What is insolvency?
Insolvency happens when a company or individual is unable to pay their debts on the due dates, or has insufficient assets to cover their debts.
It’s the directors’ responsibility to know when a company has become insolvent, and they can be held legally responsible for continuing to trade if this is the case.
There are a number of procedures available to insolvent companies. Administration, company voluntary arrangements (CVA) and administrative receivership are solutions that offer the potential for rescue.
It’s often preferable for a company to continue trading via one of these processes in order to preserve value and retain customers.
However, if rescue is not possible the company may be placed into liquidation. This involves the company’s assets being turned into cash and distributed among its creditors, and usually results in the termination of the company’s business activities.
Depending on the procedure, the insolvency process can be initiated by banks and lending institutions, the company’s creditors, the courts or by the directors or shareholders of the company itself.
The aim of any insolvency procedure is to extract the greatest value for the benefit of the company’s creditors. The company’s circumstances and the availability of its assets will determine which method is used to achieve that aim.