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The risk of insolvency can be reduced if you monitor your finances. You should compare actual performance against your budget. If problems arise it's important you take action early. You should consider:

• improving cashflow
• negotiating with creditors
• getting advice from professionals

Improve cashflow

Keeping cash flowing into the business is a challenge. Ways to improve your cashflow include:

• bill promptly to ensure a steady flow of cash
• avoid overtrading by only accepting orders you can fulfil
• recover debts by chasing up debts owed to you
• trim your inventory using a stock reduction plan
• renegotiate your credit limits and payment dates with suppliers
• reduce overheads such as wage costs

You can get advice from your accountant on how to improve your cashflow.

Negotiating with creditors

Don't ignore your creditors. If you are a sole trader and they are owed more than 拢5,000 or in the case of a limited company or partnership they are owed more than 拢750, your creditors can apply for your bankruptcy or ask the court to wind up your business.

Talk to your creditors before you become formally insolvent. You should try to renegotiate any deals you have with them. You will need to be realistic and honest about what you can afford to repay them.

Expert advice

If your business gets into trouble you should seek professional advice. This will give you time to assess the alternatives open to you. You should seek professional advice immediately if:

• you cannot cover your debts
• the business receives a statutory demand
• you can't pay staff wages
• there is an acute lack of working capital

Directors' responsibilities

Directors should seek legal advice if their company becomes insolvent. See insolvency: directors' responsibilities.

Insolvency for an individual doesn't have to lead to bankruptcy. There are alternatives including:

• informal arrangements
• administration orders
• individual voluntary arrangements
• debt relief orders

Informal arrangements

These involve contacting your creditors to get an agreement regarding repayment of your debt. Informal arrangements are not legally binding.

Individual voluntary arrangements (IVA)

An IVA is where an insolvency practitioner helps formalise the arrangements with your creditors.

Administration orders

Administration orders require you to make regular payments to your creditors. You must not owe more than 拢5,000.

Debt relief orders

A debt relief order is for people who cannot pay their debts. It applies to those who have few assets, a low income and no other access to debt relief.

What is your best option?

The best option for you will depend on your individual circumstances. It will also depend on how much you owe and how much you can repay after your basic living expenses.

Whatever option you choose, you should be aware that:

• The rights of secured creditors are not affected - for example, a bank that has a mortgage or legal charge over your home can claim the proceeds if the property is sold.
• Most debts involving credit and loans are unsecured - if you don't pay the debt, the creditor is not automatically entitled to take something of yours, such as your home. But, they may secure a judgment on your home using a charging order.
• Your credit rating may be affected - they may show up on your credit record.
• Your employment may be affected - check the terms of your employment, you may have to inform your employer.

A partner can be an individual or a company. Each partner is personally responsible for any debts that the business runs up.

Personal bankruptcy

If a partner can't pay their debts, they could become bankrupt. If they apply to be made bankrupt without winding up the partnership, the remaining partners can continue trading. The debt will be written off for the bankrupt partner, but a creditor can pursue the other partners for the whole debt.

A creditor can also apply to have:

• one of the partners to be made bankrupt, without winding up the partnership
• the partnership wound up without action against individual partners
• the partnership wound up and bankruptcy orders against the partners

The trustee in a bankruptcy can make a claim against the partnership estate. They can take possession of any assets, sell them and distribute the proceeds to creditors. If, however, the remaining partners pay off the joint debts, then they may have a claim in the insolvent estate instead.

Joint bankruptcy petition

Partnership members can present a joint bankruptcy petition to the court. Once bankruptcy orders are made this dissolves the partnership. Both individual and partnership debts are included in the bankruptcy.

Limited liability partnerships

In a limited liability partnership (LLP) the situation is similar to that for the insolvency of limited companies.

The Corporate Insolvency and Governance Act 2020 (the 鈥淎ct鈥�) has made permanent changes to insolvency law in Northern Ireland and to company law, which applies on a UK wide basis.

Moratorium

The Act introduces a free-standing moratorium to give UK companies a 鈥渂reathing space鈥� in which to pursue a rescue or restructuring plan. During this moratorium, no creditor action can be taken against the company without the court鈥檚 permission. The moratorium is overseen by a monitor (an insolvency practitioner) but responsibility for the day-to-day running of the company remains with the directors (a 鈥渄ebtor-in-possession鈥� procedure).

Restructuring plan

There is a new restructuring plan to help viable companies struggling with debt obligations. Courts can sanction a restructuring plan (that binds creditors) if it is 鈥渇air and equitable鈥�. Creditors vote on the plan, but the court can impose it on dissenting creditors (known as 鈥渃ross-class cram down鈥�).

Termination clauses

There is a prohibition on termination (or 鈥渋pso facto鈥�) clauses that can apply when a company enters an insolvency procedure, a moratorium or begins a restructuring plan. The Act prevents suppliers from stopping their supply while a company is going through a rescue process to maximise its chances of success.

The Act includes safeguards to ensure that continued supplies are paid for, and suppliers can be relieved of the requirement to supply if it causes hardship to their business (small suppliers were exempt from the obligation to supply until 30 June 2021 so that they could protect their business if necessary).

