Deal with insolvency

If your business is at the point where liabilities (what you owe) exceed your assets (what you own), your company is insolvent. At this point the shareholder equity in the business has effectively ceased to exist. When shareholder equity is negative, directors are personally at risk, and owe a duty of care to creditors.

An important thing to remember is that not all assets and liabilities are equally easy to realise. Current assets and liabilities such as cash, debtors, stock and creditors flow more rapidly through the business than long lasting items such as equipment or long term loans.

Even if your liquid assets that are readily available get too low to meet your obligations, you could still be insolvent. Also if you take on financial obligations that you have little chance of being able to fulfil then you are probably insolvent. It is important to be prudent in your business transactions as well, for instance if the next transaction you are about to undertake will probably lead to insolvency you should not take it.

There are stringent rules for directors and anyone acting as a director. If they continue trading while insolvent they could become personally liable for any debts of the company. This could lead them to be disqualified from holding office as a director for up to 15 years and even be fined. If you find yourself even approaching this area you need the prompt advice of an insolvency practitioner. However, directors who act properly will not be penalised.

What happens to an insolvent business?

If there is no realistic solution, the business will be wound up by a liquidator who will normally pay debts in the following order:

• Loans secured on a fixed asset
• The cost of winding-up the business
• Local authority rates, water charges, VAT, income tax, staff wages and salaries
• Loans and debts secured on a general floating charge across the assets, but not against a specific asset
• Ordinary trade creditors
• Shareholders

See also File for bankruptcy Develop an exit strategy