Business owners often await budget announcements with bated breath, especially amidst the economic turbulence of the last few years. And after months of political chaos and U-turns, the chancellor’s autumn statement finally provided some clarity, allowing businesses to plan for 2023.

That’s not to say it didn’t present serious challenges, however. With extended freezes on thresholds for income tax and national insurance, analysis suggests many small businesses will need to tweak their finances – altering the way entrepreneurs pay themselves – to avoid unnecessary insolvencies.

In short, insolvency occurs when a company can no longer afford to pay its debts. With recession
widely forecast, its likely that insolvencies will increase, be it due to cash flow struggles or increased expenses. Seeking expert advice can be crucial for survival in such situations – though there are ways to test solvency in the first instance.

Testing for insolvency

The first method is a balance sheet test. This means balancing a company’s assets against its liabilities (debts). If the latter is greater than the former, a company is classed as balance sheet insolvent.

The second test focuses on cash flow and looks at whether a company has the funds to meet its obligations in full and on time. If not, then it’s classed as cash flow insolvent.

Below, we’ve highlighted three potential avenues for limited companies who fail either test and enter insolvency.

Liquidation

Liquidation is a formal insolvency process in which a liquidator sells a company’s assets and delivers proceeds to its lenders. After completion, the company is removed from the Companies House register, and directors are investigated for wrongful or fraudulent trading activity.

The two main types are compulsory and voluntary liquidation. The first is enacted by creditors, while the second, and more desirable, is enacted by the insolvent company’s directors.

Administrative receivership

In administrative receivership, a designated receiver – such as a licensed insolvency practitioner – takes control of the insolvent business. This receiver is selected by a secured creditor such as a bank.

The receiver takes on various duties relating to recovering the debt owed by the company. This may involve selling said assets, selling the company itself, or continuing trading, depending on what will deliver the maximum return to the lender. Unlike administration – covered below – saving
the company is only an afterthought.

Only lenders with a floating charge before 15thSeptember 2003 can put a company into administrative receivership, however.

Administration

A third option for an insolvent business is administration. This option can be enacted by court, certain creditors or the business itself.

The primary goal of administration is usually to rescue the insolvent business, though it may alternatively focus on achieving an optimal result for its creditors. Whatever the case, an administrator will take control of said company and its assets to guide the process.

Ultimately, the right option for any insolvent business will be unique to its prospects and objectives.