If your company is insolvent, or you are facing intense creditor pressure, you may be considering your options.
The first thing to realise is that insolvency is ultimately a legal process intended to help businesses with debt, and maximise returns for creditors. That said, it is also a way for directors of struggling companies to find respite from intensely stressful situations, and to close or rescue companies that have reached a critical juncture.
This article will explore the various processes of insolvency, when they may be appropriate, and how they can help you.
Which Insolvency Process is Appropriate for Your Situation?
When a company cannot pay its bills, or whose liabilities exceed its assets, a number of options are available, as the following list explains.
Companies can either choose a voluntary liquidation process, or have compulsory liquidation forced upon them. In this process, an insolvency practitioner assumes control of the company and sells (‘liquidates’) assets to maximise the returns for creditors.
The insolvency practitioners fees are generally taken from the asset sale.
The timeline for this will depend upon the amount of assets the company has and the length of time it takes to liquidate these. On average, one year is a standard timeframe.
How Long Does the Process Take?
A company can enter liquidation in a matter of a few weeks, but the overall time frame will depend on the size of the company, and how much work is involved for the liquidator to realise the assets.
Generally appropriate for larger companies, a company that goes into administration gets protection from legal action whilst an insolvency practitioner assesses the business situation. It may involve restructuring and employee layoffs as the administrator establishes if the company remain viable. Successful administrations can end with the business reentering profitability and living to fight another day. On other occasions, the administration becomes a liquidation and the company is closed.
How Long Does it Take?
Going into Administration can have within a few weeks, and the entire process is rarely longer than a year. For this period, the administrator would typically run the business for a maximum of 6 weeks.
Company Voluntary Arrangement
This rescue mechanism involves a structured repayment plan for creditors, and must be voted into agreement. It must be arranged by an insolvency practitioner and only then if it is deemed the company can return to profitability.
How Long Does it Take?
The process of putting together a CVA proposal usually takes around a month, after which the creditors need to vote in order for it to become legally binding, which takes up to four weeks.
Personal Insolvency (Bankruptcy)
When an individual becomes insolvent it is known as bankruptcy.
Whilst individuals can arrange formal repayment plans known as Individual Voluntary Arrangements (IVAS), the process of declaring bankruptcy is done via a Bankruptcy Order.
As with companies, this can be done either voluntarily or be forced upon you for non payment of debts.