What to do if your contractor business becomes insolvent

A lot of people ask us what insolvency actually means. Put simply, your business is insolvent if it cannot pay its debts as and when they fall due.

Insolvency can also apply if the liabilities in a business exceed its assets – constituting, in effect, a negative balance sheet, writes Matthew Fox, partner at Beacon LIP Limited.

The first step 

It is often very challenging for a business-owner to ask for help as soon as there is a problem. Their pride naturally comes into it. However, it is very important to make contact with a licensed professional as soon as possible. The earlier this step to find a licensed insolvency practitioner is taken, the greater the likelihood there is of more options being available, and the more likely the business is to be saved.

Also, if prompt action is not taken, creditors can commence legal action, either by seeking a County Court Summons Judgment or by serving a statutory demand, leading to a petition being filed at court to wind up the business.

Potential options: an informal agreement

If the issue is potentially only temporary, then contacting the supplier or creditor to whom you owe the money is an important step. By discussing the current cashflow issue facing your business, you may well be able to reach an informal agreement with them.

This agreement could take the form of an extension to your current credit terms or to make and accept part payments on account. Be aware though, on any overdue element of debt, your supplier or creditor could be entitled to charge interest. 

Further consider, any informal agreement is not legally binding, so legal action can still be taken against your business at any time for non-payment of the debt.

Potential options: formal courses of action

Depending on the circumstances, the formal options upon insolvency can be many and varied, but, for small to medium-sized businesses, the main ones are:

Administration

In very brief terms, this is a formal process where a qualified and licensed insolvency practitioner is appointed by the directors of a company.  

The appointment is registered with the court to give short term protection to the company from any creditor legal action. A creditor would need to seek leave of the court to bring or continue any action.

This requirement on creditors allows you a small amount of breathing space, while a proposal is put forward (to creditors) to restructure, save or sell the business as a going concern. It could also lead to the company entering into a Company Voluntary Arrangement (see below).  Alternatively, the purpose could simply be to facilitate a better realisation of the company assets than would be achieved via liquidation.

Company Voluntary Arrangement (CVA)

A CVA is a formal agreement with the company’s creditors to repay a debt due, either in part or in full, over a period of time. 

The directors remain in control of the business, which continues to trade. Typically, the company will make monthly contributions into an account supervised by a licensed insolvency practitioner for a period approved by the creditors. 

Creditors will then receive a dividend, either at the end of the arrangement or on an annual basis, until the CVA is complete. The company will then exit the CVA and continue trading.

Creditors' Voluntary Liquidation (CVL)

In this scenario, the directors initially meet with and subsequently instruct an insolvency practitioner to wind up the affairs of their company -- though shareholders must also agree to the process. This winding up is carried out on the understanding that the business is no longer viable and able to be rescued as a going concern. 

By ceasing to trade, employees of the company are made redundant. The business and assets, if possible, are usually marketed for sale by an independent agent. Any debts due to the company will collected by the liquidator once appointed. 

At the point of liquidation, the powers of directors cease. The liquidator will report to and agree the claims of the creditors and any other company liabilities. Eventually, the company will be struck off and dissolved at Companies House. 

Compulsory Liquidation

Compulsory liquidation is a court-driven process, where a creditor can petition the court to wind up the company. The creditor will need either to have obtained judgment or have served a statutory demand which was not disputed or settled.

It may interest you to know, a company can petition a court to wind it up, but that is generally rarer. Companies tend to choose other options if they want to wind up their own affairs!  

Following the making of the ‘winding up order,’ the ‘official receiver’ from the Insolvency Service is initially appointed by the court. The directors will be required to meet with the official receiver to explain why the company has failed and to deliver up the company books and records, so that all assets and liabilities can be identified.

Getting help and advice with insolvency

As you can see, if you find yourself insolvent or on the brink of such, the options are many, varied and quite complex. They are certainly complicated enough to warrant the right, tailored advice from a fully licensed insolvency practitioner, in order that the right path can be identified and taken.

Last but definitely not least, if you are unsure who is and who is not a fully licensed insolvency practitioner, you can usually search on the ICAEW and IPA websites. And yes, before you ask, we at Beacon are fully licensed! There is also no charge for an initial meeting with us, which is something we believe is only right and proper for individuals -- including contractors – invariably enduring commercially challenging, personally trying and financially distressing circumstances.