The thought of a company you own becoming insolvent is frightening. This is made worse by the complexity of corporate insolvency and the many ways it can present itself. Having at least a basic understanding of the general rules and concepts surrounding corporate insolvency can help to ease these feelings – although it is no substitute for having expert guidance such as that offered by our team at Lewis Nedas Law. 

If you need advice on corporate insolvency, contact us here.

What is corporate insolvency?

To start to get a grip on what the corporate insolvency process involves, it is important to understand what is meant by the term “corporate insolvency”. Simply put, a company is insolvent if it can no longer pay its debts. 

The law governing corporate insolvency in England and Wales can be found in the Insolvency Act 1986, and the Insolvency (England and Wales) Rules 2016.

How to tell if my company is insolvent?

A company’s inability to pay its debts may seem somewhat broad and unclear. Thankfully, there is some guidance which helps to determine if your company is insolvent. Generally, we speak of either ‘balance sheet insolvency’ or ‘cash-flow insolvency’. 

Balance sheet insolvency 

Balance sheet insolvency describes a situation where a company’s liabilities outweigh its assets. This also includes prospective and contingent liabilities – so those which may not be fully realised yet, including deferred payments. It is important to keep accurate and up-to-date values of all assets your company holds to ensure that you know exactly when your company is approaching or indeed insolvent. 

Cash-flow insolvency 

If a company is unable to pay its bills or debts as they become due, then they are said to be cash-flow insolvent. This could occur, for example, if the company is taking triple the amount of time to pay suppliers than what is stated on the invoice and/or contract. Keeping accurate records of what debts are due and how long it takes the company to pay them will help ensure that you can tell when the company is approaching insolvency. 

If either of these two tests are met, then the company will be deemed insolvent under English and Welsh law.

What can happen if my company is insolvent?

Once it is deemed that your company is insolvent, there are a variety of potential outcomes. It is not always the case, as is commonly thought, that the business will need to shut down. In fact, there are a few options once a company becomes insolvent, which can help the business recover.

Below are three common processes which occur after a company is declared insolvent. Each is unique and careful consideration of the available options is necessary to determine what is in the company’s best interests and those it owes money.

Liquidation is likely to be the process that first comes to mind when you think of corporate insolvency. This is also referred to as the ‘winding-up’ of a company. 

Under the liquidation process, the business’s assets are gathered and distributed to the company’s creditors. This is not done in random order or even an order decided by the company itself, but rather on order of priority determined by several different factors under the Insolvency Act 1986 – i.e. it is determined by law. 

The liquidation process is completed by a liquidator and can be either compulsorily or voluntarily initiated, depending on the company’s situation. 

The process of liquidation does result in the end of the company’s life, meaning that the company will cease to exist at the end of the process.

Administration 

Administration, unlike liquidation, does not always result in the company’s life coming to an end. Instead, there are three administration aims, one of which must be the goal when the administration process is entered into. The three possible aims are:

•  to rescue the company in question, 
• to achieve a better result for creditors than would be achieved under the liquidation process alone, and
• to take control of some of the company’s property to pay certain secured or preferential creditors.

The administration process is completed by an ‘administrator’ who is an insolvency practitioner who takes control of the company during the administration process. The administrator must attempt to meet the goals in the above order.

During the administration procedure, the creditors are temporarily prevented from raising claims against the company by what is known as a statutory moratorium. This gives the administrator time to implement strategies to achieve the best result for the creditors – whether that is rescuing the company, selling it, or by some other means. 

Company Voluntary Arrangement

A Company Voluntary Arrangement (CVA) is, in essence, an agreement between a company and its creditors which is often used to try and avoid a company entering into another form of insolvency process leading to the end of the company’s life (such as liquidation). 

Under a CVA, a company can agree with its (unsecured) creditors to pay back what it owes them over a fixed period of time. This agreement is regulated under the Insolvency Act 1986 and is legally binding – somewhat similar to a contract.

The CVA allows the directors of a company to stay in control during the period but they will be supervised by an insolvency practitioner.

Contact our Insolvency Solicitors in Central London today 

As you can see from above, dealing with insolvency issues is hugely complex. Our expert team at Lewis Nedas Law are available to help you and your company during times of financial difficulty and insolvency to ensure the correct course of action is taken.  

Contact us on 020 7387 2032 or fill in our online enquiry form to get help from our team.