
RCM Advisory
February 2023Insolvency Guides | Prepare Your Business for Insolvency

What is Insolvency?
Insolvency is a financial situation where an individual or entity, such as a company, is no longer able to meet its obligations in a timely manner, and may be unable to pay all of its debts. This typically occurs due to an inability to generate sufficient revenue or cash flow, manage expenses effectively, or both. Insolvency can have serious consequences for the affected business or individual and often leads to asset liquidation, restructuring and/or winding up proceedings. Proper advice should be sought from a qualified licensed insolvency practitioner when dealing with insolvency related issues in order to ensure the best outcome for all parties concerned.
How to Prepare for Insolvency
When facing insolvency, it is important to seek out qualified and experienced professional advice as soon as possible. The earlier the issue is identified, the more time and options may be available. Preparing for insolvency requires a complete and thorough analysis of both current and future liabilities, projected business income along with an understanding of various debt restructuring options such as administration or voluntary arrangement. Accurate financial records can also help provide necessary information about economic viability as well as costs associated with any restructuring measures that could be taken. With proactive planning and timely assessment, creditors can often negotiate settlements which ease the burden of excessive debts while minimizing the disruption to the business operations.
Benefits of Preparing for Insolvency
When considering liquidation, it is essential for a business or individual to take the time to prepare for insolvency. Preparation not only helps protect against possible negative consequences from creditors and other parties in the insolvency process, but also can ensure the best outcome from the available options. Preparing for insolvency involves properly assessing assets and liabilities, locating creditors and bringing together financial statements for a proper estimation of assets. It is important to also consider avoiding preferential payments or transfers as these could cause further economic hardship at a later date. Directors have a fiduciary duty to act with 'utmost good faith' in what they reasonably consider to be in the best interests of the company. They must act honestly, diligently and for a proper purpose and not allow their personal interests to conflict. Breach of fiduciary duty or allowing a company to trade wrongfully can lead to disqualification.
Common Causes of Insolvency
Insolvency is a state of financial distress in which businesses or individuals are unable to meet their financial obligations. Common causes of insolvency include poor cash flow management, inadequate capital structure and liquidity, high debts and borrowing costs, overinvestment in fixed assets, failure to adapt to changing market conditions, ineffective cost control measures, inadequate risk assessment strategy, low profit margins, and failure to diversify investments. Insolvencies can be both long-term (due to systemic issues) or short-term (due to the unforeseen effects of external events). Business owners should strive for sound strategic planning, regular evaluations of their business models and timely adjustments accordingly in order to reduce the likelihood of going insolvent.
What to Do if Your Business Becomes Insolvent?
If your business becomes insolvent, it is important to take prompt and decisive action in order to protect your assets and those of the company. Consult with a licensed insolvency practitioner who is experienced in managing business insolvencies. They can assist you in taking immediate steps to manage cash flow by evaluating both short-term and long-term liabilities, seeking alternative financing options through restructured debt or secured/unsecured creditors, and exploring other cost cutting measures. Avoid making payments or transfers until insolvency is resolved while continuing normal operations so that employees have job security and customers receive service they have paid for.
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