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Insolvency and involuntary closure

If a business can’t pay its debts on time or owes more than it owns, it may be forced to close — but there are other options. 

To be insolvent means one of two things:

  • Debts can’t be paid when they’re due.
  • Total debt is more than the value of all assets.

This is different to operating at a loss, particularly when a business is new or growing fast.

If you become insolvent, the road back to solvency — that is, the long-term ability to pay your debts — can seem a long and hard one. There are, however, a number of support services and actions you can take to smooth this journey.

Business debt (external link) — Insolvency and Trustee Service

Warning signs of trouble ahead

Is closing your business the right choice?

If you are owed money by a business that becomes insolvent, all is not necessarily lost.

If you are owed money by a business that becomes insolvent, all is not necessarily lost.

For advice on what to do, see Are you owed money (external link) ?  on the Insolvency and Trustee Service (ITS) website. To check if a company has gone into liquidation, search the Companies Register (external link) . You can also search ITS registers (external link) for people going through insolvency.

What to do if insolvency looms

Measure your debt

The first thing to do is calculate your overall debt. This helps:

  • estimate how long it will take to pay it off
  • know what options you have
  • advisors understand your problem.

Gather all financial documents to get the most accurate figures you can.

Get advice

A problem shared will help you find the best way forward.

  • Accountant or lawyer: Make this your first stop if you want to keep trading. If you don’t, you risk making the same mistakes and ending up in the same position or worse.
  • Budgeting advisor: Getting budget advice can help cut your costs, slow debt growth and get an agreement with Inland Revenue to avoid penalties.

Take action

By taking prompt action, you may be able to resolve matters without going to court — which may order you to take the same actions anyway. You can:

  • sell assets to repay debts
  • talk to creditors about a compromise or repayment schedule.

If you plan to negotiate with creditors to pay in instalments, it’s a good idea to get your accountant, lawyer or budgeting expert to help.

Involuntary closure

There are different types of involuntary closure — both apply to companies.

Liquidation

If a company can’t pay its debts, it may be put into liquidation, meaning all its unsecured assets are sold to repay creditors. A liquidator — often a specialist accountancy firm or occasionally the Insolvency and Trustee Service — is appointed to investigate the company, find out why it failed and sell any assets to help repay creditors.

A company can be put into liquidation by:

  • its shareholders
  • its board of directors
  • its creditors.

What happens during liquidation (external link) — Companies Office

Receivership

If a company doesn’t repay debt it has secured against an asset or assets, the creditor can appoint a receiver to sell the asset to repay the loan.

Receivership — often a condition of a loan agreement — doesn’t affect assets that haven’t been used to secure a loan.

A receiver is appointed to sell assets or manage the company in order to make enough money to pay its secured creditors. The receiver is responsible for paying highest priority debts first, eg unpaid wages or tax. These are known as preferential claims.

What happens during a receivership (external link) — Companies Office

Common business assets checklist

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