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Insolvency Guide For Small Businesses

If you’re facing uncertainty with your company business and considering an insolvency procedure, knowing what to do and who can help is essential. Finances can be a scary time, but there are professional companies who genuinely care and can help you navigate through a seemingly confusing process. Regardless of the reasons your limited company is experiencing financial difficulties, the right support can ease the worry and help you navigate a future for you and your business.

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What Is Insolvency?

Insolvency is a general term which refers to a person or a business’s financial state.

Our 2024 guide to insolvency describes company insolvency as “When a company cannot meet its financial commitments due to a shortage of cash, or when the total value of its assets is less than the money it owes any creditors.”

If you want to know more about what this means for your business, our guide explains everything about insolvency, including the different types of insolvency procedures, the reason for the rise in insolvencies, and signs that businesses may be heading for insolvency.

  • Different Insolvency procedures for limited companies

    We can help differentiate these procedures for you and advise which we believe is the best option suited to your company’s specific circumstances

  • Liquidation

    is an insolvency procedure for limited companies when there is no prospect of rescuing the business and trade needs to cease.

  • Administration

    is an insolvency procedure for limited companies often used where there is a prospect of a rescue of the business or the company needs to continue to trade to complete profitable contracts.

  • A Prepack Administration

    is where a buyer for the business is identified prior to the company entering Administration, and the sales contract is usually completed on day one of the company entering Administration, avoiding the need for the company to continue trading in Administration.

  • A Company Voluntary Arrangement (CVA)

    is an insolvency procedure for Limited Companies, used as an alternative to liquidation. The Directors retain control and the company usually trades on, under the CVA umbrella, for up to 5 years.

  • A Phoenix

    is a term for when a company enters liquidation and the directors start the same or similar business up in a new entity.

7 Steps for an Insolvent Company

If you have concerns that your company is heading towards insolvency, it’s important to know what steps to take to minimise risk and further problems. Small businesses may not have access to the financial support that larger businesses may have, so knowing where to turn for sound advice is crucial if you want to get back on your feet as soon as possible.

  • Step 1

    Speak to your accountant for advice.

    Company accounts do not need to be filed at Companies House until 9 months after the year end, which means the figures are often out of date when trying to understand the current picture. Management Accounts are extremely helpful because they are usually based on recent figures but are not always produced by small businesses. Ideally, up to date accounting information will be available, and for some insolvency procedures will be vital.

  • Step 2

    Reduce any further financial borrowing

    To prevent getting into even more debt, changing the current financial status of your situation, or opening yourself up to claims of misconduct, you should stop any further financial borrowing from creditors.

  • Step 3

    Identify cash-flow quick-wins such as invoicing, debt recovery and cut-backs

    If there are ways to get cash back from outstanding invoices, recover any debt owed to the business or provide cutbacks, then it’s essential to identify these quickly and act upon them urgently. 

  • Step 4

    Consider your options as a Director

    When a company becomes insolvent you have a duty to mitigate the position. If you don’t take action, a creditor could enforce an insolvency procedure on your company, forcing you to lose control and the business to cease trading. You may also land yourself in hot water if you commit offences whilst a company is insolvent.

  • Step 5

    Consider your options as a Business Owner

    Tough decisions may have and will have to be made. But it’s important for shareholders to consider all options before making any final decisions. You may find you need to personally inject funds to keep the business above water, or make some or all of the staff redundant.

  • Step 6

    Keep records of all financial decisions

    It is essential to hold board meetings and keep written records of all financial decisions made. If a formal insolvency procedure becomes necessary, PA Insolvency can help produce all the paperwork needed.

  • Step 8

    Seek advice from a licensed Insolvency Practitioner

    This is vital to ensure you are taking the right steps for your business and also so that you are not inadvertently committing any breaches under the Insolvency Act 1986, which could come back to bite you personally if an insolvency event occurs.

Where to Get Advice

However you decide to move forward, it’s important to seek advice and support from those who have experience so you can make decisions with all the facts in front of you.

Get in touch with us for a confidential consultation where you’ll receive professional advice from one of our experienced team.