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What are the warning signs of business insolvency?

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How can I tell if my business is approaching insolvent?

It’s easy to miss the signs of business distress, especially if issues are present in several areas of the company. The business can quickly slip into insolvency if steps aren’t taken to address problems, but what does insolvency mean in practice?

If your company is struggling to pay its bills on time, or there are significant liabilities that might exceed the value of business assets, you may need to take immediate action to minimise creditor losses.

Under UK insolvency law you must stop trading as soon as your company enters insolvency, and seek the advice of a licensed insolvency practitioner (IP). When you know the warning signs of business insolvency, however, you can be proactive and take steps to avert the worst‐case scenario.

Warning signals of business insolvency

Severe creditor pressure
Do you feel like you cannot run the business effectively because you’re under relentless creditor pressure? If so, this is a strong warning sign that you may be insolvent and need to take action.

If a creditor cannot recover their money they may decide to issue a winding‐up petition against your company, so by being aware of this threat specifically, and also of generally escalating pressure from creditors, you may be able to avoid compulsory liquidation.

Borrowing applications being rejected
Maybe you’ve exhausted all your lines of credit and financiers are unwilling to sanction further lending without a personal guarantee? Or are you using your business overdraft on a long‐term basis rather than as a temporary stopgap?

An overdraft is designed as a short‐term measure – a safety net to use while you’re waiting for expected cash to come into the business. High interest rates are also charged on bank overdrafts, which considerably increase your debt over time.

HMRC arrears
If you’re finding it difficult to keep up with tax payments, or have already fallen into arrears with HMRC, this is a particularly serious warning sign. HMRC has the power to close down businesses they believe are insolvent, and they tend to do this quickly.

This is because their debt only increases the longer an insolvent business operates, so if you owe debts to HMRC it’s important that you contact them as soon as possible as they may be able to offer you additional time to pay.

You’re not collecting your own debts efficiently
Perhaps your own credit control procedures are not efficient, and it’s taking a long time to collect in the money owed. This could be due to poor systems within the business, or lack of management information.

If you don’t have access to current business figures and other information, such as the number of debtor days and cash flow statements, it’s difficult to rectify financial problems quickly and avoid business closure.

What should you do if your business is insolvent?

You must cease trading straight away if your business is insolvent, and seek assistance from a licensed IP. Insolvency means creditor interests become the priority, and you have to minimise their financial losses as far as possible.

The UK insolvency regime supports business rescue and recovery, and there may be a range of options open to you. These could include:

Company Voluntary Arrangement (CVA)
A Company Voluntary Arrangement (CVA) formally restructures your debts. It’s legally binding on all parties and typically lasts for up to five years, with the premise being that you trade your way back to profitability.

HMRC Time to Pay (TTP)
If you contact HMRC as soon as you start to experience financial difficulties, they may be willing to offer you more time to pay – sometimes up to 12 months. Their Time to Pay (TTP) arrangement means you can repay your arrears without hefty financial penalties.

Voluntary liquidation
If there are no rescue options available, Creditors’ Voluntary Liquidation (CVL) ensures you fulfil your legal obligations to creditors and close the business down according to statutory requirements.

For more information on the warning signs of business insolvency, please get in touch with our partner‐led team. UK Liquidators offers free, same‐day consultations, and we operate a broad network of offices around the country.

Jonathan Munnery
Insolvency & Restructuring Expert

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