Hard Discussions: What is Business Insolvency?

As a business owner you need to make sure that you are properly clued up on business matters, even the ones that sometimes don’t bear thinking about.

The Two Types of Insolvency:

There are two main types of insolvency. The first is commonly known as cash flow insolvency and occurs when a business cannot pay due debts. The second is balance sheet insolvency and occurs when a company’s liabilities exceed their assets. A company can be insolvent in one of these areas whilst still being solvent in the other.

What Happens When A Company Becomes Insolvent?

Insolvent companies can be wound up (technically known as liquidation) by the board of directors under the supervision of a qualified insolvency practitioner. A meeting is then usually held for the company’s creditors who can appoint their own liquidation representative. Sometimes a creditor will go to court to ask for a winding up order to be bought against a company which means that the company is placed in to liquidation by the court. The insolvency practitioner will see that the company’s assets are released and that the money is distributed amongst the creditors in order of debt importance.

Can A Company Come Back From Insolvency?

If business owners continue to trade in a company that is insolvent it can be classed as a criminal offense so the situation needs to be sorted out very quickly. Many companies will go in to a period known as administration where the company is ran by an interim CEO appointed by the creditors. It is hoped that the company may be rescued or put into a better position so that when the time comes to close the creditors can be better reimbursed. If this is not an option then a CVA may be looked into. A Company Voluntary Arrangement is formed between the company directors and its creditors. The company would look to pay off part of the debt on a monthly basis and the creditors would agree to write off a certain proportion of that debt at the end of the pay period.

Who Has Been in Administration/Liquidation?

-Videogame retailer Game has recently gone into Administration and had to close 277 of its UK stores.

-Fashion brand Firetrap have been rescued from administration after being bought out by Sports Direct.

-Book shop borders went bust in the UK a couple of years ago and unfortunately could not be rescued

Vicky writes about all business matters from start-up tips to finding insolvency practitioners.