Surviving company insolvency can be a juggling act. It is incorrect to assume that every insolvent company is a failing company.

In some instances, a company that cannot pay its bills when they become due could be a perfectly viable business that’s simply fallen on hard third party time. Something as seemingly minor as a late payment or poor cash flow management could be enough to make your business technically insolvent.

So, if you do become insolvent, it’s essential you act in the right way to make sure your business survives.

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When Does a Business Become Insolvent?

A company is deemed to be insolvent if it satisfies one of the two tests set out in section 123 of the Insolvency Act 1986. A company is insolvent when it:

• Can’t pay bills when they become due;
• Has more liabilities than assets on its balance sheet.

When either of these becomes true, company directors are obliged to act in a very specific way to avoid potential personal repercussions further down the line. You can’t, for example, simply trade your way out of insolvency, but that’s not to say there aren’t certain things you can do to keep your business afloat.

(1) Contract Your Creditors to Try and Reach an Informal Agreement

If you are unable to pay your creditors, burying your head in the sand and waiting for the pressure to build is the worst thing you can do. Instead, try contacting your creditors to reach an informal repayment agreement. Talking to angry creditors is not always easy, but the vast majority would prefer to give you more time to pay the debt rather than taking legal action.

(2) Ask for Time to Pay

If the creditor you are unable to pay is HMRC, whether it’s a corporation tax, VAT or PAYE liability, you should contact them immediately to discuss the problems you are having. You may be able to reach a Time to Pay Arrangement. A typical Time to Pay Arrangement will last 12 months, and it’s essential you reach an agreement you can stick to as defaulting will considerably reduce your options to settle with HMRC in the future.

(3) Inject Money into the Company

Most directors, at one time or another, will inject personal money into their companies when times are hard. If you don’t have savings, this can be done with a personal loan or a credit card. Although this strategy is quite risky, in some cases it is the only option. Some directors may ask for friends or family for investment in exchange for company shares.

(4) Consider Alternative Finance Options

If you don’t want to dilute your ownership of the business or sell company assets, perhaps invoice financing could free up the money you need? In an invoice finance a third-party provider (such as a bank of independent finance provider) agrees to buy your unpaid invoices for an upfront fee of up to 85 percent of their value. The finance provider will then collect the payment from the debtor when it’s due and pay you the balance, minus a small fee.

(5) Restructure the Business

Although the business may be viable in the longer term, it could be the way it is structured that is holding it back. Restructuring a business involves everything from looking at staffing levels and potential outsourcing opportunities to downsizing, moving to different premises and even renegotiating existing contracts.

(6) Enter into a Company Voluntary Arrangement (CVA)

A company voluntary arrangement is a formal and binding agreement between an insolvent company and its creditors for the payment of a debt in full, or in part, over an agreed period. A CVA will typically last for a period of five years. For a CVA to be agreed, 75 percent of the company’s creditors must agree to accept the proposal. The company can resume trading once the CVA has been agreed.

(7) Obtain an Administration Order

By obtaining an administration order, you effectively hand over the control of your business to an insolvency practitioner, known as ‘the administrator’. Once the administrator has taken control of the business, your creditors cannot take legal action against you to recover their debt without permission of the court.

The administrator will then draw up proposals to restore the company’s viability and repay the creditors. If it is not possible to save the company, they will aim to sell the business as a going concern to improve the creditors’ return.

How can we help?

To discuss your company rescue options and give your business the best chance of surviving a company insolvency situation, please call 0800 074 6757 or email: today. One of our advisers will provide you with free no-obligation insolvency advice consultation to help you consider your options.