What is insolvency and how can you steer clear of it?


There is a perpetual dark cloud hanging over any business – the threat of insolvency. It’s a phrase that will send shivers down the spines of even the most battle-hardened CEOs, but what does it actually mean and how can you best avoid it at all costs?

What is insolvency?

When a business can no longer cover its own debts then it is insolvent. These debts can be anything from invoices and salaries to rental payments and anything in between. The specifics really don’t matter in this case – if your debts are larger than your assets and you can’t meet your outgoings, you are insolvent. But that doesn’t necessarily mean it’s curtains for your company. It’s dangerous, of course, but by restructuring your business you could feasibly find your way out of the storm.

How to tell if your company is in insolvency

Cash flow – Can you pay all of your bills on time or are you struggling to pay your bills on time? If the answer to either of these questions is negative then you might be either insolvent or heading towards insolvency.

Balance sheet – List all of your assets and measure them against your debts. If the former is larger than the letter then you are technically insolvent, though this can be an easier well to climb out of.

These are the cut-and-dry tests you can do but there are also various signs you could be looking out for. For example, if you’re struggling to cover operating expenses or your lenders are chasing you for payment. As a rule of thumb, if it seems like it should be a sign of insolvency then it probably is.

What to do if your company is insolvent?

The first thing you should do is get in touch with a licensed insolvency practitioner. They should be able to go through your options and help map out a plan for restructuring your business or liquidating assets to cover it. If you don’t get in touch with a professional, then it could lead to legal action against you.

As a company director, however, you also have other responsibilities to take into account. This includes putting any creditor interests above your own and ensuring that shareholders are taken care of first and foremost. You should also abstain from undertaking any immediate activities that could increase your company debt and refrain from asset stripping, as this is impractical and immoral. You will also probably have to cease trading immediately to avoid drilling yourself deeper into the insolvency hole.

Options will include refinancing, negotiating repayment terms with creditors, liquidation and administration. Of course, negotiation is the ideal solution but it’s not always going to be realistic. The most important thing is to not panic. Thousands of businesses have been here before and there are people out there who know how to help.

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