Insolvency, or bankruptcy, happens when a company or individual is unable to pay their debts on the due dates or has insufficient assets to cover their debts.
The knee-jerk reaction is to consider personal or business bankruptcy as the end of a business venture.
However, if managed appropriately, a voluntary bankruptcy can not only save your business – but even strengthen it.
In this article, the debt-management experts at Hudson Weir, discuss whether a voluntary bankruptcy is the right option for your business and, if so, how it might benefit you going forwards.
When to consider a voluntary bankruptcy?
Some businesses just aren’t meant to be.
At the end of the day, business is about profit, and if your business consistently fails in this regard then it may be time to pull the plug.
However, if you own a profitable company that is facing hard times due to temporary factors such as the economy, it might make sense to stay operational and bear the storm.
This is when declaring a voluntary bankruptcy might be a relevant action.
Cash flow may be a problem, but if your business has more in assets than liabilities, bankruptcy should be on the table.
Seeking out professional help to reorganise business debts (or eliminate them, if you’re a sole proprietor) can help to keep a business afloat.
In the case that you’re personally liable for company debts, keeping the business running may be advantageous while you negotiate with creditors. Closure of the business may result in the creditors seeking to claim your personal assets if business assets are insufficient.
The above is not an exhaustive list of when voluntary bankruptcy might be appropriate. If you’re thinking voluntary bankruptcy could apply to your situation, it’s well worth speaking to an insolvency professional.
Is voluntary bankruptcy my only option?
This depends on your circumstances, and the nature of the debt – personal or business.
Whichever it is, you’re unlikely to have just one option – hence the necessity of speaking to a firm such as Hudson Weir.
Below, we discuss some of the primary options to consider.
Personal bankruptcy means you can no longer be a director, shadow director or officer of a limited company.
If your business is insolvent, assets must be carefully sold off for their true and accurate value to pay back debt.
All your bank accounts will be frozen when you go bankrupt. For them to be released you must apply to your Trustee (usually an insolvency practitioner).
Another possibility for personal debt is an Individual Voluntary Arrangement or IVA. With an IVA you make contributions to an Insolvency Practitioner (the Supervisor of the IVA) over a set period of time who then makes creditor repayments in accordance with the laws of The Insolvency Act 1986.
An IVA protects you from creditors who are owed sums at the date of the IVA and makes your debt more manageable.
For business insolvency, a Creditors’ Voluntary Liquidation (CVL) is an option for companies struggling to cope with the stress and pressure of creditors who need repayments.
It is both professional and voluntary, allowing more alternatives to the company directors than if it were a Compulsory Liquidation situation.
With a CVL, creditors can submit their claims in an orderly way and the process becomes controlled and manageable.
Alternatively, a Company Voluntary Arrangement or CVA may be viable for companies where their product or service is selling well but historic creditor debt is impacting cash flow.
A Company Voluntary Arrangement allows a company to continue trading while paying back creditor debts in set amounts via an insolvency practitioner.
It enables the company to avoid liquidation, improve cash flow and ease creditor pressure.
How Can A Voluntary Bankruptcy Save Your Business?
If cash flow is insufficient and creditors are owed unpayable debts, a voluntary bankruptcy is often a recommended option.
Other alternatives would be less formal, such as drawing up debt management plans.
Insolvency specialists, such as Hudson Weir, can point you in the right direction of whatever is most suitable for your situation.
Their focus is to advise the most effective and efficient solution that will ensure long-term, sustainable solvency – whether that is for your personal or business finances.