Insolvency in business: understanding your options

It can be personally challenging to acknowledge that a company is facing financial difficulties. We spoke to Mark Bowen at MB Insolvency to understand insolvency in business and how to prevent financial problems from becoming unmanageable.

Directors and business owners faced numerous challenges due to the Covid-19 pandemic. A gloomy economic outlook following the Autumn Statement has many of us preparing for even more obstacles.

Challenging trading circumstances can cause financial distress in which a person or business cannot pay their debts. For those companies facing difficulties, there are two essential steps to take to deal with those difficulties: act early and seek advice. 

What is insolvency in business?

Insolvency in business is when you cannot pay the company’s debts.

Being a company director or business owner comes with various duties and responsibilities. One of the most critical roles is to promote the financial success of the company. When facing financial difficulties, it is vital to seek advice early.

Taking early advice will help you to understand your options to prevent financial problems from becoming unmanageable. Importantly, not sticking your head in the sand puts you in a better position to resolve the company’s financial situation.

What are the warning signs of insolvency?

When caught up in the day-to-day running of a company, it can be easy to miss the warning signs of insolvency.

A typical sign of financial distress is when a company is lengthening its creditor days, i.e. the number of days it takes to pay suppliers from the date the payment is due. Longer creditor days are often a sign of cashflow issues, indicating the company is increasingly less able to pay its debts as they fall due.  

Other signs that a business doesn’t have sufficient cash or working capital to pay debts as they fall due include: 

Tax debts

Failure to pay tax liabilities such as National Insurance, PAYE, or VAT can often be a key element in losing control of company finances. HMRC can sometimes become a significant creditor in failing businesses with numerous debts to recoup. 

Pension deductions

Failure to pay pension deductions from employee wages to a pension provider due to a lack of funds can signify possible insolvency.

Cancelling staff bonuses

Failure to pay bonuses may indicate that finances are on the decline. 

Lack of investment

Failure to invest in new technology, people or marketing, or essential repairs not being undertaken to buildings or machinery due to a lack of funds can signify possible insolvency.

Directors’ remuneration

The director’s inability to draw an income from the business can signify financial distress. 

Stock levels

An increase in stock levels may be an early indication that incoming orders are reducing, clearly signalling that a company’s financial position is deteriorating.

An increase in stress

A distressed company usually results in increased stress for its directors and management.

Are insolvency and bankruptcy the same thing?

Essentially, insolvency and bankruptcy share similarities but are not the same thing.

Insolvency in business is when you cannot pay the company’s debts. Specifically, when a company’s liabilities are more significant than its assets, it cannot pay its debts. This type of insolvency is called balance sheet insolvency.

Bankruptcy, on the other hand, is a term usually applied to an individual to describe a failure in financial words. Bankruptcy is a form of personal insolvency. Therefore, a court usually declares bankruptcy when an individual’s assets are worth less than the liabilities. In this scenario, the company’s creditors cannot get anything back from the business.

Someone bankrupt is insolvent. However, being insolvent does not necessarily mean bankruptcy.

How do I apply to become bankrupt?

You can apply online via HMRC to make yourself bankrupt if you cannot pay your debts.

Where should I go for business insolvency advice?

Talking about money can be difficult, but dealing with money worries can be even more challenging.

If your company has financial problems, even temporary ones, the key to recovery is to act early.

It would help if you considered getting professional advice from a:

• Citizens Advice Bureau
• solicitor
• qualified accountant
• authorised insolvency practitioner
• reputable financial adviser
• debt advice centre

Members of the insolvency and restructuring profession, including insolvency practitioners, can act as impartial sounding boards. Crucially, they can help you understand your options and relieve you of the burden of dealing with the situation alone. 

At MB Insolvency, we help people and businesses facing financial difficulty. We offer a free initial consultation to help those seeking help with their business finances or resolving a financial situation.

About the Author:

Mark Bowen is the Managing Director at MB Insolvency, preserving businesses, reputations and livelihoods in even the most challenging situations. Connect with Mark on LinkedIn, visit MB-i.co.uk or call 07920 773643.