6 things that might happen if your business goes insolvent

The possibility of going insolvent can be worrying, but it doesn’t necessarily mean the end of the road for your company. In this article, we’re going to talk about six things that might happen if your business goes insolvent.

If your business is facing financial difficulties where you are at risk of going insolvent, this doesn’t spell the end. For starters, you should consider obtaining advice from insolvency lawyers who will have experience in dealing with similar matters and be able to assist you. 

There are also a few extra things you could try to get your business back on track. In this article, we’ll explore six key considerations you should think about before your business goes insolvent. Keep reading to learn more… 

What Does it Mean for a Business to Go Insolvent?

When a business goes ‘insolvent’, it means that they are unable to pay their debts. That could be they owe money to creditors and are unable to pay it, or when the business has more liabilities than it does assets on its balance sheet. 

It provides the possibility of the business having to close permanently. However, there are ways for this to be avoided. 

If you are interested in learning more about what insolvency means, the GOV.UK can provide further details and advice to assist. 

Now that you understand what an insolvent business is, let’s take a look at the six possibilities of what might happen if your business is classed as insolvent. 

6 Things That Might Happen if Your Business Goes Insolvent

1. Come to an Informal Agreement with Your Creditors

It might be possible for you to continue to run your business by coming to an informal agreement with your creditors regarding paying back your debts. 

If you are experiencing financial difficulties and are concerned about the repaying of your debts, contact your creditors immediately and discuss the options with them. 

Keep in mind that an informal agreement isn’t a legally binding contract, and they can withdraw at any point. 

2. Company Voluntary Agreement (CVA)

An alternative to an informal agreement is a CVA, which is a binding agreement between the company and its creditors regarding paying back all or part of the debts over a fixed period. If at least 75 percent of your creditors agree to the CVA, it will be approved, and the business will be allowed to continue trading.

3. Administration

A way of preventing the closure of a business is by handing the reigns over to an insolvency practitioner (the ‘administrator’). This is known as the administration process. When this occurs, creditors are unable to take any legal action, such as to recover their debts or to apply for compulsory liquidation without court permission. 

What the administrator will do whilst running your business is attempt to restore the company. They will do the following:

- Restore the business’s viability.

- Attempt to make an agreement with the creditors, otherwise known as a CVA.

- Sell the business as a going concern.

- Release assets to pay a preferential or secured creditor.

If the administrator is unable to return it to profitability, the business will either be sold on or placed into liquidation. 

4. Administrative Receivership 

Administrative receivership – otherwise known as ‘in receivership’ – is initiated by a floating charge holder, which is usually a bank. They will appoint an administrative receiver (private insolvency practitioner) to recover any money which is owed to the bank and others (excluding unsecured creditors). 

The role of the receiver is to recover enough money for: 

- Their costs

- The preferential creditors 

- The floating charge holder’s debt

5. Closing the Company (Liquidation or ‘Winding Up’)

If the other methods haven’t been approved or haven’t restored the business, then the last resort is usually to wind up the company.

When a business goes into liquidation, it means that trading is ceased. The business will be removed from Companies House register, meaning it ceases to exist. 

The process of ‘winding up’ a company can be applied for either by the business’s director through creditors voluntary liquidation or a compulsory liquidation (which creditors can apply to). 

Therefore, there is the possibility if you have outstanding debts with a creditor or multiple that they might make an application to the court for your business to enter liquidation. 

6. Employees Need to be Considered

There are other aspects to consider if your business goes insolvent, and this includes what happens to your employers.

If the business must close due to insolvency, your employees will be made redundant. There are safeguards in place to protect employees and ensure they will still receive their statutory payments, such as arrears in wages/salaries, holiday pay and redundancy pay. 

Employees are regarded as ‘preferential creditors’, which means they rank highly as a creditor, usually above others owed money. There are limits to the amounts that can be claimed as a preferential creditor, including:

- Unpaid wages/salary for the four months prior to insolvency

- Outstanding holiday pay of up to six weeks

- Certain occupational pension contributions

If the company is unable to pay, employees can claim using the National Insurance Fund (NIF) for the following:

- Up to eight weeks’ arrears of wages

- Up to six weeks’ outstanding holiday pay

- Pay in lieu of notice

- Some unpaid pension contributions

- Redundancy pay

It Doesn’t Have to Be the End for an Insolvent Business 

Although the term insolvent might sound scary, and make you think that it is the end of the road, that doesn’t have to be the case. 

What we can conclude from this article is that there are alternative options to liquidation. Start with your creditors, see if you can reach either an informal or binding agreement, which allows you to continue trading whilst slowly paying off your debts. If that doesn’t work out, then administration is the next step. 

Have you experienced running an insolvent business or been an employer of an insolvent company? Comment your thoughts and experience below.

Please be advised that this article is for general informational purposes only, and should not be used as a substitute for advice from a trained business or financial professional. Be sure to consult a business or financial professional or solicitor if you’re seeking advice regarding your business insolvency. We are not liable for risks or issues associated with using or acting upon the information on this site.