If your business is suffering from financial difficulties, or you work with a company that is being wound up, it will help to read our Q&A to find out what procedures are followed when a company becomes insolvent.
IPSE tells you what to expect if you are owed money by a company in financial difficulties and explains the procedure for winding up a business in case you find yourself with more debt than you can cope with.
Q): What does insolvency mean?
A): If a business cannot pay its business debts when they become due, or if the assets of a business are less than the debts, the business is insolvent. The creditors effectively own the business and if the value of the assets falls, the creditors could realise that their money is at risk and want it back. To avoid this situation happening, a business needs to make sure that it keeps its capital up by holding back on profits where possible. A business can become insolvent even if it is making a profit and has enough capital but cannot make payments to creditors on time.
Q): What is the difference between insolvency and bankruptcy?
A): The two terms are used interchangeably, but strictly speaking insolvency is the term used to describe the process of winding up a failing business and bankruptcy refers to the position an individual faces when dealing with debts he or she cannot pay. The bankruptcy proceedings free a person from overwhelming debts so they can make a fresh start. The assets are shared out fairly among the creditors. Once somebody has been declared bankrupt an Official Receiver will take control of their money and property and will deal with the creditors. Bankruptcy may not be the best way of dealing with a debt. Take advice before proceeding with bankruptcy.
Q): I am owed money by a company that is being wound up. Will I get my money?
A): If you work with a business that has entered into a formal insolvency procedure you may be owed money by the company. There are a number of insolvency procedures – which one is used will depend upon the circumstances, and this will affect how you get your money, if you get it at all. In some cases the business may carry on trading as normal and you will continue to be paid. However, you could consider terminating your contract if you are concerned about losing money. If you are owed money by a company this will make you a creditor and you may be sent details of any proposal set out in a voluntary arrangement (VA). Consider the contents and vote accordingly. See below for more on VAs. Whichever situation you find yourself in, you need to prepare a statement detailing the money owed to you and assemble evidence to prove this. This can be sent to the liquidator, administrator or trustee – whichever is appropriate to the procedure.
Q): My business owes money. Should I consider a voluntary arrangement?
A): A business may be able to avoid being wound up or individuals avoid bankruptcy by entering into an arrangement with the creditors. There are company voluntary arrangements (CVAs) and individual voluntary arrangements (IVAs). A CVA has the survival of the business as one of its main objectives. The company will seek to agree a compromise of its debts with its creditors and trading may continue while the company makes instalment payments over a specified period of time to the creditors. There are two types of IVA; formal and informal. Formal voluntary arrangements are where the business puts a proposal forward, possibly suggesting instalment payments, with the help of its advisers. The creditors hold a meeting and vote on an arrangement. If the creditors vote to accept the proposal then they are bound by the arrangement and cannot sue for their debt. In informal arrangements family members can be asked to give a loan or guarantees to help out in the short term.
Q): My business is a partnership. Will this affect how it is wound up?
A): If a limited liability partnership (LLP) becomes insolvent the process is similar to that for the insolvency of companies. In an LLP you and your partners can propose a partnership voluntary arrangement (PVA), but to remove the individual partners’ joint and several liability to meet the partnership debts, the partners will have to enter into an IVA. If partners cannot pay the debts of the partnership or enter into an IVA then they will be made bankrupt.
Q): Will insolvency affect my employees?
A): If your business is wound up it is likely that your employees will be made redundant. They will be the preferred creditors for up to four months arrears of wages, salaries, holiday pay and pension contributions they are owed and will be paid before other creditors. Employees are also entitled to statutory redundancy, but this is lower down the priority scale. If you can make a voluntary arrangement or your business is put into administration then the business will carry on and some jobs may be saved. Similarly the administrator may find a buyer for part of your business and employees will be transferred to the buyer with their terms and conditions and rights protected.
Q): Will I be able to set up another business after insolvency or bankruptcy?
A): It is possible to survive bankruptcy. Once discharged you regain control of your own money and you can start up in business again, but you may find it difficult to borrow money as your credit rating will have been affected. Even if you can borrow you may have to pay higher interest. Undischarged bankrupts cannot apply for credit or be a director of a company. After discharge some bankrupts cannot hold certain positions. You may even be subject to a Bankruptcy Restriction order for up to 15 years. Directors of insolvent companies are not allowed to become directors of companies with similar names. If a court decides that you were to blame for the insolvency you can be disqualified from being a director for up to 15 years. If you have a VA you may have fewer problems starting again but could still face difficulties applying for credit.