Understanding Insolvency
In recent years, the term “insolvency” has become increasingly familiar in the UK as a result of economic challenges, market fluctuations, and unforeseen events like the global financial crisis and the COVID-19 pandemic.
Insolvency refers to a financial state where an individual or business is unable to meet its financial obligations and liabilities, thereby risking the potential of bankruptcy. This article aims to shed light on the intricacies of insolvency in the UK, exploring its causes, processes, and available solutions.
Causes of Insolvency
Cash Flow Problems: One of the most common reasons for insolvency is a lack of sufficient cash flow to meet debts as they fall due. This may arise due to a decline in sales, delayed payments from customers, or an increase in operating costs.
Overextension of Credit: Businesses or individuals that rely heavily on credit and loans without adequate plans to repay them are at risk of insolvency. Accumulated debts can become unmanageable, leading to financial distress.
Economic Downturn: Economic recessions and market downturns can significantly impact businesses, resulting in reduced consumer spending, decreased demand for goods and services, and increased competition, all of which contribute to financial strain.
Mismanagement and Poor Governance: Incompetent management, lack of financial controls, or dishonest practices can lead to poor decision-making, financial losses, and ultimately, insolvency.
Legal Disputes: Costly legal battles, fines, or settlements can drain a company’s resources, leading to financial instability.
What insolvency processes are there?
Liquidation: When a business is insolvent and there is no reasonable prospect of recovery, liquidation may be the most appropriate course of action. The company’s assets are sold, and the proceeds are used to repay creditors. This process is governed by the Insolvency Act 1986 and overseen by a licensed insolvency practitioner.
Administration: In some cases, a company may enter administration, allowing it to be restructured and continue operating under the supervision of an administrator. This aims to maximize returns for creditors and save the business.
Company Voluntary Arrangement (CVA): A CVA is an agreement between a company and its creditors, enabling the business to continue trading while repaying debts over an agreed period. This requires the approval of creditors and supervision by an insolvency practitioner.
Individual Voluntary Arrangement (IVA): Similar to a CVA, an IVA is a legally binding agreement between an individual and their creditors to repay debts over time.
Bankruptcy: For individuals facing insolvency, bankruptcy is an option that allows for the discharge of debts under certain conditions. The process is overseen by the Insolvency Service.
Insolvency Practitioners
Keywood Group is a Licensed Insolvency Practice with offices in Birmingham and London. Our team has extensive experience in advising businesses. Our Insolvency Practitioner is fully licensed in relation to corporate and personal insolvency and is regulated by The Insolvency Practitioners Association. If you want further information, please contact us for a no obligation chat.
