Business owners face one of two situations: They can’t pay bills on time or have more liabilities than assets. If you’re operating out of the East of England, such as Norwich, knowing what steps to take can make a world of difference. This guide will provide clarity on what to do if your business is approaching insolvency in Norwich. Let’s get in.

Insolvency vs. Bankruptcy: Know the Difference

First things first, know the difference between insolvency and bankruptcy. According to the Insolvency Act 1986, a company is deemed insolvent when:

  • It is unable to pay its debts when due, resulting in cash flow issues.
  • The assets are valued at less than their liabilities
  • It has received a written demand for an unpaid sum after 3 weeks of the due date.

Insolvency, therefore, is a business’s status as unable to pay bills. On the other hand, bankruptcy is a legal procedure and a court order. Bankruptcy can be considered one outcome of insolvency. Remember that an insolvent company is not always bankrupt.

Now that you know the difference between insolvency and bankruptcy, let’s look at some steps you should take if your business is approaching insolvency:

Acknowledge the Situation

Start by acknowledging your financial troubles. Denial only makes the situation worse, so it’s important to accept that help is needed. Watch out for the following signs of insolvency:

  • Persistent cash flow issues. Your company’s outgoings consistently exceed incoming revenue.
  • Inability to pay bills. Your company doesn’t have enough liquid assets to pay bills, including wages and vendor invoices.
  • Defaulting on taxes and insurance payments.
  • Creditor pressure and threats from HMRC.
  • Reduced revenue
  • Increasing debt levels. You are heavily reliant on borrowed funds and regularly overdraw your accounts.
  • Struggling to acquire new debts from banks.
  • High employee turnover.
  • Loss of key customers and suppliers.

Seek Expert Advice

Expert advice can make the difference between your business sinking and surviving. Insolvency specialists and solicitors can offer numerous services and expert advice when your company is approaching insolvency. Here’s why you should work with a solicitor:

Guidance through complex laws. Insolvency laws can be highly technical and complex. A solicitor will break down technical jargon for you, ensuring all actions taken are in full compliance with relevant legislation.

Strategic planning. An insolvency solicitor will assess your complete financial situation (assets, debts, and liabilities) to determine if your financial issues are temporary or long-term. They would recommend recovery strategies, if applicable.

Negotiate with creditors. This is an important part of dealing with business insolvency. A solicitor can help you agree on favourable terms with creditors (more on this later)

Understand legal obligations. An insolvency solicitor will help you understand your duties. Being the director of an insolvent company, your role is to protect the interests of its creditors.

Stop Incurring Further Debt

Unfortunately, you cannot completely stop the negative consequences of business insolvency. However, you can take preventive measures.

The best thing you can do is to avoid taking on new credit you cannot repay, as this may result in personal liability.

Negotiate With Your Creditors

When your business is approaching insolvency, expect legal notices, even legal threats, from unhappy creditors. Act quickly and begin negotiations to come to manageable conditions. Here are some tips you can follow:

Consult with your insolvency solicitor as early as possible. They are expert at navigating legal complexities and developing a viable strategy.

Assess your financial situation thoroughly. Conduct an internal audit to have a clear picture of your finances, including debts, income, expenses, and cash flow issues.

Communicate proactively. Do not ignore creditor demands and explain the difficulties your business is facing.

Prioritise your debt. Differentiate between secured and unsecured debts and know which are most pressing. This will help you develop a realistic repayment plan.

Act early and insolvency may not always be the only solution. Companies that specialize in business debt settlement can often provide negotiation advice or even negotiate on your behalf. Make sure that you are taking advantage of this support.

Enter a Company Voluntary Arrangement (CVA)

Once you’ve assessed your financial situation, a solicitor would advise you to enter a Company Voluntary Arrangement (CVA). It is a legally binding agreement between you and your creditors. The agreement clarifies that you will repay debts over a period of time, usually 3 to 5 years.

The condition? 75% (by debt value) of creditors should agree. Only then can your company continue trading while repaying its debts. Moreover, directors remain in charge and continue running the business.

A CPA is managed by a licensed insolvency practitioner (IP) who drafts proposals and supervises payments.

Explore Closure Options

The last step is winding up the company. Simply put, it means you go into liquidation. There are two possible scenarios:

Creditors' Voluntary Liquidation (CVL) - It is initiated voluntarily by the company's directors. A licensed IP is appointed as the liquidator to sell off all company assets. Creditors are paid, and the company is formally dissolved.

Compulsory Liquidation - It becomes mandatory when one or more creditors petition the court to have the company forcibly wound up.

In both cases, a reputable insolvency solicitor can guide you and ensure compliance.

Conclusion

Facing business insolvency is undoubtedly stressful, but it does not have to mark the end of the road. The key is recognising the warning signs early and taking decisive, informed action. Even when recovery is no longer possible, understanding your closure options ensures that the process is handled lawfully and with minimal risk to you as a director.

Legal Disclaimer: Please be advised this article is for informational purposes only and should not be used as a substitute for advice from a trained legal professional. Please seek the advice of a legal professional if you’re facing issues regarding business insolvency.