Almost certainly every business believes it will be successful when it starts out but unfortunately, a frighteningly high
number fail, frequently for reasons beyond their control.
Certainly the fragile global economy has stretched more companies than ever in recent years and sadly this has meant that an increasing number of firms have had to face the spectre of insolvency.
However, although the word insolvency is often bandied around accompanied by a cold twist of fear, not many people know exactly what it means and what the implications are. Here’s a quick rundown of the key facts that you need to understand about insolvency if you are in business.
What is it exactly?
Insolvency is an umbrella term used to describe the situation where either a business or a private individual can no longer meet their financial commitments as and when they become due. Far more serious than just a temporary shortage in cash flow which let’s face it, is something mo
st people have faced at one time or another, it refers to a situation which is unlikely to improve in the foreseeable future.
Insolvency and bankruptcy are two words which are often used interchangeably but technically, this is not correct. Bankruptcy refers to a petition which is taken to court and the status legally declared, either with or without the individual’s consent. Bankruptcy is just one of many possible routes for insolvent individuals.
There are many different insolvency solutions and bankruptcy – or liquidation as it is known in corporate terms – does not necessarily have to be the final outcome.
How is insolvency managed?
If a business has reached the point where it is unable to continue because of financial pressures, an insolvency practitioner will become involved.
A number of companies offer this kind of service but not just anyone can set up; they must be approved and authorised. An accountancy or firm of solicitors are typically involved in acting as insolvency practitioners for distressed businesses.
What is the role of an insolvency practitioner?
Insolvency practitioners are licensed to undertake a wide range of solutions, depending on the situation the business finds itself in.
For companies which are no longer viable without some form of intervention, this means the insolvency practitioner could either be responsible for managing an administration or liquidation. Although neither are a desirable situation for a business to find themselves in, liquidation is the far worse of the two and is a death knell for the firm.
Simply put, liquidation means that there is no future and the company will cease trading immediately. All staff will lose their jobs and the assets will be broken down and sold off to the highest bidder in order to raise the most cash to pay off creditors. Liquidation is always the final step and is appropriate for companies which have no other viable options.
Going into administration is slightly different however and in some cases can end up being a positive step for the firm, strange though it may sound. Administration is a formal acknowledgement that a business is seriously ‘ill’ and requires urgent attention if it is to avoid being permanently wound up. However, unlike liquidation, a company is usually permitted to continue trading – sometimes with caveats in place – because it is normally in the best interests of all parties.
One of the actions an insolvency practitioner may take for businesses in administration is to try and find a buyer. This ideally would be to take on the company as a whole but if this is not possible, the firm may be broken down into chunks and sold off. To get the best price, the business needs to be continuing to trade and performing as well as it can in order to seem attractive for a potential takeover.
There can still be redundancies and losses when a company enters into administration as the insolvency practitioner will take a long, hard look at the expenditure and carry out a cost benefit analysis. This could result in some parts of the business being identified as not being commercially justified. However, in the long term, if the firm survives, it should be in a far stronger market position.
Call an insolvency practitioner in early!
The idea of getting a financial expert in who is authorised to act in insolvency proceedings may sound like a scary idea but in some cases, it can be worthwhile calling them before you have reached the point of actually becoming insolvent.
For businesses facing administration, if radical steps are taken quickly enough, the necessity of having to go down the route of formal insolvency might be avoided. As well as processing formal insolvency solutions, practitioners also offer a prevention service.
This involves a detailed scrutiny of the company’s finances and identifying where the problems lie and coming up with new or creative ways to address them. If this is your business, you may well shrug off this suggestion as undoubtedly you will have spent countless hours poring over the accounts yourself. However, these people are experts and deal with insolvencies all the time and have in-depth knowledge of the law relating to this area, which may throw up possibilities you weren’t even aware existed.
If you are in business, hopefully you will never find yourself in such a serious financial predicament that your livelihood is at stake. However, if you are starting to battle to stay afloat, it is worth considering getting help sooner rather than later, as it could be the one thing that saves your company. Although many national firms offer insolvency advice, making sure you pick one with an office reasonably close to where you are located will help speed the process along, as well as keeping costs down.
Written on behalf of Birketts Chelmsford Office by Samantha Wood, contact Birketts for legal advice about insolvency.