Insolvency is by definition is:
The inability of a business to pay money owed when it is scheduled for payment.
Quite simply, if your business has financial obligations (debts) such as:
- commercial rent
- hire purchase
…& you are unable to pay any one of them when they become due…
Then your business is, by definition insolvent.
[ in- (1) “not” + Latin solventem “paying“]
However, there are 2 technicalities to be aware of concerning the practical handling and management of insolvency:
- Defining ‘how‘ insolvent you are:
- Cash flow insolvent – not enough ready cash available to upkeep with debt repayment schedules
- Balance sheet insolvent – not enough asset value in the business to pay even if you liquidised the cash
- Which jurisdiction you come under:
- Each country has it’s own policies and procedures when governing insolvency business matters
- Some countries enforce administration or other measures of overriding, whilst others take a more patient approach
- Some countries prefer to recognise either cash flow or balance sheet insolvency differently above and beyond the other
Whilst these two technical aspects, in particular the latter – jurisdiction, are critical in the proper and expected handling of the matter…
We at Selmore, not being legal experts, will back off from attempting to venture into any advisory patter within this forum…
But – before we discuss the meat of the matter of our article – here’s a quick outline of a few insolvency FAQs:
Legal FAQs concerning insolvency
- 1 Why should debt restructuring be sought after as an alternative to insolvency proceedings?
- 2 What is an administration order?
- 3 What is a CVA (company voluntary arrangement)? And do I need an insolvency practitioner for this?
- 4 What is receivership?
- 5 What is bankruptcy and how does it relate to insolvency?
- 6 What is a debt relief order?
- 7 Creditor petitions and the £750 unpaid sums threshold…
- 8 What the credit crunch should have taught us about insolvency?
- 9 Insolvency: its definition at root
- 10 The sands of debt & insolvency
- 11 Business self-sufficiency: render insolvency powerless
- 12 What insolvency says about your business? And to who?
- 13 How to recognise the early warning signs of insolvency before your bank…
- 14 Strategies for overcoming the threat of insolvency
- 15 A solid business management plan: the faithful business foundation
- 16 Building a business with better cash flow: become insolvency proof
- 17 Increasing business asset value to fight insolvency
- 18 Reaching a controlled exit & avoiding the crash of insolvency
Why should debt restructuring be sought after as an alternative to insolvency proceedings?
debt restructuring as an alternative to insolvency proceedings…
Why is an agreement better than a judgement?
If there is any way a voluntary agreement can be made between the debtor and their creditors, prior to proceedings to legally bind them to an obligated schedule of repayment over an above their heads…
Then this should be sought after.
Where an agreement is possible before court action, both parties have the opportunity to salvage any value which still remains.
Said another way,
If you were a creditor, an operational company which still turns a trading profit is able to pay you back…
Whereas one which is driven out of trade whose remaining assets are sold on the used market at bargain prices and split between all creditors may not even cover the court fees even.
Mercy is worth much more all round, than judgement.
It is therefore in the interest of the preservation of value that parties reach an agreement prior to the courts seizing control.
What is an administration order?
This is the process by which a debtor seeks by way of a 3rd party insolvency practitioner to halt the process of having their business enter into a legally enforced cycle of being wound up.
Taking on an administrator effectively & legally hands over the reins of the business to the appointed practitioner and gives the business 8 weeks to negotiate a feasible conclusion with all creditors.
But remember, you will not be at the controls of the negotiation – a 3rd party insolvency practitioner whom you have not known is given authority.
They owe you nothing and do not have to exercise their duties with any consideration or compassion for you, your staff or your business.
The following are the quoted as the common courses of action taken by insolvency practitioners on behalf of their clients:
- sell the assets of the person or company who owes money;
- collect money due to the person or company;
- agree creditors’ claims; and
- distribute the money collected after paying costs.
Further information: What Is An Insolvency Practitioner? – ICAEW Chartered Accountants
What is a CVA (company voluntary arrangement)? And do I need an insolvency practitioner for this?
A CVA is an agreement which an insolvency practitioner requests on behalf of their clients to negotiate a suitable rate of payment according to creditor.
What is receivership?
When a business becomes insolvent and is unable to pay it’s debts.
Cheques start to bounce and the bank who holds security over some of the core assets of the business seeks after some reasons for why this is happening.
Often companies experiencing such problems are in such positions because their attention to detail in managerial paperwork is lacking.
