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Insolvency is a critical issue that many company directors face, particularly in times of financial uncertainty.

It occurs when a company cannot meet its debt obligations.

Understanding the different examples of insolvency and the available solutions can help directors facing potential insolvency.

This article explores various insolvency scenarios, including balance sheet insolvency, and outlines the different types of insolvency in the UK.

What are examples of insolvency

Types of Insolvency

Insolvency can manifest in several ways, and it is crucial for company directors to recognise the signs early.

The two primary types of insolvency are:

1. Balance Sheet Insolvency

Balance sheet insolvency occurs when a company’s liabilities exceed its assets.

This means that if the company were to liquidate all its assets, it still would not have enough to cover its debts.

An example of balance sheet insolvency is when a company has £500,000 in assets but owes £700,000 to creditors.

2. Cash Flow Insolvency

Cash flow insolvency happens when a company cannot pay its debts as they fall due, even if its assets exceed its liabilities.

For example, a company might have considerable assets, such as real estate or equipment, but lacks the liquid funds needed to meet its immediate debt obligations.

What are the Different Types of Insolvency in the UK?

In the UK, there are several types of insolvency procedures available to companies facing financial difficulties.

Each type of insolvency procedure offers different solutions, depending on the specific circumstances of the business.

The main types of insolvency in the UK include:

1. Company Voluntary Arrangement (CVA)

A CVA is a formal agreement between a company and its creditors to repay a portion of its debts over a specified period.

This allows the company to continue trading while restructuring its debt.

A CVA can be a lifeline for businesses that are viable but temporarily unable to meet their debt obligations.

2. Administration

Administration involves appointing an insolvency practitioner to manage the company’s affairs, business, and property.

The primary goal of administration is to rescue the company as a going concern or achieve a better result for creditors than an immediate liquidation would provide.

3. Liquidation

Liquidation is the process of winding up a company’s affairs, selling its assets, and distributing the proceeds to creditors.

There are two main types of liquidation:

4. Compulsory Liquidation

Compulsory liquidation is a court-ordered process initiated by a creditor who petitions the court to wind up the company.

This typically occurs when a company cannot pay its debts, and creditors seek to recover their funds through the sale of the company’s assets.

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Balance Sheet Insolvency Example

To illustrate balance sheet insolvency, consider a company, ABC Ltd., that owns assets valued at £1,000,000.

However, ABC Ltd. has liabilities totaling £1,500,000.

Despite having significant assets, the company’s liabilities exceed its assets by £500,000, making it balance sheet insolvent.

In this scenario, ABC Ltd. would need to explore insolvency options such as a CVA or administration to address its financial distress.

Cash Flow Insolvency Example

For a cash flow insolvency example, imagine XYZ Ltd., a manufacturing company with assets worth £2,000,000, including machinery, property, and inventory.

Despite these assets, XYZ Ltd. has immediate debts of £300,000 due to suppliers and a bank loan repayment of £200,000 coming up.

However, the company has only £100,000 in cash and short-term receivables.

Even though XYZ Ltd. has assets that exceed its liabilities, it lacks the liquid cash to meet its immediate debt obligations.

This inability to pay debts as they fall due indicates cash flow insolvency.

XYZ Ltd. might need to consider insolvency procedures such as administration to restructure its debts and improve its cash flow.

Conclusion

Understanding the different types of insolvency and recognising the signs early can help company directors take proactive steps to address financial challenges.

Whether dealing with balance sheet insolvency or cash flow insolvency, exploring the appropriate insolvency procedures can provide a path forward for struggling businesses.

If your company is facing insolvency, it is crucial to seek professional advice to determine the best course of action.

For more information and assistance, contact Business Helpline, supporting directors across the UK.

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    Andy Slinger

    Andy is Head of Marketing for Business Helpline with a wealth of experience Marketing in the financial sector. He has a passion for helping business owners struggling with debts.

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