Worried about insolvency? Things to consider and the help available

What is insolvency?

In short, insolvency refers to the inability to pay one’s debts as they fall due.

It’s important to know if your business is insolvent, or is likely to become insolvent if you continue to trade. There are risks involved with continuing to trade while insolvent, including potentially harmful implications for directors (find out more about this here).

The best thing to do if you’re worried about insolvency is to reach out to a licenced insolvency practitioner (IP) for advice.

At Bailey Ahmad, we offer free and confidential consultations with no obligation to proceed. We will listen to you, take the time to understand you or your company’s challenges, and offer honest and practical advice. We’re licensed and regulated by the Institute of Chartered Accountants in England & Wales and are also firm members of R3 (The Association of Business Recovery Professionals), so you can have absolute confidence that you’ll be receiving advice from trusted, qualified professionals.

The earlier you speak to an IP, the more options will be available to you, including the potential to avoid a formal insolvency procedure.

 What is a formal insolvency procedure? Do I need one?

  • Creditors’ Voluntary Arrangement (CVA) – this is a solution for viable companies that are struggling to pay their debts. It is a formal agreement between a company and its unsecured creditors whereby the company commits to pay back all or part of its debts over an agreed time period. Find out more here.

  • Creditors’ Voluntary Liquidation (CVL) – this is a solution for companies (and LLPs) that are in financial difficulty, unable to pay their debts, and where there is no chance of recovery, despite the best efforts of the company directors. Find out more here.

  • Members’ Voluntary Liquidation (MVL) – this is a solution for a company that’s fulfilled its purpose, has stopped trading, can pay all its debts in full, and allows the company’s shareholders to realise their investment in a tax-efficient way. Find out more here.

  • Administration – this is a formal insolvency procedure available to an insolvent (or soon to be insolvent) company. An IP can be appointed as an administrator, and their aim is to rescue the company as a going concern. They’ll look to achieve a better result for creditors as a whole than would be likely if the company was wound up, and realise property to make a distribution to secured or preferential creditors. Find out more here.

Some warning signs of potential business failure

  • Lack of working capital – it’s important to make sure you have sufficient funding to meet your ambitions.

  • Late payment & bad debts – significant delays in payments from customers, or worse still non-payments, can have a catastrophic effect on cash-flow.

  • Cash-flow management – many businesses operate with an insolvent balance sheet (aka the value of its liabilities exceeds its assets). This is acceptable as long as, on a cash-flow basis, you can meet your financial obligations as they fall due. If you don’t take the time to understand and plan your business cash-flow, this is cause for concern.

  • Industry changes & product innovation – Covid-19 has changed the world as we know it. There has never been a time where being adaptable has been more crucial for business survival. If your business is struggling to adapt to the ongoing situation, you may start noticing issues such as a reduction in cash-flow, and a downturn in trade.

Find out more about warning signs of potential business failure here.

Some scenarios we regularly see

Scenario 1

  • You’re unable to pay creditors on normal terms, but they’re currently happy to extend credit;

  • You cannot pay your taxes on time but have agreed a payment schedule with HMRC;

  • You’ve exceeded your credit limits with key suppliers but have managed to gain credit elsewhere.

If this sounds like you, it seems like you’ve found a way to manage in the current situation, and can continue to trade without a massive risk to the company. However, it’s important to keep your company under constant review and act quickly should things start to change.

Scenario 2

  • You’re only able to get credit from new sources and are having to use this to keep current creditors happy;

  • Creditors have started to threaten legal action;

  • You’re falling behind on tax payments and have not agreed a payment schedule with HMRC;

  • You can’t accept new orders.

If this sounds like you, we would recommend contacting an IP for advice.

Situation 3

  • You’re on stop with most/all of your suppliers and can’t get further credit anywhere;

  • You‘re receiving final demands for payments;

  • It’s starting to take a toll on your mental health.

If this sounds like you, stop trading and seek advice from a licensed IP as soon as possible.

We can help

If you need help finding a solution for a financial problem, be that recovery, restructuring, insolvency or restarting, please get in touch with us today. The sooner you seek help, the more options you’ll have, so don’t delay in reaching out. All consultations are free and confidential with no obligation to proceed. We will listen to you, take the time to understand your situation, and offer you simple, professional advice so you can plan your next steps with confidence.