Therefore, when it comes to answering difficult questions from the bank, regarding their managerial practice – they are left wanting without a word to stand up to the test.
Where a company is unable to answer for its financial position appropriately, the bank will sense deeper issues at hand.
They will lose confidence.
Where this happens, the bank put a squeeze on the credit availability…
What does this look like & what are the consequences? Just think the credit crunch.
Fiscal austerity measures proceed from here…and more importantly this piles on managerial scrutiny from the bank.
The bank begins to demand reassurances (guarantees) fro you (the business owner) that there is likely to be a turnaround.
They may ask for an accounting audit, or perhaps even more invasive, a business plan review.
If these details fail to satisfy the bank’s scrutiny, then the bank begins to attempt to wrestle control of the business out of the hands of the owner.
But what would the bank gain from ousting you from your business?
The answer: assets to liquidise.
The primary method of the bank or lender achieving a hostile ‘take over’ of the business in question, is by appointing an insolvency practitioner (IP).
The supposed aim of the insolvency practitioner is to assess the viability or stability of the business going forward.
If the verdict of the IP is that the business will not survive:
…the business will then legally go into what is known as receivership.
The one who governs the receivership process is known as the ‘receiver‘.
Often, the IP is appointed as receiver in such cases, by default – as coerced by the bank. At the least, this appointment is a conflict of interests, let alone a full on set-up.
The IP judgement ultimately will determine the survival or destruction of the business.
Along the way to making that decision on the outcome of the business, the insolvency practitioner will assume the unlimited executive rights (custodial responsibilities) for running the business, including the ability to:
- remove directors,
- to sell assets etc.
What is bankruptcy and how does it relate to insolvency?
- Bankruptcy is when a person (individual) is unable to meet their personal borrowing obligations/repayments.
- Insolvency is the same, but for companies (please see the previous point of this FAQ section).
What is a debt relief order?
A debt relief order (DRO) is a court order, which if you (as an individual) are eligible for and obtain, will prevent your creditors from extracting debt repayments from you.
They will not be able to force you to make payments.
Also, at the end of 12 months under such an order, you will be able to walk away debt free.
However, you would still be required to continue paying off any debts not covered by the order.
A DRO does mean that you will be forced to disclose all aspects of your personal finances to a court for public inspection.
A very invasive process.
Creditor petitions and the £750 unpaid sums threshold…
The last thing any director of a struggling business will want to face is liquidation.
This means the business is legally forced to officially close down.
How does liquidation come about?
Liquidation is a legally enforced closure of a business – which a court will grant if the petitions of the business’ creditors is persuasive enough.
How much does a business have to owe in order to trigger off a creditor petitions?
The threshold for debt owed by a business to any one creditor which can legally be used to raise a creditor petition is £750.
At this level of owing sums, the business can be challenged in the courts to have it’s right to trade forcibly removed, and all saleable assets sold.
Key contributing failures to insolvency
Insolvency comes about for many reasons…
But, what are the most contributory factors:
- credit (debt-based business)
- lack of a business plan
- poor strategic agility
- poor cashflow management
- poor operational and financial audit trail
- desperation and panic
The root mechanism of insolvency is a loss of executive control.
How that comes about is by the owner handing over authority over the business to a third party, often a bank, during a time of financial distress.
The bank (or lender) then at a time of financial weakness then exerts, or rather usurps authority over the business, by wielding fear as its major weapon.
The lever used for prising authority over the business out of the hands of its owners is:
Credit. A most deceptive aid and accomplice in the act of undermining the authority of business owners at the length.
Whilst many owners see the receiving of credit in the beginning of a business journey, as a benefit or a shield against failure, by improving cash availability for continuing operations…
At the inevitable time of financial adversity, credit or rather debt becomes a most hurtful sword to fall upon which thrusts through the owners when they can least defend themselves.
The wounds inflicted can be difficult to recover from commercially and personally.
And the assailants, much to the disbelief of the victimised business owner, are the one’s whom seemed to be the most friendly throughout:
The bank (the lender).
What the credit crunch should have taught us about insolvency?
A system built on credit is a ticking time bomb.
Ready to go off in the hands of the unsuspecting carrier, at a time of least awareness or preparedness.
The result: an unnatural disaster!
Credit has fast become the valued currency of business and finance. The material value of gold is now despised in a economic architecture where puff (hot air) and ‘the story’ sells.
Talk moves markets and people who haven’t yet earned the right are able to leverage fortunes from only conjecture.
