Businesses across all sectors can be affected by changes in the economic, societal and political landscape. When that happens, financial difficulties can arise and managing your way out of those can be extremely challenging.
In order to survive, organizations need to act quickly and decisively, while restructuring and insolvency experts such as Withers can offer a range of advice and services to navigate the hurdles ahead.
While hoping that it is an issue they never have to face, all businesses must be aware of the threat of insolvency, what it could mean for the organization and how they can respond.
What is insolvency?
The term insolvency refers to the point where a business’ liabilities exceeds its assets, meaning it cannot raise enough capital to pay its debts to lenders.
This state of serious financial distress can occur as a result of poor management, a rise in expenses or a reduction in cash flow.
What’s the difference between insolvency and bankruptcy?
Insolvency is sometimes confused with bankruptcy, which is one way a company can respond to insolvency.
It refers to a legal process that occurs when the court declares an individual or an enterprise owes at least £5,000 and can no longer repay its debts.
What can insolvency mean for a business?
Becoming insolvent does not necessarily have to spell the end for a business. Of course, it depends on the specific circumstances of the situation – for example the total of a company’s assets weighed up against its liabilities.
But with careful management and the right advice, an organization can recover.
How can businesses tackle insolvency?
As already touched upon, declaring bankruptcy is one method of dealing with insolvency. Others include:
1# Individual Voluntary Arrangement
This is where an individual comes to an agreement with their creditors to repay their debts – in full or in part – over a period of time. IVAs are set up by licensed insolvency practitioners and are legally binding.
2# Company Voluntary Arrangement
CVAs are essentially the same as IVAs, except that it is a business, rather than an individual, that comes to an agreement with its creditors. If accepted, it allows the directors to retain control of the organization.
3# Compulsory Liquidation
Also known as a winding up order, where a creditor presents to the court that the company is unable to pay its debts. A liquidator’s job is to release the business’ assets so that creditors can be repaid.
4# Creditors’ Voluntary Liquidation
In this instance, the company’s shareholders will decide to wind up the business without the need to go to court. Arrangements will be made to repay creditors on a priority basis, as far as finances allow.
This is where an administrator is assigned to help a company recover its position and continue trading, or achieve a more desirable outcome for creditors than if liquidation were to occur.
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