What Happens when a Firm Becomes Insolvent?

There are various stages that a business might go through when it becomes insolvent. It will have taken various steps already to try and deal with the problem but if some legal action is being taken, it may have got beyond the stage where the firm itself can cope with it and some outside assistance may be required.

If it gets to the position where it has tried to deal with the problems it faces but has to accept that it will not be able to do so there are a number of possible routes it can take.

Decide to go into liquidation. This will involve selling of the assets of a company in order to try and pay off creditors. There are various forms of liquidation:

1. • Compulsory liquidation. In this case, one or more of the creditors will have gone to a court to get their money. The Court issues a winding up order that forces the business to close down and take steps to sell off its assets.
   • Members' voluntary liquidation. This occurs where the company has sufficient assets to cover its liabilities but the shareholders decide to put the company into liquidation. The implication is that the shareholders are not confident of the longer-term position of their business and decide to cut their losses.
   • Creditors' voluntary liquidation. In this case, shareholders have decided to put the company into liquidation but they face a situation where they do not have sufficient assets to cover their liabilities.
   
   
2. Informal Arrangements. Here the company might contact its creditors advising them of its position and seeking to come to an agreement about arrangements to settle its debts.
3. Company Voluntary Agreement. Similar to the informal arrangement but the company would use a court to formalise it. In such cases a specialist Insolvency Practitioner (IP) will be employed to see through the agreement. An IP must be registered and will often be part of a firm of accountants who specialise in dealing with company failures.
4. Administration. An application to a court by the company to suspend the requirement to pay creditors for a period of time. During this period of time, the company will be administered by an IP and it will be their job to either find a new buyer for the business or parts of the business, negotiate with the creditors to restructure the debts or oversee the liquidation of the assets to pay off creditors. Going into administration gives the firm some breathing space to help deal with its problems and can result in the firm surviving albeit probably in some different form than before it went into administration.
5. Receivership. In this situation, the creditors can ask for a receiver to be appointed to sell the assets of the company and thus pay off the creditor. The receiver's job in this case is purely to recover the debts of the creditor. Once this has been done the remains of the business is handed back to the owners.