Insolvency company means that the financial liabilities of a business (the money owed to creditors) exceed the value of its assets. Insolvency can be a result of poor income or cash flow, but it can also be caused by the company pursuing unprofitable projects, or it may have disposed of its assets for less than their true value. Operating an insolvent company can lead to accusations of wrongful trading and the directors of the company may be held personally responsible for the company debts.
How a company becomes insolvent insolvency company is dependent on the circumstances of each case, but there are some common warning signs that insolvency is looming. For example, if the company is struggling to pay its wage bills, this is usually an early warning sign that things are not going well. When the wages of employees go unpaid, it can become difficult to keep the company afloat and if the situation is allowed to deteriorate, the company could soon be placed into liquidation.
Another reason that companies can become insolvent is if they are unable to cope with rising vendor costs. When a company is unable to raise prices to match the higher cost of raw materials, it can lose clients and ultimately income which would normally be used to pay creditors.
There are a number of different insolvency processes available to companies, but it is important to understand that the interests of creditors must always be put before those of shareholders and directors. Therefore, it is important for directors to be aware of the warning signs that their company may be teetering on the edge of insolvency and to take action accordingly.
For example, if a company receives a statutory demand from a creditor, the director should not continue to trade and should seek professional advice immediately. They should also ensure that they do not undertake any additional borrowing which they know they will be unable to repay and they should not dispose of any assets of the company for less than their true value.
Liquidation is the most common form of insolvency and it is generally only undertaken if the company’s position is hopeless. It is an expensive process and it is not uncommon for the company’s assets to be sold off during the process, with the proceeds being used to pay creditors in full as far as possible.
If a company is put into liquidation, the directors can then choose to start a new company with the same team, often referred to as a ‘phoenix’ company. However, it is important to be aware that the previous company’s entry on the insolvency register will still be visible, even though the director has moved on to a new project. In the event of a phoenix company, it is vital that the same procedures are followed to prevent any further debt from being incurred by the company.