Insolvency options

If your company is unable to pay its debts, you should take financial and legal advice. There are several options for limited companies, including:

• Informal arrangements
• Informal 'family' arrangements
• Company voluntary arrangements
• Administration

Informal arrangements

Involves writing to all your creditors to see if an acceptable agreement can be reached. It is advisable to include a timetable of when payments will be made.

Informal 'family' arrangements

Where family and friends may be prepared to give or loan cash or provide guarantees to help in the short term. Creditors may be prepared to agree to this.

Company voluntary arrangements

This is a formal version of the informal arrangement. The company directors need to apply to the court with the help of an authorised insolvency practitioner (IP). The IP supervises a meeting with creditors to agree a repayment plan which must be adhered to.

Liquidation

If you are advised by your accountant or solicitor that no arrangement or period of administration is likely to save your company, then you or your creditors may propose liquidation.

If you are a director you should get legal advice if your company becomes insolvent.

As a director you must make an early decision on whether or not the company should continue to trade. If you do decide to continue trading you will need to be sure that the company will be able to avoid liquidation.

Personal liability

As a director you need to be aware of your position regarding the business. It is your duty as a director to know the trading situation of the business. This is important as you may be:

• personally liable due to any personal guarantees
• both criminally and personally liable for fraudulent trading, that is, deceiving creditors
• personally liable for wrongful trading, that is, trading while the company is insolvent

You may be disqualified if you are found liable and you could face criminal proceedings.
 

An Individual Voluntary Arrangement (IVA) may be an option for you if you have surplus income each month. If your creditors agree to an IVA some of your debt may be written off. IVAs are legally binding, break one and you could be made bankrupt.

How do I get an IVA?

An IVA begins with a formal proposal to your creditors on how you will pay your debts. You will need an insolvency practitioner (IP) to draft the proposal. The IP will charge fees. You must disclose details of all your debts and assets to the IP. The IP will then draft the proposal based on your ability to pay.

The IP will arrange a meeting with all registered creditors to consider the proposal. If creditors holding more than 75 per cent of your debt vote in favour, your proposal is accepted. All your creditors will then be bound by the IVA. 

Advantages of an IVA

• All your creditors are bound by it.
• No maximum or minimum level of debt.
• You usually only make one monthly payment to the IP.
• You may keep your home if your creditors agree to it.
• You avoid bankruptcy restrictions.

Disadvantages of an IVA

• Your IVA is entered on a public register.
• The IVA cannot be changed without creditors' agreement.
• If the IVA fails you could be made bankrupt.
• The IP may require advance payment of their fees.

How long does an IVA last?

How long an IVA lasts depends on your proposal. Most IVAs involve monthly payments to creditors lasting up to 5 years.

Fast Track Voluntary Arrangements

It's better to set up an IVA before you become bankrupt. However, if you have become bankrupt you can ask the Official Receiver to help you prepare a Fast Track Voluntary Arrangement (FTVA) to deal with your debts.

You can ask the Enforcement of Judgements Office (EJO) to make an Administration Order if you owe no more than 拢5,000.

An Administration Order means that you must make weekly or monthly payments from your income to the EJO. The EJO will then share the money among your creditors, in proportion to the amounts you owe them.

Attachment of earnings order

If you don't keep up the payments, the EJO may make an attachment of earnings order. This is sent to your employer, directing them to deduct amounts from your wages and pay them directly to the court. The EJO may also revoke the order.

Advantages of Administration Orders

• you only have to make one monthly payment to the EJO
• the payment will be based on what you can afford
• your creditors cannot act against you without EJO's permission

Disadvantages of Administration Orders

• missing a payment means the arrangement may be cancelled
• orders are for individuals with debts under 拢5000 and judgement against them
• having an order may make it difficult to get credit

Administration Order fees

The EJO charges for this service. The fee may be up to 10 per cent of your total debt.

A Debt Relief Order (DRO) is a formal insolvency procedure for people who cannot pay their debts. It is appropriate for those who have few assets, low income and no other access to debt relief.

Applying for a DRO

DROs involve a partnership between the Insolvency Service and professional debt advice organisations whose advisers can act as an 'approved intermediary'.

The approved intermediary can decide whether you are eligible for a DRO. They can then help you complete your DRO application. The official receiver (OR) will then consider the application. For further information see from the Department for the Economy (DfE).

Eligibility for a DRO

To apply for a DRO you must:

• be unable to pay your debts
• not have debts more than 拢50,000
• not have total gross assets more than 拢2,000
• not have income after living expenses of more than 拢75 per month
• live in Northern Ireland, or at any time in the past 3 years been resident or carrying on a business here
• not have had a DRO within the last 6 years
• not be involved in any other formal insolvency procedure at the time of the application

How long does a DRO last?

The DRO places a moratorium on the debts included in it. This means creditors can't ask for repayment of debts during the moratorium without permission from the Court. Once the moratorium has ended (usually 12 months) you will be free from those debts.

DRO restrictions

You will be subject to the same restrictions as a bankrupt during the DRO period. Your name will not be published in any newspaper but it will be entered in a register maintained by the OR.

Search DfE's .