Right now many companies in Ireland could be classified as insolvent. As cashflows are disrupted by slow paying customers and as bad debts stack up, business owners who find their company in an insolvent position often wonder what the next steps are.
Firstly, don’t panic – after all, if you’re confident that your company can trade its way back into a profitable position (which it can in a lot of cases) then you’ll be fine. It’s in nobody’s interest for a company to fold just because there are cash flow issues, least of all the company’s creditors.
However, many business owners lose sleep when their company is in the red. The monthly wage bill and the day-to-day operating costs have to take priority to keep the company going but the real acid test of whether or not you can get back to a solvent position is by taking a close look at your balance sheet at the end of each year.
If your company’s performance is improving in terms of reducing the level of losses or if profitability is increasing on a gradual scale over a period of say three years, then you can continue trading and at that point, it will generally be agreed that the company and the company’s creditors are of the opinion that the company is returning to a solvent position.
On the other hand, if there is really no way of knowing whether or not the company can get back in the black, the directors must consider a number of options. The first is whether or not to put the company into liquidation. It is the responsibility of the directors to be honest here and acknowledge the true financial position of the company. Delaying the liquidation process can have, after all, grave consequences – reckless trading being the most serious.
There are three types of liquidation. The first is a voluntary liquidation whereby the owners of the company are in a position to wind-up the company themselves. This can only arise in a situation where the company is solvent in the first place though. In other words, the directors should know that if they cash in their overall assets, the money they receive will be sufficient to cover any liabilities that exist within the company.
The second and most common type of liquidation is a creditor’s liquidation. This is where the directors realise that they are in an insolvent position. Under company legislation, they are obliged to hold a creditor’s liquidation if they are of the opinion that they will not be able to trade out of their troubles and return the company to a solvent position.
The third type of liquidation is a compulsory liquidation, where by a petition has been presented by a creditor to the courts under section 2.3.1 of the Companies Act 1963 to wind up a company and sell off its assets in order to receive outstanding payments in full.
How we can help
If you find your company is in financial trouble, the first thing your accountant or business advisors should do is take a look at the state of the company’s finances and restructure where appropriate and possible. At DCA Accountants and Business Advisors, we often start with the company’s costs and see if there is any room for reducing outgoings. In many cases there will be. It is also important to ensure that the company in question is maximising the resources at its disposal.
Once the internal process is complete, creditors need to be informed of the situation – the company’s primary aim, which we always advocate at DCA Accountant and Business Advisors, should be to try to trade back into profitability. To do that takes time and creditors need to be made fully aware of the restructuring process and payment plans that have been put in place.
If there is really no other course of action left having explored all possible avenues to keep the company in business, liquidation may be the only option. If that’s the road that you have to go down, it is imperative to ensure that the entire process is carried out as efficiently – from a professional and financial point of view – as possible.
DCA Accountants and Business Advisors