Sunday, December 26, 2010

Am I insolvent?

The economy has been tough those last few years. Many businesses have gone under. You might have a hard time as well. Whatever your situation, it is important to understand what your options are. While no one likes to talk about insolvency it's better to face problems early on than wait until all your options have been exhausted. And if you have a limited company you have quite a few options are your disposal.

What is insolvency?

There are 2 kinds of insolvency. The first one is cash-flow insolvency and it happens when a company can no longer pay its bills and other obligations on time. The second one is called balance-sheet insolvency and and it occurs whenever liabilities exceed assets, i.e stockholder equity (capital plus accumulated losses) becomes negative. The second one is the one you have to be careful about, because it's possible to continue trading while in that state and the consequences can be dramatic.


Why must you do something about it?

Even if you can continue trading while being insolvent (because for example your creditors will continue to extend credit to you), you put yourself at risk as a director while doing so. If you know that there is no reasonable prospect of avoiding insolvent liquidation and you have not taken steps to minimise the potential loss to the company’s creditors, you can be deemed to have engaged into wrongful trading. In that case the directors become personally liable for the company liabilities and may face disqualification under the Company Directors Disqualification Act 1986.

What can you do about it?

There are many options available if you act early. Probably the cheapest and simplest option is to ask for the company to be stricken off. That is only possible if the company has no assets however. The next available option is what is called a CVL or Company Volontary Liquidation. It is triggered by the directors by writing to all the creditors and asking them to hire an insolvency practitioner. While there is a cost, that cost will be born by the creditors.

If none of those are appropriate, you have another 2 options, a CVA (Company Voluntary Arrangement) or an Administration, both of which allow the company to continue trading. While there might be some emotional reasons to want to continue trading, sometimes you would be better off start fresh with a new company and no debt!

Remember, being insolvent does not mean that you will loose your house or that you won't be able to start a new business. But it can if you don't take the right steps early on. Don't wait until it's too late. Check the insolvency web site. Know your options. Talk to your accountant. And do it early!