06 Oct 2023
by Menzies

What is Insolvency?

Insolvency refers to a financial state in which an individual, business, or entity cannot meet its financial obligations and liabilities as they become due. It's essentially a state of financial distress when assets fall short of the liabilities, making it challenging to honour financial commitments.

It is unfortunate that many businesses may face financial or operational difficulties during their journey. These challenges can range from minor issues, such as temporary cash flow problems due to delayed payments from creditors to more severe problems that can threaten the company's solvency. Insolvency can be a jargon-heavy topic, and it's important to make sure you can translate the paperwork.



How to deal with Corporate Insolvency

When facing corporate insolvency, businesses have several options:



Turnaround refers to a company that has experienced a period of poor performance moving into a period of financial recovery due to a restructuring process. This is known as an informal process. For Insolvency Practitioners (IPs), insolvency is always a last resort, and every effort is made to turnaround the business, if feasibly possible, before a formal insolvency process begins. This might include restructuring or refinancing the company’s operations.


Company Voluntary Arrangement (CVA)

A CVA, or Company Voluntary Arrangement, is a formal legal agreement which allows a financially distressed company to reach a compromise or arrangement with its creditors regarding the repayment of debts. This arrangement is typically overseen by a Licensed IP and requires approval from a significant majority of the company's creditors.



Administration is a formal insolvency procedure designed to protect a financially distressed company while maximising the return to its creditors. It is often used as an alternative to liquidation or bankruptcy and aims to rescue the company as a going concern or achieve a better outcome for creditors than an immediate liquidation would. An Administration is a flexible insolvency procedure aimed at providing a lifeline to struggling companies. It allows for the business to continue trading whilst various restructuring options are explored, with the goal of preserving jobs, maximising creditor returns, and ensuring the company's ongoing viability if possible.



When a company or individual faces financial instability, a legal process called a Receivership can be initiated. This involves the appointment of a Receiver who takes control of and manages the assets, operations, or finances of the entity on behalf of creditors or other stakeholders. A Receivership can be triggered by loan defaults, breaches of financial covenants, or the need to safeguard the interests of creditors.



During a liquidation process, the IP is responsible for gathering and selling assets to pay off creditors in a predetermined order. The company's directors may choose to enter a Voluntary Liquidation, or the courts may order a Compulsory Liquidation, also known as a winding-up petition. In the case of a Compulsory Liquidation, the Official Receiver serves as the initial Liquidator.


There are four types of Company Liquidation: Compulsory Liquidation, Creditors' Voluntary Liquidation (CVL) and Members' Voluntary Liquidation (MVL).

  • Compulsory Liquidation is initiated by a court order when a company is unable to pay its debts and is considered insolvent. A Liquidator is appointed to oversee the process and sell the company's assets to repay creditors.


  • In a CVL, the company's directors, shareholders, or creditors voluntarily wind up the company due to financial difficulties or insolvency. A Licensed IP is appointed as the Liquidator to handle the sale of assets, and where funds permit, make a distribution of funds to creditors.


  • MVL is used when a solvent company wishes to close its operations and distribute its assets to shareholders. A Liquidator is appointed to oversee the process and ensure that assets are distributed to shareholders after settling all debts.

Trading with a company with a past history of Insolvency

If you find yourself dealing with a customer that has now ceased to trade and they owe you money but the directors have setup a new company and this new company wants to trade with you, what should you do? Read our blog on "Trading with a familiar face" which dives deeper into this unique scenario.

How to handle Personal Insolvency

When facing personal insolvency, an individual has two options:



Bankruptcy is a legal process that is initiated when an individual or a business is unable to pay off their debts. It is a form of insolvency that involves a court-supervised process aimed at helping the debtor to manage their debts and repay their creditors. During the bankruptcy process, a trustee is appointed to manage the debtor's assets and liabilities, and to distribute any available funds to the creditors. Bankruptcy can provide relief to debtors by allowing them to discharge certain debts and start afresh, but it can also have serious consequences such as damaging the debtor's credit score and limiting their ability to obtain credit in the future.



Individual Voluntary Arrangement (IVA):


An IVA is a legally binding agreement in the UK for individuals who are struggling with unmanageable debts. It allows the individual to make a structured arrangement with creditors to repay a portion of their debts over a set period, often five years. Any remaining unpaid debt at the end of the IVA is typically written off.



The role of an Insolvency Practitioner


If you are facing financial difficulty, an IP will provide an expert assessment of you or your company's financial situation. This is an important consideration if you think your business might be insolvent because it's crucial not to conduct business in these situations. The sooner you seek the guidance of an insolvency practitioner, the more useful they are to your business. If you contact an insolvency practitioner when your company is still in its early stages of difficulties, you will be giving it the best chance of survival.


Remember – the earlier Insolvency Practitioners are engaged, the more options available to the business, the individual or you as a creditor.


Test your Insolvency Knowledge in 60 seconds

Find out what you know and what you can learn in the "A Creditor's Guide to Insolvency" training session