While insolvency may be an unavoidable end-of-the-road destination for many businesses, there are multiple options to be considered prior to pushing the final button. As a business owner, you have a fiduciary duty to ensure that you have taken every step to prevent the liquidation of your firm, so it’s best to know what options you have.
You should only be in this situation where you are considering insolvency if you have business debts you cannot pay, that the business if continued would be trading illegally or if you (or shareholders) no longer wish to run a business.
There are two main options that you can consider before insolvency: Receivership and Voluntary Administration.
What is Receivership?
A receivership is when you have a creditor who owns security in the firm organises the sale of company assets to repay the owed funds. For example, this may be a bank that has security on the company building. They might appoint a receiver to organise the company’s assets and sell off items quickly to recoup their debt. This need not be the end of the business; many firms have recovered from these situations (just look at any airline during a fuel crisis!).
What is Voluntary Administration?
Voluntary Administration is when a firm believes that soon they would be trading while insolvent (which is against the law) and have decided to appoint a third party administrator who has extra powers to restructure the business. This administration might either be able to recover the business and turn it profitable again (perhaps by negotiation out of unfavourable contracts or reducing liabilities) or make the company more attractive to potential buyers.
In both scenarios, businesses have been able to flip their luck and come back stronger than ever. Had many household names taken the insolvency route in the past, they would no longer exist and would not have recovered to become well known today.
You may also want to read: The Voluntary Administration Process
What do I need to know before insolvency?
There are several critical things that you need to know before you commit to the path of insolvency.
The first is that you and your business will be examined by an independent liquidator who will be looking to ensure that you (or any other directors and management) did not do anything on purpose to put the company in its current position.
This will include any payments made up to four years before liquidation to any debtors to ensure that there were not any excessive preference payments.
Additionally, you will no longer have any control over your business during liquidation; you will lose your role as Director and, consequently, have no control over the firm’s future. You will lose access to all assets and everything may be sold. This may be a blessing for some, but for others, it may allow competitors to swoop in and buy intellectual property (that may be useful for future endeavors) or to poach good employees.
If you want to know how to liquidate your business, then read here.
For more information on the potential pre-insolvency options available and to discuss how they may apply to your business, contact us.