In business, insolvency is a financial state where a company is either unable to meet its debts as and when they fall due or when its liabilities exceed its assets. In simple terms, a business becomes insolvent when it cannot pay what it owes. This can gradually happen over time or suddenly due to unexpected circumstances such as a large bad debt, cancellation of a major contract or external pressures that cannot be forecast such as the COVID-19 lockdown in 2020 or more recently wars in Ukraine and Iran.
At BRI Business Recovery and Insolvency, we regularly support directors and business owners who are facing this situation and need clear, practical advice. If you need support or are looking for more information on insolvency, please contact our team.
What Does Insolvency Mean in Business?
But what does insolvency actually mean for businesses? At BRI, many of our clients initially come to us for advice. Navigating insolvency alone is difficult, we are here to give you guidance and support.
Under Section 123 of the Insolvency Act there are two main definitions of insolvency:
Cash flow insolvency – When a business cannot pay its debts on time, even if it has assets, it doesn’t have enough cash in the bank to make payment deadlines.
Balance sheet insolvency – When a company’s total liabilities (including contingent liabilities) are greater than its total assets. This is less to do with cash flow and looks at your business as a whole.
At BRI Business Recovery and Insolvency, we help you assess your financial position and determine the issues you are facing. We identify the type of insolvency you might be facing in your business and provide you with the most appropriate course of action.
Signs a Business May Be Insolvent or on the Road to Insolvency
Recognising the early warning signs of Insolvency and seeking advice quickly can make a significant difference to the outcome. It is not uncommon for businesses to experience cash flow issues at some point, but ignoring this can lead to bigger problems down the road.
Many of the business that come to us for insolvency advice have experienced the following:
- Struggling to pay suppliers/HMRC/staff on time;
- Increasing pressure from creditors;
- Greater reliance on overdrafts;
- Declining cash flow or reduced profitability;
- Receiving legal threats such as county court judgements, statutory demands or winding-up petitions.
Whatever situation you have found yourself in, we have seen it before. So please reach out for advice, we are here to help!
What Does it Mean When a Business Becomes Insolvent?
When a business becomes insolvent, directors have a legal duty to act in the best interests of creditors rather than only the shareholders. Continuing to trade without due care and attention for the position can lead to serious consequences, including personal liability upon the directors.
When you reach out for help from BRI, our insolvency practitioners can advise on a range of formal insolvency procedures that will help you, including:
- Informal agreement with creditors;
- Administration – aims to rescue the business and achieve a better outcome for creditors;
- Company Voluntary Arrangement (CVA) – allows a business to repay debts over time;
- Liquidation – There are many types liquidations, they involve closing the company and selling its assets or business to repay creditors.
Each option has different implications. The right option depends on what the directors wish to achieve, the viability of the business and its financial position.
Can an Insolvent Business Recover?
Insolvency does not always mean the end of a business. In many of the cases we work on companies can recover through restructuring or informal agreements with creditors.
At BRI Business Recovery and Insolvency, we focus on identifying whether a business is viable and exploring all available options to support recovery where possible. Acting early is key – seeking advice at the first signs of financial difficulty can significantly improve the chances of survival.
However, in some cases recovery is not possible, and in others, the director may decide to close the business. In these cases we can guide directors through the liquidation process in a clear and professional manner.
Why Understanding Insolvency in Business Matters
Understanding the meaning of insolvency in business is essential for company directors and business owners. It helps ensure that all legal responsibilities can be complied with and that the best possible outcome is achieved for creditors and the business itself.
BRI Business Recovery and Insolvency provide expert and confidential advice to help directors navigate these financial difficulties. Contact our team for more information.