2020 was a grim year for UK businesses. The COVID-19 pandemic saw GDP drop 9.9%, according to ONS figures, and while various industry surveys are suggesting a fightback, many companies are facing the threat of insolvency and bankruptcy; almost 15%, according to a recent ONS survey. In this guide, we detail the differences between the two, what circumstances can lead to each, and the best practices and solutions which a business can utilise to overcome them.
How do insolvency and bankruptcy differ? What causes them?
Often confused or seen as the same thing, there are some crucial differences between insolvency and bankruptcy that should be understood so the risks of each can be properly navigated.
- Insolvency: A financial state where a company or individual is not able to pay their creditors, due to problems with a business’ balance sheet (higher debts than business assets) or cash flow (higher debts than assets and liquid capital). It can lead to bankruptcy being declared by the courts, but this can be avoided by negotiating a repayment plan with creditors, selling assets, restructuring, or otherwise increasing revenues
- Bankruptcy: Bankruptcy is a legal process started by an individual in debt or their creditor, eventually declared by a court. It is a specific type of insolvency that legally applies to individuals, as opposed to limited companies or partnerships. It essentially declares that a person is unable to pay their creditors; typically, because their cash and capital are worth less than the sums owed.
How to overcome insolvency and bankruptcy
Insolvency and bankruptcy are serious matters. They must be properly dealt with in order to safeguard the health of the business and investments of creditors and protect leaders within the business from the significant legal and financial consequences at play.
- Legal advice – Legal advice should be sought by any company facing insolvency or bankruptcy. Restructuring and insolvency solicitors have plenty of experience in helping companies navigate the pitfalls and legal requirements associated with these issues, making their advice an invaluable investment.
- Contact creditors – An informal repayment agreement can be a useful means of satisfying creditor demands. It can be a difficult process, but ultimately, most creditors will want to avoid potentially costly legal action in exchange for giving the business more time to pay them back.
- Contact HMRC – There are several instruments that can be agreed with HMRC, relevant to the different types of the creditor you must pay. A Time to Pay Arrangement, for instance, will provide 12 months of leeway for you to pay back the sum owed.
- Raise capital – Using personal funds to pull the company out of danger can be an option for directors. Using loans or credit to do the same is inherently very risky and can make the situation worse. Alternatively, it may be possible to raise more investment through the issuing of shares.
- Restructure – Changing the structure of the business – staff, facilities, offices, outsourcing, contact renegotiation, and so forth – can be a useful way of reducing expenditure to rebalance a business’ books.
Establishing a strong strategy to avoid insolvency and bankruptcy is crucial to keeping a business trading. As with any legal issue, however, it always makes sense to contact a solicitor to discuss the options available to your specific circumstances.
