It’s certainly no easy thing to come to terms with, and can be a tough pill to swallow, but when your company is in financial dire straits, often insolvency is the only answer. That doesn’t mean it’s the end of road, as far as your career is concerned; it simply means this particular business venture has run its course – there’s no shame in that, and it takes great courage to admit that your company has reached the end of line and it’s time to take action.
If you’ve decided that you’ve reached the point where you need to call time on your business, you’ll no doubt have a few questions about the process and what it entails. Here are the most common questions.
What is insolvency?
Insolvency simply means you’re no longer able to pay the debts of the company. There are two forms of insolvency: Cash-flow insolvency means that while you may have the assets to cover the debt, you don’t have the appropriate means to pay; balance-sheet insolvency is defined as a company, individual or partnership not having enough assets to cover the debt.
How do I begin the insolvency process?
You’ll need to discuss your situation with a licenced insolvency practitioner, who is qualified to formally begin the procedure as laid out in the Insolvency Act 1986.
If I’m insolvent, how can I pay for an insolvency practitioner?
Your insolvency practitioner’s fee will typically be covered by existing business or individual assets, depending on company type.
How long does the process take?
This varies from company to company, depending on circumstances – for more complex matters, it can take several years to formally declare a company insolvent; others can be resolved in less than a year.
What are common reasons for insolvency?
Naturally, this is a broad topic, but the main reasons include:
- Lack of outside funding, leading to cash-flow issues.
- Regulation changes or investigations carried out by HMRC, which lead to historic debts which cannot be covered.
- Customers moving to a competitor, or declaring insolvency themselves.
- Unexpected outlays, such as a company being fined or taken to court.
- Fraudulent activities by those working at the company, or poor fund management on behalf of the directors.
- Lack of planning, strategy or simply overtrading above and beyond that which the company is capable.
- A refusal to change in an evolving market.
- Board members deciding not to financially support the company any longer.
When should I consider formally starting the insolvency process?
Simply put, as early as possible. By seeking advice by a licenced practioner, you can limit the impact of insolvency, or even avoid the process altogether.
What happens to the money I owe?
All creditors are informed by your insolvency practitioner that your company is insolvent, who can negotiate claims, dependent on remaining funds. If the sale of company assets cover the debts owed to creditors, they’ll receive a dividend. For staff who are owed wages, there are two routes. If the business is taken over by another, those wages will be covered by the new owners; if not, they can make a claim with the Redundancy Payments Office, who can offer wages and other benefits up to a certain limit.
Are my personal assets at risk?
This is wholly dependent on the type of business you run. If you’re a sole trader or partnership, then your home, car, and so on will be at risk. Your personal assets are generally protected should your company have a limited liability status, providing you haven’t offered a personal guarantee.
Will I be able to start another business after insolvency?
Yes – unless, of course, you’ve been involved in malpractice prior to the insolvency, which will affect your ability to become a company director. Companies House will retain a record of your insolvency, which means others will be able to see your involvement in liquidation of a business. Once the insolvency process is complete, your responsibilities as a director will end, although you’re still required to work with your insolvency practitioner should they require it.