Insolvency is a legal term used to describe when a person or organisation is unable to meet its financial obligations. This can happen when a person or organisation does not have enough money to pay its debts or when a person's or organisation's income is not sufficient to cover its expenses. Insolvency can also occur when a person or organisation is unable to sell its assets to pay its debts.
What types of insolvency are there?
There are three laws for insolvency: bankruptcy, suspension of payments, and debt restructuring for persons act. Companies with payment problems and outstanding debts can apply for bankruptcy or suspension of payments. Suspension of payments is granted by the court and gives companies room to put their affairs in order and avoid bankruptcy. Often through an agreement with creditors. If the issues are too great, the company is declared bankrupt.
Bankruptcy through insolvency
There are several types of bankruptcy or insolvency procedures available in the UK, including:
- Bankruptcy: This is a formal insolvency procedure for individuals who cannot repay their debts. It involves the sale of the individual's assets to pay off creditors and can last up to 12 months.
- Individual Voluntary Arrangement (IVA): This is a legally binding agreement between
an individual and their creditors to repay a portion of their debts over a set period,
usually five years. After this period, the remaining debt is typically written off. - Debt Relief Order (DRO): This is a form of bankruptcy for individuals who have little to no assets, a low income, and debts under a certain threshold. It allows debts to be written off after 12 months.
- Company Voluntary Arrangement (CVA): This is a formal agreement between a company and its creditors to repay debts over a set period. It can help a company avoid liquidation or administration.
- Administration: This is a formal insolvency procedure for companies that are financially struggling but have the potential to be saved. An administrator is appointed to try to rescue the company or sell its assets to repay creditors.
- Liquidation: This is a formal insolvency procedure where a company's assets are sold to repay its debts. There are two types of liquidation: compulsory liquidation, which is ordered by the court, and creditors' voluntary liquidation, which is initiated by the company's directors.
Preventing insolvency
Insolvency can be prevented by:
- Regular financial management: Monitor your income and expenses, keep your
accounts, and monitor your debts. - Proactive planning: Predict any financial problems and make plans to solve them before they get bigger.
- Improve liquidity: Find ways to improve your cash flow, for example, by selling non-essential assets or finding new sources of funding. You can do this, for example, by outsourcing debtor management or opting for factoring.
- Working with creditors: Hold regular meetings with creditors and work together to find a solution.
- Consider insolvency treatment: If financial issues are unavoidable, consider in time the available options for insolvency treatment, such as suspension of payments or bankruptcy.
It is important to recognise solvency problems early on and take actions to prevent
bankruptcy.
