It is important for any business owner to understand corporate insolvency but because of the complexity of the financial implications, often it can get lost in translation. Naturally, most business owners don’t think about insolvency until it is too late, and their business is already in trouble. However, insolvency, just like any other aspect of running a business is important to understand. If you struggle to define terms such as liquidation and insolvent trading, then keep reading this concise guide to insolvency.
Insolvency is when a company reaches a point where they are no longer able to pay their debts when they are due.
To avoid insolvency, you may wish to seek out accountants and solicitors to help you restructure your business. By strategizing how you can address your existing financial problems you may be able to prevent falling into further problems. This is why terms such as these are crucial to understand so that if you come across these problems you have a better understanding of the preventative or reactionary measures you can take.
If your business has reached the point of insolvency, you may wish to go into voluntary administration as an alternative to liquidation. This will provide you with a chance to save the business by appointing an administrator who will work to create and submit a proposal to settle the outstanding debts owed and to be able to return all control to the directors. During this period, the administrator will be in complete control of all the businesses’ affairs. They will work to complete an investigation and submit reports to creditors as to whether the company should be liquidated or whether the proposal shall be accepted. Unlike liquidation, administration gives a business time and opportunity to sort out its finances if it is believed that they can be successful and profitable in the near future.
Insolvent trading is when as a business owner you choose to continue trading even after your business has become insolvent. However, it is your responsibility to ensure that trading does not continue after this point and that you immediately seek out the advice regarding insolvency via a solicitor. Many business owners are not aware that if you choose to continue trading past the point of insolvency, you can be held personally liable. If the liquidator discovers this during their investigation into your businesses affairs they may choose to make a claim against you leaving you bankrupt.
Liquidation is when a business is forced to shut down because it is not able to fully pay off their existing debts. As a result, the company’s assets are valued and sold off to pay off these debts and the business as a whole is investigated to better understand the destination of its finances. If the liquidated assets are able to cover the liquidation costs, any remaining funds are then distributed to former employees and creditors.
A liquidator is a person, independent of the business who is appointed to help oversee the liquidation process. They will have the responsibility of collecting in all of the businesses assets company and settling all claims against the company before putting the company into dissolution.