Tips for identifying company insolvency

What is company insolvency?

Your company is insolvent if it is unable to pay its debts according to the agreements made with its creditors.

Very often, a company can maintain solvency by receiving cash injections from investors or borrowing from the bank. As such, an underlying insolvency problem can be hidden from the directors.

However, if the cash runs out, the company will not be able to continue to pay its bills.

More and more management time will be spent on juggling the finances and negotiating with creditors. This detracts from the business of running the company and in turn is likely to make the situation worse.

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Implications of company insolvency

• Company at risk of closure
• Employees made redundant
• Directors held personally liable for debt

If a company is unable to pay its debts and a solution is not found, the business will be at risk of closure.

Any creditor who is owed more than £750 which they cannot recover through other reasonable means has the right to apply for the company to be compulsorily wound up or closed.

HM Revenue and customs will often resort to winding up a company, not to recover tax owed, but to ensure the arrears do not get any greater.

If the company is forced to close any assets will be sold and the employees made redundant.

An investigation will then be undertaken as to the conduct of the company directors. If it is found that they have allowed the business to trade while insolvent, they could be disqualified from other directorships and help personally liable for the company’s debts.

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Signs of company insolvency

• Overdraft at its limit – Is the current account permanently at the limit of the overdraft? This is a strong indication that there are cash flow problems. Make sure that you receive regular reports regarding the status of the company’s current account.
• Holding out for a contract - Is the business holding on for one more sale, contract or big customer to solve the cash flow problem? You must realistically forecast the possibility that this event will not happen. Give yourself realistic deadlines after which alternative action must be taken.
• Late posting of accounts - Have the company accounts and annual returns been posted late? If so, you need to understand why this is and take appropriate action. It may be a simple mistake. However, in times of financial difficulty, the accounts department will often be distracted by other pressures and overlook accounts filing deadlines.
• HMRC debts paid late or deferred - Often when a business is getting into financial difficulty, VAT and PAYE/NIC payments are regularly made late as available cash is being used to pay suppliers to keep the business running.
• Credit lines dried up - Are your company unable to secure new credit or extend existing lines of credit for the business? This situation has become more and more common with the onset of the credit crunch and banks reluctance to lend and expose themselves to further risk.

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What to do if you think your company is insolvent

If any of the situations highlighted above are identified, it does not necessarily mean that your business is heading for failure.

Once the underlying reasons for the problems are investigated and understood, it may be possible to resolve them quickly through a change in business processes and or cost cutting.

However, if you believe that cost cutting alone will not be enough, there are various business rescue options you can consider:

• Pre Pack Administration
• Company Voluntary Arrangement
• Administration
• Voluntary Liquidation

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