Insolvency

What it means

Insolvency takes two forms: inability to pay, where a company fails to meet more than one debt over 30 days past due, and over-indebtedness, where liabilities exceed assets with several creditors.

Establishing it is not a matter of feeling. It rests on the books and the sub-ledger, which is why current accounting is what makes the filing deadline manageable at all.

Insolvency is not the same as liquidation. Liquidation is a way of winding up a company that can pay all its creditors. If it turns out during the process that the assets are not enough, the company is insolvent and the liquidator must file for bankruptcy instead of quietly completing the liquidation.

How it works in practice

Once insolvency is established the director has a statutory period to file for bankruptcy. The alternative is restructuring where the business is viable and creditors will negotiate.

Before insolvency there is crisis and preventive restructuring. Solutions at that stage are cheaper and preserve the value of the business.

When a client starts paying late, we give the director an overview of overdue liabilities by creditor and days overdue, and a comparison of assets with liabilities. The director takes it to a lawyer, and in parallel we assess whether the statements can still be prepared on the going concern basis.

What to watch out for

Filing late carries personal consequences: the director is liable for the loss and can be disqualified. Staying quiet and waiting for a better month is the most expensive strategy available.

An insolvent company pays only chosen creditors, typically related parties, or repays the director’s own loan. The bankruptcy trustee can later challenge such payments as preferring certain creditors, and the money has to go back into the estate, often with personal consequences for the director.