Over the past year, there has been a 19% increase in the number of company insolvencies, according to the Insolvency Practitioners Association. Whether it’s failure to pay back Bounce Back Loans or difficulties paying rising overheads, there are various challenges facing businesses today. But what's the difference between bankruptcy and insolvency? We explain how these different procedures and options work.
Common business challenges
Since 2020, businesses in the UK have experienced a series of pressures, from the impact of the pandemic to steep energy bills. Rising inflation and interest rates are also having a knock-on effect on company overheads. Certain industry materials have become scarce and, therefore, prices have risen. Supply chains have been squeezed, allowing little or no room for profit margins. Consumer spending has also tightened, due to rising household bills and the cost-of-living crisis.
Recently, we have seen retail giants such as Wilko go into administration, and it seems that no business is entirely safe from economic pressures. It has been reported that Wilko never fully recovered after the pandemic and was struggling to compete with online marketplaces like Amazon. High street businesses have faced such pressure for many years now, from Woolworths to BHS to more recently Debenhams and Paperchase, which have all gone into administration.
As well as retailers, there have been plenty of service-based, hospitality, and other businesses experiencing difficulties too. The rise in energy prices placed huge pressure on logistics companies, who faced huge bills for heating warehouses. Volatile fuel prices have affected transport, haulage and taxi firms, while the rising cost of food and energy has impacted cafes and restaurants too. All of these challenges can lead to a business becoming insolvent and forced into administration.
One of the main aims of any business is to ensure they have a stable cash flow or balance sheet to operate. A solvent business is one that can meet its financial obligations, such as paying employees and any debts. An insolvent company is in a state of financial distress and has greater liabilities than its value. When a business becomes insolvent, this means it does not have enough funds to trade and cannot pay its debts.
In some cases, changing a business structure can sometimes prevent a company from becoming insolvent. Such solutions could include changing the financial, operational or legal structure, or making the company more efficient. These measures could help the company become financially buoyant and profitable, leading to a more stable cash flow and healthy balance sheet.
There are different types of insolvency procedures, as follows:
Liquidation – this is where the company assets are collected, and the money is used to pay creditors. Company directors might decide to liquidate – or ‘wind up’ - the company, or an order might be made by the court.
Administration – this is where an appointed ‘administrator’ would attempt to rescue a viable company. They might decide to restructure the business or sell off its assets to pay off outstanding debts.
Receivership – this is where a solution has been found to pay off debts, often through a secured loan. The company might be restructured so it’s profitable again. A ‘receiver’ might also be appointed to complete a project, sell the business, or to liquidate assets to pay creditors.
Voluntary Arrangements – this is where an arrangement has been made with creditors to repay part or all outstanding debts. There are two types available in England and Wales: Company Voluntary Arrangements (CVAs) and Individual Voluntary Arrangements (IVAs).
Bankruptcy is a personal version of insolvency. It’s a legal state where a petition is made to the court against a person who is insolvent and unable to pay their debts. The legal consequences could involve liquidating their business as a means of paying creditors.
The bankruptcy process involves sharing the individual’s assets among the creditors, which includes their bank accounts, property and any valuable possessions. An officer of the court known as the ‘official receiver’ manages the bankruptcy process, along with your chosen specialist insolvency solicitor or practitioner.
When someone becomes bankrupt, their bank accounts are usually frozen, although funds might be released to help pay for certain items, such as food. Bankrupt individuals may no longer be able to use credit cards, although they may still be able to draw from a pension. A full list of assets will need to be given to the official receiver, along with all financial information.
There are certain restrictions when someone has been declared bankrupt, for example, they can no longer be a company director. On a positive note, bankruptcy can enable people to become debt free, giving them a fresh start to managing their finances. Bankruptcy usually lasts for 12 months, although in some cases, the court might decide on a delayed discharge.
Insolvency advice for businesses
If you are worried about your business or you are experiencing financial difficulties, then it’s advisable to get advice as soon as possible. The longer you wait the more problematic your situation can become. There might be simple solutions to get your business back on track.
Salusbury Harding & Barlow has a dispute resolution team, who can advise on bankruptcy, insolvency, and a wide range of other contractual and debt matters. We can help you wind up your company, make arrangements with creditors, and settle a dispute.