Quarterly company insolvencies on the rise: Guide to insolvency & restructuring

Company insolvency and liquidation rates have been markedly rising in the UK since 2021, with figures indicating quarterly company insolvencies may be up by as much as 30% on a year-on-year basis, and company liquidation rates of almost 50% per 10,000 companies in England and Wales. 

To the untrained eye these numbers may appear alarming, but data suggests that the driving force behind much of this action comes as a result of increased compulsory liquidations, whereby directors choose to close down their operations to address unpaid debts before costs become unmanageable. 

By engaging with the courts in this way, business owners are able to realise and redistribute relevant company assets to appease creditors in a supervised manner, opening the door for a restructuring of the business to potentially save jobs and mitigate financial strains on creditors and business owners. 

In layman's terms, addressing the financial issues brought about by recent world events in a structured and reasonable manner is likely to be the most proactive approach to supporting local and national economies, with this in mind, here’s a guide to insolvency and restructuring in the UK. 

When should a company file for insolvency? 

A company will become insolvent if its available assets are deemed insufficient to cover any and all accrued debts and liabilities requested by recognised creditors, insolvency in this case will generally be determined by two factors:  

• Cash-flow insolvency - A company that lacks the funds to pay debts as they fall due  

• Balance-sheet insolvency - A company with liabilities in excess of available assets 

If a company meets one or both of these criteria, insolvency proceedings will be required to ensure that all relevant creditors receive the compensation that they are due. Directors that find themselves in this position will need to decide upon the most appropriate action to take in order to avoid any chances of legal action being taken against the company or being sued in a personal capacity.  

Available options for insolvent companies 

If a director decides that insolvency represents the most realistic path to appeasing creditors and avoiding unnecessary legal proceedings, advisors will recommend a path to restructuring that will usually begin with administration and may involve liquidation and further schemes of arrangement. 

Administration 

During this process, the company will be protected from creditors enforcing active debts whilst an appointed administrator takes control of all business affairs and trading activity. The administrator’s primary role will be to reorganise the company with a view to selling some or all of its business assets to cover the costs of accrued debts, without requiring the business to cease operations entirely. 

Liquidation 

Liquidation will take place if an appointed insolvency practitioner decides that a majority of the company’s assets will need to be sold to appease its creditors. During this process, the company will usually be required to cease trading immediately, though this can be beneficial to staff who, despite being made redundant, will be legally entitled to claim unpaid wages as part of the sale of assets. 

Restructuring plans 

Directors of insolvent companies may wish to draw up a Company Voluntary Arrangement (CVA) between themselves and their creditors to compromise all active debts and arrange for compensation to be delivered by way of a fixed payment schedule, this must be voted on and approved by creditors due at least 75% of the total debt value. 

Alternatively, a restructuring plan may be devised allowing the company to continue operating provided that creditors agree to a new repayment plan, this can be beneficial in some cases as if an effective plan is adhered to, new funds can be injected into the company to facilitate future growth. 

Effective restructuring plans can help companies facing temporary financial difficulties to save a majority of jobs whilst still addressing the bulk of their debts, though creditors may have to agree to: 

• A compromise in the total debt value 

• Possible debt for equity agreements  

• A resetting of covenants  

• Rescheduled debt repayments 

Potential benefits of insolvency 

Insolvency exists as a method of mitigation for both companies and creditors, in most cases seeking to find an arrangement that helps the business to either stay afloat in some capacity or at least minimise the financial impact felt by employees.  

Making the decision to pursue insolvency allows directors to: 

• Address mounting debts – The pressure of increasing debts can be alleviated and a managed plan can be implemented to ensure that all parties are compensated fairly 

• Avoid legal action – Any legal action in motion against the business will be halted in the event of liquidation, relieving some of the pressures felt by business owners 

• Limit costs – Insolvency proceedings generally require little cash-flow as practitioners are likely to receive their fees from asset sales 

• Pay staff – Existing staff will be made redundant and entitled to claim wages as part of asset sales 

Final word 

Oftentimes choosing to undergo insolvency can be beneficial to companies facing financial issues, though before moving forwards it is wise to consult a qualified accountant to help devise an effective plan. 

For more professional advice on financial law, or for any tax, accounting or legal business advice, get in touch with us today on 0207 043 4000 or info@accountsandlegal.co.uk.