Early warning signs - rescuing a business from insolvency

by Startacus Admin

What are the early signs of ‘going under’? Hasib Howlader, Director of Hudson Weir, an insolvency practitioners firm based in London, highlights some of the early-warning signs that can be key indicators for the liquidation or ‘winding up’ of your business. 

Although the term ‘bankrupt’ is widely used, a company in the UK cannot go ‘bankrupt’. Technically, the company enters liquidation and ends trading and initiates a creditors voluntary liquidation, or CVL, to pay off its debts. The company can be ‘wound up’ as a result of a petition by creditors who are owed money by the company.

Liquidation can occur whether a company is insolvent or not. An insolvent company’s assets will be distributed among its creditors after liquidation whereas a solvent company would pay any remaining monies to its shareholders once its debts are paid off.

Trouble ahead

The warning signs of insolvency are not always obvious. But keeping an eye open for symptoms of a sickly company on its last legs will go a long way to preventing liquidation. Like most illnesses, if caught early the patient can be saved. That’s enough of the medical analogies. What are the early signs of ‘going under’?

Testing times

There are two fundamental tests of a business that can determine whether it is insolvent or not. Remember, insolvency does not automatically lead to liquidation, going ‘bankrupt’, but being insolvent means there is no time to lose to save your company. 

Balance Sheet Test—If the value of assets is less than outstanding liabilities, technically the company is insolvent.

Cash Flow Test—If the company is unable to make payments as and when they are due, again, the company is insolvent. 

Domino effect

Having problems with cash flow is the early warning sign. If you are unable to clear your debts on time or in full your company is well on its way to insolvency. If you are struggling to order new stock because debts remain unpaid, if creditors have declined to extend your credit line, to offer new credit or are contacting regularly to demand payment these are serious red flags and require immediate attention. Creditors after their money may also start to threaten legal action. 

You may already have received a Statutory Demand from a creditor. A Statutory Demand often indicates that a winding up petition is on its way and this will essentially mark the end of your company.

If the tax man is after you, then things are really serious. HMRC’s dogged pursuit of debt owed to them can result in harsh penalties that will make a bad situation worse. Hearing from the tax man is an early sign of ‘bankruptcy’. 

Problems with cash flow can also be attributed to your company not being paid on time. If your own debtors are unable to pay their bills in full and on time this will inevitably have a knock-on effect on your company and its ability to pay its own bills.

Empty-handed

If your staff are left empty-handed at the end of the month, this is another bad sign that your company is technically insolvent. Relying on an overdraft to pay your staff wages should be a massive red flag. You may also have denied yourself a salary for some time in an attempt to keep the company afloat. Hoping for that next big sale to correct the imbalance may never come and unpaid wages mean the end is near for your company. 

What next?

There are three options that could allow your insolvent company to continue trading. First of all, your company directors can contact all of your creditors to see if an informal agreement can be reached. If an arrangement cannot be reached then your company could enter into a company voluntary arrangement. A CVA is a binding agreement between your company and its creditors for payment of all, or part of, the company’s debts over an agreed period of time. The company can then continue to trade. Lastly, if these efforts fail it’s time to put your business into administration. This will offer some relief from creditors and enable your company to sell property while continuing to operate.  

All of these will prevent the need for the liquidation or ‘winding up’ of your business. 

Author Bio

Hasib Howlader is director of Hudson Weir – an insolvency practitioners firm in London helping small businesses with their finances. He is a licensed insolvency practitioner as well as a chartered tax advisor and chartered accountant.

  

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• #insolvency
• #winding up
• #liquidation

Published on: 1st May 2019