If your business has reached the end of its lifetime as you no longer have the necessary funds to stay afloat, fulfil financial commitments and make repayments to creditors, take this as a warning sign. Diffusing the situation early can prevent your company from becoming insolvent, however, prolonging the situation could result in extinguishing any prospect of survival and worsening the financial position of creditors. In this circumstance, taking no action could result in trading as insolvent which is a serious offence.
If the health of your business is beyond repair and the damage encountered is long-term, you may explore company closure procedures to put an end to your insolvent business. It is likely that if you fail to proactively deal with the worsening affairs of your company, creditors may launch legal action against your business, resulting in forcing your business into liquidation. As an attempt to recover outstanding debts, creditors may launch a Winding Up Petition which could attack your ability to trade, if successful.
What happens during a Creditors’ Voluntary Liquidation?
A Creditors’ Voluntary Liquidation is a formal insolvency procedure used to close your business, administered by a licensed insolvency practitioner. This liquidation process is entered voluntarily as decided by the company director(s) following months of debt build-up and creditor pressure. Creditors will then be notified of your intention to liquidate and presented with a Statement of Affairs which is essentially a summary detailing the financial position of your business and creditor returns.
This liquidation route enables the company director to settle outstanding affairs with creditors by using the funds generated from realising assets to make debt repayments. If there is a shortfall of cash, this is likely to be written off as part of the Creditors’ Voluntary Liquidation process.
What happens to debt tied to a Personal Guarantee Agreement?
By signing a personal guarantee agreement, you are agreeing to be held personally liable for the debt in question, falling outside the protection of limited liability. This is often a condition put forward by finance providers and banks when taking out a loan. By agreeing to a personal guarantee, you may be able to secure a greater credit line, a competitive interest rate and a larger overdraft or finance facility.
By securing the loan against the value of personal assets, the creditor can recover funds in the event of non-repayment or company liquidation. The personal guarantee will continue to stand in the event of a Creditors’ Voluntary Liquidation and will not be written off.
How can I test if my business is insolvent?
The two common tests used to check if your business is insolvent consist of a balance sheet and cash flow test. By proactively analysing business performance, you can analyse company finances and track the balance of income and expenditure. By conducting a regular health check on your company, you can prevent your business from falling into debt by minimising overheads and restructuring company operations.
The balance sheet test for insolvency calculates the value of company assets against liabilities, including deferred payments, helping you keep track of the flow of cash running in and out of the business. If your business has more liabilities than company assets, this is likely to result in balance sheet insolvency. A cash flow test for insolvency assesses if your business is likely to run out of cash, taking into consideration running financial commitments and impending payments. This test will help forecast if your business will require a cash injection to survive. Recording accurate financial data is vital for both tests to be carried out successfully.
The liquidation route used by solvent businesses differs, drawing focus on the cost-efficient distribution of retained profits, known as a Members’ Voluntary Liquidation. A licensed insolvency practitioner can help point the route forward for your business and explore if your company can be recovered through a restructuring solution or by accessing alternative finance.