Richard introduces the series with a definition of insolvency and explores:
- Technical and practical definition of insolvency
- Business versus company definition of insolvency
- Who does it affect? Limited companies, sole traders…
- Who is at risk?
- What to look out for
Hello. Richard Simms from FA Simms and Partners.
I’m here today to talk about “what is insolvency?” This is part of a series of podcasts we’ve put together for you so please do follow through the series to get the full picture of what you need to know.
We’re talking today about business areas and actions, and we’re talking about how insolvency and business relate to each other.
There are two different definitions of insolvency. You have a technical view, which we’re going to break down in more detail as the podcast progresses over the next few episodes, and also how that affects a business from a practical perspective.
Very briefly on the technical insolvency tests, we’re looking to see really whether you, as a company, can pay who it should be paying on time.
Now that overlaps then into a practical definition of insolvency, because you could argue that virtually every company in the UK is insolvent because most people won’t pay creditors – that means who they owe money to – businesses won’t pay who they owe money to on-time, all the time. It’s quite a natural thing that people tend to start to play with their cash flow a bit by delaying payments, slowing things down.
But technically, once the payment is overdue, not paid on time, the business could be argued to be insolvent at that stage. So what we actually see here is between when a payment is not made to a supplier or a creditor HMRC or whoever it might be, when it’s not paid on purpose and when it’s not paid when you can’t make the payment. And that’s where the big distinction is here. So if the business can’t pay who it should pay when they should be paid, and that’s a decision they’re not making by choice but because they can’t afford to pay it, they’re likely to be insolvent.
Now from a technical perspective, that becomes more important because if a company was to end up in an insolvent situation, through a formal procedure (and we’ll come back to formal procedures later on in the series) then it could mean that the investigation that’s undertaken into the reasons for the failure of that business could lead to a record of when that point of insolvency first started. And again, we’ll come back into some symptoms and causes later on in the series.
So, let’s imagine you can’t pay who you’re supposed to pay. That’s not your choice. You’re being forced not to pay. And that’s where you’re saying to yourself: well, arguably, well technically you are insolvent as a business.
Now I’ve used the term ‘business’ and ‘company’ interchangeably in the podcast so far. And why is that important? Why is it important to understand the difference between the two? Well, imagine that your company is a cardboard box, an open cardboard box with the flaps open. You look inside the box and the contents of the box is your business.
So your business operates within the company, that’s if you use a company. Inside that company is your business. Why we need to be conscious of that is because there might be a situation where at some point in time, you choose to move your business to a different company or move aspects of your business to a different company. So please do imagine, keep that picture in mind. The company’s a cardboard box, the business takes place within it. Very important to understand that and look at how that all sits together. We’ll come back to that concept again during the course of this series. It just helps you to imagine that structure of your company as it might be.
So if you look at the limited company – I mentioned company, I mentioned business – you’ll need to know, are you a limited company? Do you run your business in a limited company? It is possible to run a business as an individual or as a partnership that doesn’t have a limited status behind it. So if you’re a limited company – in the UK it’s a limited company or what’s called an LLP limited liability partnership. They’re the two principle limited status you might run through the UK.
If you run your business separate to that, if you run your business in your own name or your name trading as ‘Bob’s Blowers’, ‘Joe’s Gardeners’ or wherever it might be, that’s a separate entity structure. So limited company and the business separately. But I said before the business could be within the company, which gives it that protection as a limited company.
So that has a flow from there because then you need to ask yourself: what status is your company? What status is your business? Is it in a company? Is it not? If it’s not, that affects who is at risk of your business being insolvent? Because if your business is insolvent within the company, then the risk sits with the company directly. If the business is not in the company, the risks will sit actually with the individuals who own it and run that business. So that’s very important.
The quickest thing to do is to check, do you have ‘limited’ at the end of your company name, business name, is LTD at the end of there. Or if it’s a bigger company it’s PLC. And also do you have a company registration number? If you have a company you’ll be able to see it on Companies House in the UK, you’ll be able to see the company exists there. So check first of all: is your business a company? Or is it running personally so no limited company involved? That affects who’s at risk in this.
Company again, to recap, there could be a risk for the company. If you look at a business the risk is for the individuals who own the business. When I say the risk is with the business owners in that situation, that actually means that could extend as far as any personal assets the owner of the business has. So again, I’m distinguishing that from the business to a company.
The risk for you as a company, if you run a company, the risk for you is that you’ve given some form of personal guarantee. Whether you are a director or a shareholder, you could have chosen to guarantee the borrowing from a company. You could have taken a borrowing from a factoring company, a bank, you might have taken finance on some assets. That again will have some potential guarantees in place. So very important, before you think any further about the situation you’re facing from a personal or a business insolvency situation, do check if you have any personal guarantees in place.
You may choose to do that quite subtly because you might decide that you don’t want to actually go and ask that particular lender ‘have you got a personal guarantee in place’ because they might wonder why you’re asking that question. But if you can check your paperwork and see whether you have got liabilities you might have given guarantees to, I think you’ll find it very helpful from that side.
It’s important, again, you have this in place. What we talk about it in a very simple view, if we’re reviewing the business position, we imagine there’s a coat hook. So the coat hook’s hanging on the wall and we need to get information in place to hang all those coat hooks before we can make a decision as to the best way to deal with the business. It’s really important we start to gather this key information together.
So first of all, are you a limited company? Are you running without a limited company? Have you given any personal guarantees? And they are the few things we need to start off with until we’re able to gather information to put on our hooks to help us understand the situation we’re facing.
Then let’s say you’re a company and you say, “we’re faced with a situation. I think I might be approaching insolvency.” What are you looking out for? What is it that’s worrying you? It’s about helping you to understand if you are insolvent or not, or if you’re facing insolvency. Because if you’re anticipating insolvency and you see it coming, there’s more you can do than having to respond to insolvency when it lands on your doorstep. And we’ll talk further about cash flow and we’ll talk then about cash-flow forecasts later in the series, to give you some more context on how you can deal with the situation.
This is very much just setting out the problems you might be facing in this current podcast. What you’re looking out for then is pressure from people you owe money to. That’s probably the most important thing you’re going to come across is that pressure coming in, people aren’t being paid, they’re pressuring you for payments for things you can’t pay. That’s a pretty good indication of what’s going on. You might find that you’re not able to submit your VAT returns on time. You may find you can’t pay HMRC, anything like that that’s leading you to that sort of problem is what you’re going to be looking out for.
What we’ll move on to from here, in the next podcast we’ll talk a bit more about the definition of insolvency and we’ll come on to talk about ‘is your business insolvent?’ And then third to talk about the steps you can take, how we can help you, some process for you to follow, steps you can take to do a bit of self-recovery of your own business or company that’s important. So we’ll come at that a bit later on. Thank you very much.