However, we still live on a very material earth which is governed by unmovable law
(let’s take the seasons, for example – regardless of all the talk and science – you can’t get around the course of the sun and climate dictating the patterns for agricultural growth).
Hence, if we all decide to invent a world where credit (promises) rather than substance (material provision) should be the measure of wealth – it all seems to go well, until somebody somewhere insists on reality.
This pops the bubble.
Whoever has pledged their living on the hype of that bubble will find themselves entirely laid bare when it pops.
Many people lost…businesses, homes, their livelihood and indeed lives following the fall-out of the credit crunch.
Whilst institutions and conglomerates simply made new vows to one another, real people and their substance got swept away swiftly onto destruction.
What was at the root of it all?…
What was the culprit?…
Credit. False promises.
Insolvency: its definition at root
Taking a look again at the definition of insolvency i.e. not paying – it even alludes to the cause.
Not being able to pay.
Which in itself shouldn’t spell disaster, because in a material arrangement – not paying, or not being able to pay, should mean simply not receiving.
Your business should continue without threat, but just minus the addition of your desired acquisition.
The threat of danger only comes in when you receive a benefit without paying – now owing the lender (creditor) and are legally bound to give them their due on their terms…regardless of outcome.
You then fall prey to the underpinning legal framework geared for stripping you and your business down to nothing should you have nothing to pay.
How does this happen?
A court will transfer your executive liberties to an insolvency practitioner acting as a receiver.
Once the wheels are in motion and sovereignty of your business is in the hands of a stranger, you have no way to recover or remedy.
Why allow it?
Take action today and turn your business around to become debt free…self-sufficient and credit-less.
The sands of debt & insolvency
Erosion threatens to sweep away the refuge of your business.
Whilst your business is your chosen investment vehicle for personal financial stability, debt threatens to claw you out of your position and have you fall.
The unfulfilled promises of failed credit arrangements and inability to pay the lender – make your business (…and you, its pilot…) a target for your adversary = the lender.
Whilst the commercial going is seemingly good, the lender appears to the eye to be on your side and a genuine, sincere help.
But on the contrary when the tide of circumstance is against you…
And the institutional lender senses weakness in managerial performance…
It’s only a matter of time before a brute force takeover attempt is launched to break open the lid and rip out the assets for a fire sale.
Lack of resilience leads to a swift collapse.
Business self-sufficiency: render insolvency powerless
Fight off insolvency simply by unseating its power:
Don’t accept credit.
Trade within your means and keep your business debt free to avoid running a ground whilst sailing your business to the destination of success.
Credit is debt.
Debt is money which is not yours, that has you bound to repayment on the premise that if you are unable to pay…
You hand over your executive rights and legal ownership of your business to a complete stranger.
A hireling who does not have the heart and compassion you have for the enterprise or those dependent upon it for their living (i.e. staff).
Accepting credit, immediately hands over sovereignty of your business, by covenant, to the lender…only to be realised when adversity hits and you are unable to pay.
In order to liquidise their capital (should you not pay), they will not hesitate to launch a legal levy against your business assets to break up and sell them for cash…
- the personal well-being of your staff and your families is not the concern of a lender. A bank will see you all out of your houses in order to recover its loaned funds.
- …foreclosure during the credit crunch was the shameful conclusion to what we had inadvertently released on one another through the use of credit.
- the personal well-being of your staff and your families is not the concern of a lender. A bank will see you all out of your houses in order to recover its loaned funds.
What insolvency says about your business? And to who?
Cash flow insufficiencies show up first to suppliers and providers.
The tell-tale signs are failed payments, bounced checks etc.
Following this, staff will take the hit with docked wages, lower shift hours and late payroll payments…which of course spells uncertainty for them. Fears then abound.
The tripwire for the bank is when you, as a client (business owner) approach them to raise the ceiling on lending – contrary to the routine.
In other words, the first signs of desperation set in.
Remembering that failed creditor payments will show up on the bank radar very readily, on statements etc.
This immediately shows the bank that goings on within your business are not proceeding to plan.
This is where the bank labels a business as a target for takeover.
How to recognise the early warning signs of insolvency before your bank…
Whilst we’ve identified the warning signs from a bank’s perspective of a client nearing insolvency…
What are the early warning signs of insolvency for the business owner?
