When you or your company are facing cash flow problems and are concerned about your financial solvency, choosing the right course of action to take or understanding the potential outcomes can be difficult. In many cases, if you act quickly enough, there are solutions you can rely on to recover your business, or at least give it a better chance of returning to good financial standing.
At the same time, there may be a lot of complicated and unclear terminology being used in your situation. For example, bankruptcy and insolvency are not the same, but they’re often used as if they are, which can add to the confusion you may already be feeling. If you have examined your options in terms of business recovery, you may have encountered legal mechanisms like Company Voluntary Arrangements (CVAs) or Time to Pay Arrangements, which are subject to similar confusion. While they are separate procedures, they function in much the same way.
Here, the business finance specialists at Company Insolvency Advice will help to clear things up. We’ll clarify the differences between bankruptcy and company insolvency, as well as the differences between CVAs and Time to Pay Arrangements, and explain how your business could recover from its financial difficulties by considering these approaches.
If you’re concerned about your company’s financial future, the most important thing is to take action as soon as you can. It’s usually possible to recognise the signs of insolvency before the situation becomes urgent, and if you contact a specialist advisor with expertise in business finances at this stage, you often have a strong chance of recovering your business. If you leave things until later, there will be fewer options available to you – but even then, it may not be too late to set your business on the path to financial recovery.
What is company insolvency and how does it differ from bankruptcy?
Company insolvency refers to a situation in which a business is unable to pay its debts when they fall due, or when its liabilities exceed its assets. This can often lead to legal procedures aimed at rescuing the business and restoring it to a state of financial solvency through mechanisms like CVAs or Time to Pay Arrangements.
Insolvency may be incorrectly referred to as bankruptcy, and while they are similar, there is an important distinction. Bankruptcy is a legal process that applies only to individuals who can’t meet their debt obligations. In bankruptcy, a court declares you bankrupt and transfers control of your financial matters to a trustee, usually an insolvency practitioner, who then liquidates your assets to repay your debts.
There are important differences for individuals involved, particularly in terms of how each state affects your financial affairs. Once you’re declared bankrupt, your credit rating takes a severe hit. You will usually be discharged from the bankruptcy status after a year, although the record stays on your credit history for several years.
With insolvency, however, company directors are not typically liable for business debts, except in cases where they have made personal guarantees. A limited company is a separate legal entity from any of its individual directors or owners and, as such, insolvency will not necessarily have any negative impact on the personal finances of those involved.
In summary, company insolvency deals with businesses that can’t pay their debts, while bankruptcy applies to individuals in similar circumstances. Both lead to formal procedures meant to resolve the debt situation but operate under different laws and have different implications for those involved.
What are CVAs and Time to Pay Arrangements?
As we mentioned above, there are several company rescue procedures that might be considered if a business is facing insolvency. CVAs and Time to Pay Arrangements are two separate concepts that operate in a similar way – like with bankruptcy and insolvency, they are often confused, but it’s important to understand the differences if you aim to get more time to pay your business debts.
These procedures are both types of payment plan, in which a business examines its finances and calculates what it can afford to pay over a set period of time. The company directors will prepare a proposal and present it to the business’ creditor. If the creditor accepts, any legal action against the business is halted and the debtor has a new opportunity to pay off the money it owes.
The key distinction between these two agreements is that a CVA is for any business creditor, while Time to Pay Arrangements are specifically designed for debts to HM Revenue and Customs. While this may seem like a minor distinction, it is important to pursue the right procedure for your circumstances in order to have the best chance to recover your company.
This is another area where an expert advisor can help. They can assess your company’s finances and determine how much you can afford to pay on a monthly basis. They can also negotiate with your creditor to make sure the proposal is fair to all parties, and give it the highest chance of being successfully implemented. If these procedures aren’t right for your business, a qualified practitioner can discuss the other options you have available and shepherd your business towards recovery, so that you can go on to thrive.
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