Company or Personal Insolvency can be as a result of your own actions or as a result of circumstances that lead to it because of several factors, such as the loss of your job, the impact felt as a result of a recession, a major creditor in receivership causing a chain reaction and other circumstances that may be outside of your control.
In the business world, insolvency can also be as a result of the actions of the employees of a company, an example being Nick Leeson the rogue trader whose unchecked risk-taking caused the biggest financial scandal of the 20th century when his employer Barings Bank collapsed in 1995 because of his actions.
Dealing with insolvency requires specialist skills, knowledge and (where transport is concerned) an understanding and background of the industry we're all a part of.
Insolvency can be broadly split into two types, (1) corporate (2) personal and it is dependant on how the entity trades as to which is applicable.
Corporate Insolvency is applicable when trading takes place through an incorporated company, be it a large plc or a small "one man band". The entity of an incorporated company should be viewed as being entirely separate from the directors, who - whilst being responsible for the running of the company - do not automatically become responsible for company debts in the event of insolvency.
Company insolvency can be identified in either of two ways:
- The balance sheet test
- Do the net assets of the company exceed the net liabilities?
- The Cash flow test
- Can the company pay its debts as and when they fall due, along with any accrued interest?
If the answer to either of these is no, then the company may be considered to be insolvent. If a company is apparently insolvent then the directors will need to take proper advice as to whether it should continue trading or not, for if they fail to do so, they may make themselves liable to personal liabilities including disqualification.
The options that are open to an insolvent company are :
- Company Voluntary Arrangement
- Company Compulsory Liquidation
- Company Voluntary liquidation
There are frequently complex reasons that affect the choice of route to be taken and it is important that appropriate advice be taken at the earliest sign of problems, particular if directors want to avoid any possibility of personal liability.
Personal Insolvency includes those who trade in their own name without the benefit of an incorporated company "sole traders", as well as those who trade in partnerships. It means that the individual or partner is liable for debts incurred and is responsible for making payment.
In many ways the test for insolvency is much the same as that for companies and the acid test is always that of "Can the individual pay their debts as and when they fall due, along with any accrued interest?"
An individual (whether a sole trader or a partner) cannot be placed into liquidation and only has the following options available:-
- Informal debt resolution ie Debt Management Plan
- Individual Voluntary Arrangement ("IVA")
- Partnership Voluntary Arrangement ("PVA")
Taking advice at an early stage of insolvency is more likely to result in some sort of "rescue plan" being implemented.
Frequently Asked Questions
The following are a few brief questions usually asked.
- What happens if a customer of mine becomes insolvent?
- If the company or the individual enters into a formal insolvency procedure, an Insolvency Practitioner or Official Receiver will contact you and provide you with details of who is dealing with the case. They will provide you with details of any meetings of creditors that are being called along with all appropriate documents.
- Do I have to complete the paperwork?
- No. But if you do not you may lose an opportunity to register for a dividend. You will also need to register your claim so that you can claim VAT bad Debt Relief
- Do I have to go to the meeting?
- No. But if you do not, information which may be important to the enquires of the appointed insolvency practitioner may be lost. Also it is usually your opportunity to ask questions of those responsible at the time of the insolvency.
- Can someone go in my place?
- Yes. As long as you send in a proxy before the day of the meeting. Like many Insolvency Practitioners Tenon Recovery offer a free service and will represent you at the meeting, as well as representation on creditors committees and will seek and report back to you on the chances of a dividend.
For further information, there is a link to the government web site on Insolvency. We have also provided a link to Nick Leesons web site which makes for very interesting reading.