Insolvency means that a company has fewer assets than it has debts and cannot repay the debt owed. Insolvency can sometimes be reversed; however, it will often mean the end of the company. For a company to remain financially viable, the warning signs of insolvency should not be ignored; in fact, taking stock of warning signs may lead to a more favourable outcome.
Warning signs
Warning signs include receiving demands for payments from creditors. Whilst in the thick of financial instability, it can sometimes be difficult to see the wood from the trees. HMRC is quick to take insolvency action if it is a creditor demanding payment.
If operational costs such as buying stock and paying wages are becoming increasingly difficult to manage, this is a sure sign that a company is in financial distress.
If a company is declined for further borrowing and has reached its borrowing limits, this could be a red flag of imminent insolvency.
The results of a cash flow test that looks to see how a company can manage future repayments based on benchmarks of affordability can give an insight into a company’s financial health.
In Q2 2023, there were 6,342 company insolvencies registered in England and Wales.
Directors guarantee
A director guarantee is when a director secures a loan against their personal assets. This can apply to any form of borrowing, including mortgage products. As a large amount of risk to the director can be involved, with specific clauses from the lender integrated into the guarantee, this is not to be undertaken without seeking specialist and independent legal advice.
Not all mortgage lenders will require a director guarantee. A specialist legal team will be able to provide further information and answer any questions you may have.