What does insolvency mean in business?
A very simple question, but one that can generate various definitions. Very simply, insolvency is defined as the inability to discharge the liabilities of a business as and when they fall due for payment. A more detailed explanation is given in the following section.
How do I know if my business is insolvent?
For most people, knowledge of insolvency arises from knowing that you simply do not have funds available to meet your current liabilities, which is generally evidenced by some or all of the following:
- Creditors constantly chasing for payment
- Letters from debt collection agencies and solicitors chasing payment
- Pressure from HMRC for payment of outstanding liabilities
- Payments being returned by your bank because you’ve breached your funding limits
- CCJ’s, statutory demands, winding up petitions being served.
As mentioned above , the true test of insolvency is the ability to discharge your liabilities as and when they fall due for payment. The key phrase here is “as and when they fall due”. This generally refers to ongoing operational overheads – costs such as wages, salaries, rent, rates, light and heat and other general overheads, which most companies pay on a monthly basis – quarterly for rent.
Costs such as bank and finance loans are not usually included in this category, apart from agreed monthly repayments. If for example you have a bank loan of £50,000 repayable at the rate of £1,000 per month, then you would only include the £1,000 monthly payment when calculating “as and when they fall due”.
Effectively, a further test of insolvency is looking at the correlation of current assets against current liabilities, given that it is these assets and liabilities that you use on a daily trading basis.
If your current liabilities exceed your current assets, then technically your company is insolvent.
Your company may have significant fixed assets – i.e. a property, plant and machinery etc, but those are assets that would take time to realise or raise funds against, and as such are not likely to be readily available to allow you to use them to discharge your liabilities “as and when they fall due”.
We would be more than happy to discuss any issues or queries you may have in regard to further understanding the true financial position of your business, at no cost.
I think my company is insolvent – what help and advice is available?
There is an amazing array of information on the web from a plethora of organisations offering advice to directors of insolvent businesses. A significant proportion of that is simply marketing aimed at directors under pressure designed to persuade you to place your company with them. Here at CFS we take a very different approach. We are a completely independent firm, owned 100% by the partners and have no head office or central committee to report to. We have run our own business for well over thirty years and as such fully understand the problems of running a business. We will only offer advice that is the very best advice and most appropriate solution to your particular problems.
We take the time to understand your business
To enable us to offer insolvency advice, we first need to fully understand your business, the market in which you operate, the particular problems that you are facing and the reasons why those problem are now prevalent. We will arrange to meet with you, at no cost, for however long it takes to fully understand your position. Only then will we provide you with what we believe to be the most optimum solution to your problems.
Options for Directors – what happens next?
Clearly, by the very fact that you need to take advice, there is usually some element of financial/cash flow issue. Within the constrains of this article it is not possible to provide full details of all of the likely options available. However, it is likely that they will include one or more of the following options:
- A cost reduction exercise
- A refinancing package
- A restructuring of part or all of the business
- An informal arrangement with creditors
- A formal insolvency scheme – further details are given in the next section.
What happens to insolvent companies?
This will depend to some extent on the advice received by the directors and the directors’ actions based upon that advice.
The vast majority of insolvent companies will enter some type of formal insolvency scheme. The most common are as follows:
- Company Administration in London
- Creditors’ Voluntary Liquidation in London
- Compulsory Liquidation in London
- Company Voluntary Arrangement in London.
What if I need insolvency advice or just a chat?
As mentioned earlier, here at CFS we understand the problems of running your own business. Our partners have all spent their entire careers in the business turnaround and insolvency profession, firstly working for several of the multinational practices before setting up our own practice. Our entire focus will be on looking for the very best solution to your problem. If that involves a process whereby we will not be financially rewarded, then so be it. Our goal is to give you the very best advice – by doing so you may even recommend us!
London Insolvency Case Studies
We were approached by the directors on a London printing company who were experiencing significant cash flow difficulties. We worked with the directors, suppliers and customers to implement a Company Voluntary Arrangement, to rescue the company and allow it to carry on trading profitably once more:
An engineering company with an excellent reputation was experiencing cash flow problems and pressure from key suppliers. We spent time to fully understand the business and implemented a rescue package using a Prepack Administration and business refinancing package:
Covid 19 and Your London Business
One of the key issues that we are now starting to see is the attitude of HM Government and banks to businesses that took loans under the Government support scheme initiatives, whether that be bounce back loans or CBILS loans.
We suspect at some point in the not too distant future, guidelines will be issued to insolvency practitioners appointed to insolvent companies, to look carefully at any such borrowings taken on by that company. It is extremely important, that you ensure that you have documentary evidence to support the decision you took to apply for any such loan. Again, if you have any doubts about this, then please just contact us for an informal chat.