an agreement made between a company that is experiencing financial difficulty and its creditors. The agreement summarises an agreement of payment to creditors of all, or a proportion, of the money it owes to its lenders and states a set period of time in which the repayments should be made.

While a company is entered into a CVA, they are allowed to continue trading as normal both during and after it has been fulfilled. Only the directors of the company can enforce and propose the CVA – shareholders and creditors do not have the power to do this, and you can only acquire a CVA through an insolvency practitioner.

If you don’t want to sell your assets to pay off your debt, you could instead use it as collateral against a secured loan. You could then use the loan to pay off your debts but would be in a better financial condition because you would be able to pay off the collateral loan in manageable monthly instalments. Keeping hold of your assets would allow you to continue to trade and could salvage your business.

File for administration

If you feel as though your options are thin and you cannot afford to make short term changes to avoid financial standstill, then you can hand over your company to an insolvency practitioner. They will come to an agreement, through a CVA, with creditors on your behalf, use assets to pay off secured creditors, restore the companies viability and sell the business if worse comes to worst.

At this point, control is out of your hands. It is at the creditor’s discretion as for whether to accept the proposals from the insolvency practitioner or not. During the administration process, you and your fellow directors will be protected from legal action by those that you owe money to.

If your business is a partnership, it could be possible to file for partnership bankruptcy if you are in serious financial trouble. Before deciding to do so, you need to make sure that you inform HMRC that your company is no longer fit to trade for income tax purposes – you will need to file a final tax return upon doing so. If you cannot afford to make income tax payments, for example, informing HMRC of this in advance can allow you to negotiate payments with them under your new circumstances. It is much easier to do this after you have ceased trading and informed HMRC of your decision to do so.

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