Quick guide to insolvency

Insolvency is a general term used for all types of insolvency, including being made bankrupt, going into receivership, liquidation, administration and voluntary arrangements.

How do you become insolvent?

  • If you owe over £5,000, or a significant amount of money, to any one person or company, they can push you into insolvency. In most cases, the creditor (who you owe money to) does not want you to become insolvent; they just want to get their money back. 
  • You can make yourself insolvent, should it become clear that you cannot financially repay your debts as they fall due or pay them off in full.
  • If you are self-employed, your choices of insolvency are bankruptcy, a voluntary arrangement or a debt relief order.
  • Partnerships can go into administration, liquidation or a partnership voluntary arrangement.
  • Limited companies have the option of liquidation, administration or a company voluntary arrangement. 

It used to be that a bank could put your company into receivership, but that is rarer now, and they are likely to push for administration. In fact, receiverships can only apply to companies that have a debenture on them registered before the 15 September 2003.

Most businesses that are making a profit should try to avoid insolvency.

What to do if your business is insolvent

The costs of insolvency can be expensive. They will include the professional fees of a licensed insolvency practitioner (IP), other costs, and in some cases, a 17% ad-valorem fee, which is charged by the Insolvency Service.

If in doubt about what is best for you and your business, you should seek professional advice from an IP, as they will give you a list of options available and help you to choose the right one for you.

These options will include:

  • continue trading, but with careful monitoring
  • raise more finance and funding
  • cease trading and enter liquidation
  • restructure your existing debts using a voluntary arrangement
  • enter administration to immediately protect the business

See also: What is corporate restructuring and turnaround?

About the author

David Kirk is a chartered accountant and licensed insolvency practitioner based in the south west. Follow @kirksinsolvency or visit www.kirks.co.uk.