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Steps to Business Insolvency (Not Bankruptcy) - Fleximize

Steps to Business Insolvency

What's involved in filing for insolvency?

By Kate Josselyn

What does it mean to file for insolvency?

Filing for insolvency means you’re officially starting a legal process because your business can’t pay its debts. It’s recognising that your business is in financial trouble and needs help.

When you file for insolvency, you are asking for legal help to either fix your financial problems or close the business. It’s a way to get structured help to manage your debts so you can either try to recover or end the business lawfully.

The difference between insolvency and bankruptcy

There are many misconceptions surrounding business bankruptcy in the UK.

Bankruptcy vs. insolvency

For businesses

Types of insolvency

When a business is struggling to pay its debts, there are two main types of insolvency it can choose from: voluntary and involuntary. Each type has different insolvency procedures and outcomes. Here’s a closer look at these options:

1. Voluntary insolvency

Company Voluntary Arrangement (CVA)

A Company Voluntary Arrangement (CVA) is a way for a company to solve its financial problems while still keeping the business running. It’s similar to an Individual Voluntary Arrangement (IVA) that people use, but it’s designed for companies.

The company’s directors need to plan how they will pay off their debts. This proposal includes details about how the company will manage its finances moving forward.

The directors must submit several important documents to the court, including:

If the creditors and the court accept the proposal, the company can continue trading while following the repayment plan. This helps avoid more serious actions like liquidation.

Administration

Administration is another voluntary option that can help a company if it is in serious financial trouble. Here’s how administration works:

  1. The company or its creditors can file a petition to start administration. This petition is a request to the court to protect the company from its creditors while it tries to fix its financial problems.
  2. Once the petition is approved, an administrator takes over the company’s management. The administrator’s job is to help the company get back on track and find a way to pay off its debts.
  3. While in administration, the company is protected from further legal action by creditors unless the court allows it. This gives the company time to recover and try to avoid liquidation.

2. Involuntary insolvency

Involuntary insolvency occurs when external parties, like creditors or courts, take action to close a business that cannot pay its debts. One common outcome is liquidation, where the company is closed, and its assets are sold to repay creditors.

Compulsory liquidation

This happens when a court orders the company to shut down, often because creditors have taken legal action to recover unpaid debts. The company ceases trading immediately, and its assets are sold to repay creditors.

Voluntary liquidation

While called "voluntary," this process often results from financial distress and may be initiated to avoid compulsory liquidation. Directors choose to close the business by filing an application with the court, after determining it cannot continue to trade. Assets are sold, and proceeds go to creditors.

Costs and fees

Depending on the type of insolvency chosen, fees may be involved. For example, there might be costs for legal advice, court fees, or administrative fees. It’s important to consider these costs when deciding which type of insolvency is right for your business.

What happens when you file for insolvency?

When you file for insolvency, different things might happen depending on the type of insolvency you choose:

Company Voluntary Arrangement (CVA)

If you choose a CVA, you can keep your business running while you work out a plan to pay back your debts over time. This plan is like a contract between you and your creditors, showing how you will repay what you owe.

Administration

If you go for Administration, an administrator will take over your business. This means someone else will manage the business to try to fix the financial problems and avoid closing it immediately. This can give your business a chance to recover.

Liquidation

If your situation is very serious, you might choose Liquidation. This means your business will stop trading right away, and everything it owns will be sold to pay off the debts. Liquidation is usually a last resort if other options won’t work.

How does a company file for insolvency?

To file for insolvency, follow these steps:

1. Get professional advice

It’s a good idea to talk to an insolvency practitioner or a lawyer who can help guide you through the process.

2. Prepare your financial information

Gather all the details about your business’s finances, including debts, assets, and income.

3. Submit the application

File an application with the court, including all the necessary documents. This might include a proposal for how to repay your debts, financial details, and statements from professionals.

4. Follow legal requirements

After filing, make sure you follow all legal requirements, including attending meetings and providing additional information if needed.

Your common questions answered

1. Choose the type of insolvency

Decide whether a CVA, Administration, or Liquidation is best for your situation.

2. Prepare and submit your documents

You need to fill out and submit important paperwork to the court. This might include:

  • A plan for how you will handle and repay your debts.
  • Financial details about your business, including what you owe and what you own.
  • Statements from professionals, like a nominee or administrator, who will help with the insolvency process.

3. Follow the plan

Depending on the type of insolvency, you’ll either follow a repayment plan, let an administrator manage your business, or close the business and sell its assets.

Insolvency doesn’t automatically erase your debts. Instead, it helps you manage and deal with them in a structured way.

Depending on the insolvency type, some of your debt might be reduced or repaid over time, but not all of it will be written off. Insolvency provides a way to handle your debts more effectively, but it doesn’t mean you’re free from them completely.

Yes, claiming insolvency can damage your credit score.

This is because it shows that you’ve had trouble managing your debts. As a result, it can be harder for you to get loans or credit in the future. Your credit report will show the insolvency for several years, which can affect your ability to borrow money.

Yes, there are costs involved with insolvency. These can include fees for:

  • legal advice
  • court costs
  • administrative fees related to the insolvency process

The costs can vary based on the type of insolvency and the complexity of your situation.

Insolvency can sometimes affect your job, especially if you work for the business that is going through insolvency. It might lead to job losses or changes in your employment conditions.

If the business closes or changes significantly, your job could be at risk.

The penalties for insolvency can include a damaged credit rating, legal and administrative fees, and possibly losing your business or job.

It’s important to follow the legal process carefully to minimise these penalties and try to resolve your financial issues effectively.

Being bankrupt and insolvent are related but not the same.

  • Insolvency is a term used for businesses that are unable to pay their debts.
  • Bankruptcy, on the other hand, is a term used for individuals with similar financial problems.

So, insolvency applies to businesses, while bankruptcy applies to people.

In the UK, there are three main types of bankruptcy:

  • A Debt Relief Order (DRO) is for those with low income and small amounts of debt.
  • An Individual Voluntary Arrangement (IVA) allows you to repay your debts over time, usually for those with larger debts.

Bankruptcy is a legal process where your assets are sold to pay off your debts, often used for more serious financial problems.

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