The formal insolvency options available are:
There may be several solutions available to the company or there might just be one. It will depend on the financial circumstances of the business. The insolvency procedures are set out in law and their benefit is that, generally, the creditors – the suppliers to whom the company owes money – must accept the legal consequences of the solution.
Is the company insolvent?
This is one of the first things we will work out. There are commonly two tests we apply:
- Has it got enough income each month to cover its expenditure? What actions are creditors taking against the company? Have they raised a court action, and formally demanded money? If any of these apply, the company is likely cash-flow insolvent.
- If all of the company’s assets were sold today, would there be enough money to pay off all of its debts? If not, the company may be balance-sheet insolvent.
The company would likely qualify for an insolvency procedure if it meets either, or both, of these tests.
Assets and liabilities
All the company’s assets are included in the insolvency process. It is the job of the insolvency practitioner to realise them, and raise as much money as possible from their sale. The money raised goes to pay the creditors a dividend.
Creditors rank according to law, and each class of creditor shares in the available cash by way of a dividend. Depending on the amount available, they may get none, some or all their money back. To qualify for a dividend, they should submit their claim to the insolvency practitioner dealing with the company.
Depending on how the company’s financial arrangements are structured, the bank may be one of the most influential creditors. If the bank’s lending to the company is supported by a fixed charge over an asset, the bank will usually be entitled to rely on that security in liquidation. They may support a sale of the business premises as part of a going concern sale out of administration.
If the bank holds a floating charge, it can request the appointment of administrators to the company in certain circumstances. It is important that where the company is facing insolvency, you understand the bank’s options and how these can be exercised.
Director responsibilities on company insolvency
The advantage of a company with limited liability is that formal insolvency will unlikely affect the directors’ personal financial position, unless the directors have provided personal guarantees to any of the creditors.
A liquidator or administrator will however have the right to examine transactions between the company and its directors, and to investigate and report on the conduct of the directors in the three-year period ending in formal insolvency.
We can guide you on your responsibilities as a director including your fiduciary duties particularly where your company is facing insolvency.
If the company rents its business premises, formal insolvency will likely result in a breach of the lease, and the landlord will be able, after a short notice period, to terminate the lease and take back control of their property. If the company is behind on its rent, the landlord may also have a right of hypotech: a claim over the assets of the company located on the landlord’s premises. This claim only extends to goods or items that belong to the company however, and only for arrears of rent.
If the company owns its business premises, then the insolvency practitioner is entitled to sell them. This will either be as part of a going concern sale, or as a stand-alone sale of the premises once trading has ceased.
Public registers and advertising
Details of the company insolvency will be recorded on public registers, the Register of Insolvencies (ROI) and at Companies House. The ROI is kept by the Accountant in Bankruptcy and publicly available online, and any formal insolvency will be recorded by the insolvency practitioner with the statutory company information required by the Registrar. The insolvency practitioner must in all cases advertise their appointment publicly, although where and how varies, depending on the type of appointment.
The costs of the procedure
As insolvency practitioner, we are entitled by law to be paid as part of the insolvency process. Our fees come out of any money we ingather from the company’s assets, to the extent that there are available sums. If there are no assets available, then sometimes a petitioning creditor or the directors will pay the fees, to ensure that the company still benefits from a formal winding up.
Creditors will be told regularly throughout the process what we have charged and have the right to challenge our fees and outlays if they think they are too high.
As we said at the beginning, there is no substitute for detailed advice, tailored to your circumstances. Contact us in any of the ways listed on the next page and we will arrange to meet you, free of charge, for a discussion on what your options may be.
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