Insolvency is the inability to pay one’s debts as they fall due. Bankruptcy and individual voluntary arrangements (IVAs) are insolvency processes used by individuals; liquidation, administration, administrative receivership and company voluntary arrangements (CVAs) are insolvency processes used for businesses.
When a company is unable to pay off its debts, it is referred to as insolvent or trading as insolvent and specialist Insolvency Practitioners are required.The UK Insolvency Act 1986 defines insolvency both in terms of cash flow and balance sheet. A company can be cash-flow and/or balance sheet insolvent. The key parts of the Act for defining being unable to pay a company’s debts:
Section 123 (1) (e) if it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due.
Section 123 (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.
Once a business is insolvent there are various core options available to management and creditors – those who are owed money by the business. Creditors include bank lenders, suppliers, other trade creditors and the Inland Revenue. Directors risk civil and criminal offences if they knowingly allow a company to trade whilst insolvent.