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Corporate Insolvency

An Introduction to Corporate Insolvency

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When a business realises that it is in financial trouble, or even that financial trouble might be ahead, it is best to find out what restructuring and insolvency options are available sooner rather than later.

By seeking advice early, there are often more options available and better opportunity to rescue the Company via restructuring and avoid closure of the business. 

Our Restructuring and Insolvency team has many years of experience dealing with all forms of insolvency - both corporate and personal and can therefore offer confidential expert advice based on their knowledge of the latest updates to insolvency law and also the many real cases they have dealt with.  

Whether you are a business that needs help, or a creditor looking to recoup losses, you can be assured that the Moore South Restructuring and Insolvency team has the knowledge and expertise to gain the best possible outcome for all involved. 
A company becomes insolvent when either: 
 
  • it can’t pay its debts when they become due; and/or 
  • it has more liabilities than assets on its balance sheet’ 
 

How do you know if your company is insolvent and what are the warning signs? 

Before a business becomes insolvent, there are some warning signs to look out for. 

One of the main signs is lack of cash flow. If the company does not have sufficient cash available to pay its operating costs then it may soon become insolvent. This also includes having insufficient funds to pay staff and directors. 

Increasing pressure for payment of debts is another major warning sign. If you have mounting debts and requests for immediate payment from creditors, this can often lead to receiving a payment demand or even a winding up petition.  

If you have reached borrowing limits and cannot access additional working capital. Ceiling borrowing, as it is known, is another common warning sign that your company could be about to become insolvent. 

Recognising these warning signs and seeking appropriate insolvency advice will improve opportunities to rescue the business. Our team can help you do this and put you back on the right track with the right advice to move forward. 

However, if you are currently experiencing any of the following, then the company may already be insolvent. 
 
  • Regularly making late payments to creditors 
  • The company debt outweighs the market value of the company’s assets 
  • The business has unpaid payment demands, statutory demands or CCJs against it 
It’s important to note that there can be serious consequences for a Company’s Directors if a business fails to take appropriate insolvency advice when it recognises that the Company is either insolvent or unlikely to avoid insolvency.

The insolvency Act 1986 states that; in the UK, limited company directors are legally obliged to act in the best interest of creditors as soon as they establish that the Company is or will become insolvent. Failure to seek advice and act in the best interests of creditors can lead to potential accusations of fraud, wrongful trading and misconduct possibly resulting in: 
 
  • the director being disqualified from being a director of any UK limited company for up to 15 years; and 
  • Potentially being held personally liable for further losses to creditors resulting from trading whilst insolvent.  
A good insolvency practitioner is not there to judge, they are simply there to help improve the situation. Just because the business is insolvent, this does not mean it has to go out of business. A large proportion of what we do is to help get company finances back on track and we do this by working through a variety of restructuring and insolvency options with each client. These include:
 
  • Restructuring 
  • Third party refinancing through new investment and/or sale of business. 
  • Refinancing with Asset-Based Finance – If the business has any assets not subject to security, these may be able to be used as leverage or collateral to obtain some form of secured financing. The funds can then be used to pay debts and creditors.  
  • Refinancing with Invoice Discounting and Factoring – These processes allow a company to leverage the value of its sales ledger to secure working capital. With factoring, a finance company takes over the management of the sales ledger and credit control process but with invoice discounting the sales ledger is self-managed and payments are collected in-house. Because you retain control of the invoice discounting process, customers should be unaware. 
  • Refinancing with bank finance, through re-banking and/or extension of existing bank facilities
  • Operational cost reduction programme to improve profit yield.
  • Working capital improvement programme to more effectively convert profit into positive cashflow. 


Insolvency 

  • Informal Creditors Arrangement – This is where businesses try negotiating with creditors to mutually agree repayment terms for outstanding debts before any formal action is taken.  
  • Company Voluntary Arrangement (CVA) – This is a formal arrangement with creditors whereby all creditors are bound by the terms of the CVA. CVA’s are very flexible and can be formulated to fit with a Company’s individual circumstances. If creditors agree, the limited company can pay creditors over a fixed period and enables the business to continue trading. 
  • Administration – This is where a licensed insolvency practitioner is appointed to act as the administrator of the business with a view to rescuing the business. Administration is often used where a business is ultimately viable but is burdened by its historic debt. This procedure provides legal protection from actions being taken by creditors and can often facilitate the rescue of the business so that it can continue operating. 
  • Pre-packaged Administration – This process is generally used where a business sale (either of its share or business assets) can be achieved but needs to be done on a confidential basis in order to preserve goodwill. It enables this by allowing an Insolvency Practitioner to market and negotiate a sale of the shares or assets to a third party outside of a formal insolvency process, whereby the sale is concluded immediately on appointment of an administrator. 
  • Creditors Voluntary Liquidation (CVL) – This is voluntary process commenced by the Company where a rescue of the business is not possible and closure of the business is unavoidable. CVL is often used to formally wind up a business without the need to apply to court. 
  • Compulsory Winding Up (CWU) – This is a court driven process whereby an unpaid creditor of the company petitions to the court to wind up the Company. If not defended, a court has the power to place the company into compulsory liquidation. An Official Receiver is initially appointed to handle the liquidation and will investigate the Company’s actions prior to liquidation. Like CVL, CWU is a terminal process whereby the business cannot be rescued.


CONTACT US 

Moore (South) R&I LLP provide corporate insolvency services in our five office locations:  If you require more information about the recovery options for corporate insolvency, or if you wish to discuss anything we’ve mentioned in the above article, please contact our expert team now. All client information is treated completely confidentially.