Avoiding Corporate Insolvency

Corporate insolvency is something that no business wants to have to deal with. Corporate insolvency is what happens to a business when it can no longer keep up with its debt repayments. When a business runs out of money they become insolvent. As the Insolvency Act 1986 states:

123. Definition of inability to pay debts (i.e. insolvent)

(1) A company is deemed unable to pay its debts...

(e) If it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due.

(2) A company is also deemed unable to pay its debts if it is proved to the satisfaction of the court that the value of the company's assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities.

Many businesses become insolvency for a number of different reasons; the most common problem lies within the fact that companies often do not have enough capital and are frequently relying on their creditors for financial help. These businesses that are not generating enough money from sales and revenue, and are increasingly relying on creditors, will generally tend to become insolvent.

When businesses become insolvent they can sometimes be put into liquidation. This process involves a procedure where all the company's assets and property are redistributed either as they are or transferred into cash value, in order to satisfy their creditor's claims. The process can brought into effect by either a majority ruling by the board of directors of a company or if the company creditors petition for the 'winding up' process.

There are also certain ways of avoiding insolvency. If a business believes it can dig itself out of the bad financial situation it is in, there are several methods of delaying insolvency which would allow the business to carry on or not lose as much money. Listed below are a few methods that are regularly used by businesses in an attempt to save their company.

Company Voluntary Arrangements (CVA): This is a legal agreement that is created between an insolvent business and its creditors. The two parties will arrange a repayment by a fixed rate instead of a one off lump sum. This allows the business the chance to sort out the company finances and still pay back what they owe.

Administration: This is where a business appoints a licensed administrator to manage the company's finances, whilst at the same time, protecting the interests of creditors. An administrator's main aim is to restructure the whole company so that it can continue to function. One of the most common forms of administration is a pre-pack administration; this is where a administrator organises a pre-arranged sale of the business. They will tend to set up a sale to the company's directors and owners, which aims to get the best price of the assets for the business creditors. This ensures that the company owners and directors cannot be held personally liable as all the money that is owed to the creditors can be financed through the asset sale.

Any businesses that may be nearing insolvency should get expert advice from a qualified solicitor about how to sort out their business finances .