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Your Business is Insolvent — What Do You Do Now?

Your Business is Insolvent — What Do You Do Now?

Insolvency in business can happen for several reasons, especially when there is a downturn in the economy. Poor management and fraud are also common factors. Signs that your business is losing ground can be creditors continuing to be unpaid, poor cash flow, and ongoing losses. A company becomes insolvent when it is unable to pay back its debts.

There are two ways to determine corporate insolvency the first being the cash flow test. Is the company able to pay its debts when they are due? The balance sheet test goes like this: Is the value of the company’s assets less than the number of its liabilities, taking into account uncertain and future liabilities? It’s heartbreaking to see your business go bankrupt after all the effort you put forth. Before it gets any worse, it’s imperative that you act quickly. Acting within the law and finding the best solution will help you better deal with your company becoming insolvent.

Find Insolvency Professionals to Help

The very first step is to speak with a commercial lawyer from a highly reputable company. They can advise you on anything from cutting costs to restructuring your business depending on the current state of your affairs. If there is no way possible to save your company and it becomes insolvent, you must stop all trade. Do not incur any more debt, and appoint a liquidator.

A creditors voluntary liquidation (CVL) is the process in which the company’s directors choose to bring the business to an end. A licensed insolvency liquidator is then hired to liquidate all of the assets.

How Does A Creditors Voluntary Liquidation Work?

Step 1

The directors or board members make the initial contact to an insolvency administrator. A few basic questions are asked during the initial consultation to determine if a CVL is the best option for your business.

Step 2

A Company Voluntary Arrangement (CVA) will likely be discussed as an alternative option if the directors are interested in keeping the company in business. A CVA can help if they are concerned there is no way to repay outstanding debts and escape insolvency. A CVA is a payment plan that the company proposes to its creditors.

This arrangement is a last-ditch effort of sorts to reach a formal agreement. If all parties agree, it will be easier for your business to recover from its debts. Under a CVA agreement, the company would have to sell some or all of its assets to repay the creditors. Secured creditors will always take priority.

Step 3

If the directors and insolvency administrator determine that a CVL is the best option, a report is prepared and distributed to all known creditors. This process takes the stress out of the entire process, as there is no longer a need to hold a creditors’ meeting.

A date is set where the business will enter into liquidation which is usually within two weeks after the time the report gets distributed to said creditors. A CVL makes it quick and easy to put an end to a stressful situation.

Step 4

The final step is the liquidation of the company’s assets. The insolvency liquidator will continue to act as the middleman with the creditors during the settlement of the company. They will resolve any problems that are related to the creditors’ claims, and take action to sell the business’s assets. The insolvency liquidator will also handle employee claims, issue reports to government agencies, and stop the collection of outstanding book debts.

After liquidation, the company will cease to exist. During the liquidation period, the liquidator must investigate any actions the directors may have taken during the insolvency period. If they find the directors did not fulfill their fiduciary duties, they could be found guilty of wrongful trading. In this case, it will likely result in the directors being held liable for the company’s debts. They could be banned from acting as a director of any business for up to 15 years.

The takeaway is to understand where you went wrong in the first place. Many people consider bankruptcy as their best option when they are struggling to become insolvent and clear debts. However, with hard work and thorough research, it is possible for a company to bounce back and become viable again.

If there’s nothing you can do, you may want to look at other business ventures. To ensure you never make the same mistake twice, you need to understand how your financial issues came about. It’s vital to look for alternative ways to work or trade to prevent negative problems from arising due to financial management and cash flow. If you choose not to acknowledge your failures, you are destined to repeat the same mistakes.

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by Eileen O'Shanassy // Eileen O'Shanassy is a freelance writer and blogger based out of Flagstaff, AZ. She writes on a variety of topics and loves to research and write. She enjoys baking, biking, and kayaking. Check out her Twitter: @eileenoshanassy.

Opinions expressed by contributors are their own.