What is company insolvency and what are your options?

Updated: 8th February 2021

A company is deemed to be insolvent when it cannot pay its debts as they fall due, or the value of its liabilities is greater than its assets. If you think that your company is insolvent, you must seek the advice of a licensed Insolvency Practitioner as soon as possible.

Taking too long to cease trading leaves directors open to accusations of wrongful trading, and subsequent disqualification as directors. Begbies Traynor offers a same day initial consultation free of charge with a fully licensed Insolvency Practitioner.

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Common insolvency options for companies

Company Voluntary Arrangement (CVA)

A Company Voluntary Arrangement (CVA) can allow the directors of a distressed company the ability to continue to trade while dealing with its debt problems. A CVA functions as a formal payment plan entered into by a company and its creditors. Extended payment terms will be negotiated with creditors on the company's behalf by a licensed Insolvency Practitioner who will act as nominee and supervisor for the duration of the process.

A single consolidated monthly payment is made over a longer period of time (typically 3-5 years), freeing up valuable working capital for the company and immediately improving cash flow. Interest and charges are frozen, and creditors are unable to take legal action while the terms of the CVA are being met.

A CVA may offer the opportunity to get the company back on its feet, and suppliers could continue to trade with you. In order for a CVA to be implemented, however, at least 75% of creditors (by value) must give their consent to the proposal. Due to this, a CVA is only an option for those companies who can demonstrate their ongoing viability and the ability to turnaround their current situation.

HMRC Time to Pay arrangement

If you have arrears on VAT, corporation tax or PAYE, you or your insolvency practitioner may be able to agree a Time to Pay arrangement with HMRC. This is an instalment plan that grants you extra time to pay, and commonly lasts for three to six months. although terms of up to 12 months can be negotiated in some instances.

Although many directors enter into negotiations with HMRC, it may be beneficial to ask a licensed insolvency practitioner to help you in this regard. Begbies Traynor can contact HMRC on your behalf to negotiate a TTP arrangement on your company's behalf.

Under a TTP, your tax liability is not reduced – you will still need pay the full amount you owe, but being able to do this over a longer period of time often helps to relieve some of the immediate financial pressure your company is experiencing.

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Pre-pack administration

Pre pack administration involves selling the underlying business assets as a going concern, and differs from Company Administration as the sale is negotiated prior to appointment of an insolvency practitioner.

This benefits several parties – the company’s financial problems are unlikely to become known to the public, meaning that trade should not suffer, jobs are often saved, and creditors generally receive a higher dividend than they would if the company was placed into liquidation.

Indeed, it is incumbent on the administrator - who must be a licensed insolvency practitioner - to prove that a pre-pack administration is the best possible option, and is in the best interests of creditors.

Creditors’ Voluntary Liquidation (CVL)

The CVL process may be suitable if there is no future for the company and you want to avoid potential accusations of wrongful trading or misconduct. A CVL is a director-initiated process which sees the company placed voluntarily into liquidation following the appointment of a licensed Insolvency Practitioner. As part of the process business assets are sold to realise as much as possible for the creditors prior to being formally dissolved.

Begbies Traynor can offer advice on whether your company is insolvent, and provide professional guidance on any of the insolvency options mentioned. We offer a free same-day consultation from offices spanning numerous UK locations.

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