Insolvency – When a business can no longer afford to pay its debts
To remember what insolvency means, use the following mnemonic:
If the industrial plant operators can't solve the emergency (insolvency), the business will lose money and will no longer afford to pay its debts.
Before we discuss insolvency, you need to know the difference between insolvency, bankruptcy and liquidation.
Insolvency – the state of being insolvent, or when a company cannot pay their debts, known colloquially as having gone bust.
Liquidation – refers to companies that cannot repay their debts and are in the process of being closed so their assets can be sold to pay them. This is usually managed by a government official receiver or passed to an insolvency practitioner.
Bankruptcy – refers to individuals only. A court will conclude that they are unable to pay their debts and an insolvency practitioner should be appointed to deal with their affairs.
If a tradesperson injures themselves and cannot work for 3 months, they may not be able to pay rent on business premises, pay the lease for their van or pay a hefty electricity bill. If their company is a limited liability business, they will face insolvency. A supplier or bank will pay a court to force an official government receiver to appoint an insolvency practitioner to try and recoup money by seizing and selling off any remaining assets of the tradesperson’s company. This will hopefully provide money towards the debt that is owed. This is limited to the company’s assets only. If the tradesperson’s company is not limited, then the supplier that is owed money can pay for a court to look into the tradesperson’s personal possessions, including their home, to recoup the money that is owed. However, before these actions go to court, it is important for all concerned, the tradesperson and the supplier, to agree on a debt repayment plan. This could involve paying a small sum every month over 5 years until the total debt is paid. This can save paying the high costs that occur within the court system.