David Kirk, insolvency practitioner, offers an overview of how to prevent your company from reaching insolvency stage.

For some businesses, it may be too late to avoid insolvency, because you are being pushed down that route by a creditor, or you may have decided the situation is irrevocable and your business needs to be closed or restructured.

If your business has not reached this stage, then you need to take the following steps to avoid insolvency:

• Work out your business finances: make a list of what assets you own and the liabilities you have, and get a proper idea of where you are financially. This is really a balance sheet in accountant's terms.
• Make a realistic cash flow projection for the next few months and see where the pressure points are. For example, can VAT and PAYE be paid on time? If you're a seasonal business, can you survive the quiet part of the year? Once complete, you can assess whether you can carry on trading or not.
• If manageable, talk to suppliers that you owe money and ask for instalment options. Talk to HM Revenue and Customs and ask for Time To Pay (TTP), and justify why you need the time.
• If you can't manage the situation yourself, take professional advice from an accountant or a licensed insolvency practitioner.

Even if insolvency is inevitable, there are still some options available, should you wish to carry on the business in a new entity, or try and rescue the existing company:

Company Voluntary Arrangement (CVA)

A common way to be given a longer time to pay debts off and even be allowed to write debt off is by using a CVA, which is a legally binding agreement between a limited company and its creditors to suspend payments. Quite often it involves freezing interest and allowing the company to pay back its debts, with a discount, over 3 to 5 years.

Pre-pack administration

If a CVA is not suitable, a pre-pack administration may be used. This is a fairly common formal insolvency procedure that provides continuity for the company with the minimum of disruption, in order to preserve goodwill. It can be quick to arrange, and can help to prevent clients and customers leaving, making a change in ownership as smooth a transition as possible. 

Liquidation

Liquidation is the legal process by which a limited company or partnership is brought to an end. A company or partnership usually stops trading as soon as it enters into the liquidation process.

For pre-packs and liquidation, the assets can be sold to a new limited company, though there are rules that need to be followed, and assets have to be sold at market value (though they can be paid for by instalments in some cases).

As always, the earlier you recognise the threat of insolvency, and the sooner you take professional advice, the more options you will have.

About the author

David Kirk is a chartered accountant and licensed insolvency practitioner based in the south west. Follow @kirksinsolvency or visit www.kirks.co.uk.