Complete Guide To Corporate Finance

The Business Finance Guide

The vast majority of entrepreneurs struggle to keep their companies afloat in the face of rising expenses and declining revenue. When they are finally forced to accept that they are not able to pay the bills anymore, many entrepreneurs simply stop making rational decisions, which is a big mistake because even if the business does fail, there are many decisions that have to be made. If you fall in the situation when you cannot raise enough cash to meet your obligations, or pay your debts, you should consider corporate insolvency. Nonetheless, insolvency does is not synonym with bankruptcy. Insolvency simply means that you are not able to pay your debts as they become due. If you are deemed insolvent under the law, you should hire Chartered Accountants to help you resolve your issues. Following are the basics of corporate insolvency.

When a company is considered insolvent

A company is generally considered insolvent if it is unable to pay its debts. For corporate insolvency, there are two main tests: the cash-flow test and the balance sheet test. The cash-flow test determines whether the company is currently, or will be unable in the future to honour its debts. On the other hand, the balance sheet test determines if the value of the company’s assets is less compared to the liabilities. Should evidence prove that either of these situations is true, then the company will be deemed insolvent. A company can also be deemed insolvent if a judgement or a court order has not been satisfied yet.

Available insolvency procedures

A company can be placed into insolvency procedure by any of the following entities: directors, shareholders or creditors of the court. How this is realized depends to a large extent on the facts of each case. There is a number of insolvency procedures, each of which is carried out by appointed insolvency practitioners.

The first procedure is administration. Administration refers to the collective rescue procedure that is run for the sake of all creditors. The assets of the company are protected by virtue of stoppage, and the administrators have power to trade on the insolvent business and look for a buyer. In the case of administrative receivership, the holder of a floating charge against the company may sell the company’s assets for maximum value. Administrative receivers do not have any authority to pay unsecured creditors. In order to do so, they need subsequent liquidation. The compromise between the creditors and the company is called a scheme of arrangement. Last but not, liquidation occurs when all of the company’s assets are converted into cash value and they are distributed to shareholders.

The consequences of insolvency

Insolvency implies that your business will have to cease trading and if you are a limited company you will get into liquidation. There is an increased risk of personal claims and disqualifications. The directors of an insolvent company cannot continue to trade or they risk personal and professional consequences. If you intend to sell goods or make payments, you will have to obtain authorisation from the court. Another thing that can take place is withdrawal of support from suppliers and customers. The protective measures that they can take includes termination of contracts.

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