Avoiding bankruptcy and winding up.

To keep your business solvent you should bear the following in mind:

• Do not allow your debts to exceed your assets.
• Keep an eye on your cash flow.
• Choose the right business structure.
• Implement good credit-control structures.

Take care before offering personal guarantees for business loans. If your assets - eg stock, buildings, machinery or debts owed to you - equal the amount of loans and debts that you owe, then you are in a situation where all of your capital could be wiped out.

Your creditors effectively own your business and if the value of the assets falls further, your creditors could realise that their money is at risk and want it back. This would make you insolvent, as you wouldn't be able to pay them all.

To avoid this you need to make sure that your capital is maintained. You should try to keep your own capital up by holding back profits where possible. Do not be tempted to take on loans that would increase your borrowing far above your own investment in the business.

Even though you are making profits and have enough capital you can still become insolvent if you cannot make payments on time. You need to make sure that yhou have a good cash flow so that you can pay debts on time.

A common problem is to take on too much debt while chasing new business. This is known as overtrading. Careful planning and forecasting will help you to avoid this.

Insolvency and Bankruptcy

Administration and administrative receivership.

When a company or partnership gets into financial trouble an administrator or administrative receiver may be appointed.

Administration

The role of an administrator is to get the company out of trouble and trading again if possible.

Administrators can be appointed to a company that is unable, or is likely to become unable, to pay its debts. They can be appointed by any of the following:

• The courts - on application from a creditor, directors or partners.
• The holder of a qualifying floating charge over the assets of the business.
• The company or its directors.

An administrator's primary goal is to rescue the company as a going concern. If this isn't possible, the administrator will try to get a better result for The creditors than would be possible if the company were wound up.

If neither of these is possible, the administrator will sell the company's property to make at least a partial payment to one or more secured or preferential creditors, such as employees or the bank.

Administration can also apply to partnerships.

When a company borrows money, the lender is usually given some security over the Company’s assets to guarantee payment. If the company fails to keep the terms of the loan or encounters financial difficulties, the lender may be entitled to appoint an administrative receiver. An administrative receiver is an insolvency practitioner who has control of the whole, or a substantial part, of the company's property and wide powers over the business.

The administrative receiver is mainly concerned with getting back the money owed to the secured creditor. The administrative receiver may sell the assets piecemeal, or sell the whole business as a going concern to pay off the secured creditor, and the costs of the receivership.

Insolvency and bankruptcy

Winding up and liquidation of companies

If your company becomes unable to pay its debts and no arrangement or period of administration is likely to save it then you, as director, can propose a creditors' voluntary liquidation (CVL).

In a CVL the company must pass a resolution that the company cannot continue and then call a meeting of the creditors. The creditors will appoint a liquidator who will carry out the winding up of the company.

Your company can also be wound up by compulsory liquidation under a court order. If there are sufficient assets, the official receiver will call a first meeting of creditors to appoint an insolvency practitioner as liquidator. You can apply for the court order yourself but usually it will be made by a creditor owed more than £750.

In a compulsory liquidation the official receiver is appointed to wind up the business. When your company is insolvent the accounting date is reset to start a new accounting period at the date the liquidator or administrator is appointed.

At the end of a winding up a company is struck off the register and ceases to exist.

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