Here’s a quick list…
- supplier reminders
- non-payment letter
- fear to answer unrecognised phone calls
- failed applications for credit extensions with existing lenders
- exhausted avenues for personal credit extensions
- forging new pledges with new lenders
- losing staff to unpaid wages
- debt consolidation
- push back from potential investor approaches
- new lenders start refusing credit
- defaulting existing lender agreements
- threats of debt recovery
These are just a few points among the typical signs seen by business owners nearing a looming insolvency.
Strategies for overcoming the threat of insolvency
Can an insolvency be avoided – even amidst the flood of oncoming indicators and confidence rocking circumstances?
Whilst pressure will be on to find additional operational capital to iron out cash flow crinkles –
Steering the ship into the clear will be achieved by keeping your eyes on the future, yet not allowing current circumstances to govern your actions.
It’s the shortsightedness and immediacy of wanting things to happen now which tempted you to take on credit/debt.
Breaking the habit will lead to you breaking out of the prison of insolvency onset:
- Stop seeking more credit.
- Debt reduction.
- Cost reduction.
- Doing more labour yourself.
…and now for the secret weapon against insolvency?
Serve your market.
Start to appreciate giving excellence to your market, at what ever cost.
Solve their problems.
Answer their questions.
Express your authority in expertise.
Broadcast this strategically and without eyes on immediate gain.
Freely give the benefit of what you know to those who need it the most.
Build your value proposition in the market and generate organic interest.
What else would you be doing otherwise:
- reading bank letters
…you may as well begin focusing your strength in doing your best for the countless people who might need you – showing them upfront the value of working with you.
This way organically increase your ability to earn and turn the financial corner – without expensive advertising or marketing agency fees.
A solid business management plan: the faithful business foundation
Knowing where your boundaries lay and your gains are to be made is key to avoiding insolvency.
Thinking ahead and trying to get a grasp of potential problems in advance of them happening.
A strategic business management plan will give a sound theoretical base for staying afloat.
Building a business with better cash flow: become insolvency proof
Having sufficient cash availability in a business is not a matter of coincidence.
It takes diligent budgetary handling and foresight to ensure sufficient cash provision.
Resilience is key.
Building in contingency and stability on a broad base of cash generation.
Drawing in from multiple sources grants a certain agility for ducking past times of constraint or obstruction.
Purposeful engineering of multiple cash flow options in every area of critical functioning will help to prevent calamity.
Increasing business asset value to fight insolvency
Enforced legal liquidation is evidently end stage…
But what about before things anywhere near that bad?
What can be done to give your business a little bit more internal buoyancy, should the waves of adversity rise up against?
Build asset value.
Ensure your business retains the value precious time and effort invested…
And can be readily crystalise and convert such value into liquid cash availability, should the need arise.
This is very much the same as throwing overboard the lading when a ship starts taking on water and begins sinking.
The idea is to increase buoyancy by divestment at times of challenge, in order to set the vessel back at an even keel.
Reaching a controlled exit & avoiding the crash of insolvency
Exiting a business doesn’t have to be by force and you don’t have to be pushed.
It can be controlled…
And a thing of success, rather than shame.
A predetermined exit plan gives a business owner a long term ownership destination to aim at.
A feasible trajectory for realising value of their efforts (and staff’s efforts) over the long term in a one-off reward for departing their executive function.
Plotting such a journey on paper prior to commitment gives a certain confidence throughout the ownership experience.
Insolvency by definition means ‘cannot pay‘.
Whilst in times gone by, if you couldn’t pay for something – it simply wasn’t yours and you’d have to do without.
Since the 1950, when the 1st commercially available consumer credit vehicle, the credit card became available…
The man-made concept of having possession of something without having the means to buy it emerged.
We invented a fallacy.
The seeming upside for many, was laying hold of products and services which are in reality – out of one’s reach.
But the question remains, where does a business get the money to pay for something which is, at the time of use, unpaid for, and is depreciating by the day (and therefore will be in need of replacement due to wear and tear, or obsolescence)?
By current revenues made, for past services or products already sold.
In other words,
The business pays for the present expenses of its operation, with the proceeds of past trades completed.
Filling in a hole which is continually being dug out. A fruitless endeavour at the length.
This means the very survival of a business which uses credit is entirely dependant upon the availability of more, and more credit to sustain its operational obligations.
Should the availability to credit dry up for any reason, for example:
- credit crunch
…then the business’s most critical resource is wanting and the house collapases.
But what is the solution to avoiding insolvency?
A self-sufficient business.
How does a business become self-sufficient?
I’m glad you asked…
Get in touch and I’d be happy to show you.