Insolvency and Bankruptcy Valuers Overview

What is Insolvency?

You can be insolvent without being bankrupt, but you can’t be bankrupt without being insolvent.

Confused yet? Many people think of the two as the same thing, but they are very different. Insolvency is a problem that bankruptcy is designed to solve.

Insolvency is the inability to pay debts when they are due. Fortunately, there are solutions for resolving insolvency, including borrowing money or increasing income so that you can pay off debt. You also could negotiate a debt payment or settlement plan with creditors.

Bankruptcy is usually a final alternative when other attempts to clear debt fail.

To make things a little more complicated, insolvency comes in two flavours. The first, called “cash-flow insolvency,” occurs when an insolvent debtor can’t make a payment because he doesn’t have the money. The second, called “balance-sheet insolvency,” results when debts exceed assets.

In the first case, the debtor doesn’t have the money to make a payment when it’s due; in the second it might be possible to make a payment with cash on hand, but financial collapse might not be far off. Paying debts will deplete cash and that leads to cash-flow insolvency.

Insolvency only becomes an issue when a creditor seeks to collect and the debtor can’t pay what’s due. Failing to pay debts usually leads to debt collection efforts that force some kind of action. For example, if you own a house and don’t pay the mortgage, you’ll go into default that can soon lead to foreclosure. If you can’t meet minimum monthly payments on your credit cards and you don’t try to work out a solution with the card company, you’ll almost certainly hear from debt collectors.

Think of insolvency as the trigger for financial hardship. If you can’t pay your rent or electric bill because you don’t have the money, you could call faithful Aunt Beth and ask for a loan. If you get one, the insolvency goes away, probably temporarily unless you are able to balance your income and expenses. The longer you are insolvent; the worse things will become.

If you can’t resolve the insolvency, bankruptcy might be the only way to stop your financial haemorrhaging. Showing that you’re insolvent is necessary for establishing a bankruptcy claim. Federal bankruptcy law defines insolvency for corporations and individuals as the “financial condition such that the sum of such entity’s debts is greater than all of such entity’s property, at fair valuation.”

In other words, you owe so much that selling all your assets won’t cover the bill.

CASH FLOW INSOLVENCY

When you can’t pay a debt because you don’t have the money, you are cash-flow insolvent. If insolvency were a medical problem, doctors might call it an acute condition. Many people see financial trouble in their future, what might be called a chronic problem, but they aren’t cash-flow insolvent until they can no longer pay their bills. Financial trouble is chronic; not paying you bills is acute, since that’s the moment when a problem becomes a personal crisis.

Cash flow, or equitable, insolvency impacts both businesses and individuals. Usually it occurs when they’ve exhausted other ways of resolving debt. If you have a credit card payment due, you might be able to liquidate an asset like a lawnmower to pay a debt and avoid cash-flow insolvency, at least for the moment. When you run out of assets to sell and places to borrow money, and your income isn’t enough to cover your debts, you’ll probably be forced to negotiate a payment agreement with your creditors, either directly or through a debt management firm.

Deciding what to do about this type of insolvency requires taking a cash-flow test. The debtor needs to evaluate current and future cash flows to determine whether your income is enough to cover debt payments. If you have an inheritance distribution or some other windfall coming in a few months, your insolvency might be temporary, but if you’ve sold your assets and your income is not going to increase, you might not have an easy way out of insolvency. The analysis can help you decide whether to seek a debt settlement or file for bankruptcy protection.

BALANCE SHEET INSOLVENCY

Businesses commonly use a balance sheet insolvency test to decide whether to take steps to stay afloat or file bankruptcy. To decide, the business will evaluate its inflows, outflows and assets. If inflows are less than outflows and the value of the business’ assets are worth less than what is owed – a condition called negative net assets — it might conclude that restructuring without the help of a bankruptcy filing might be pointless. But if it has assets that could be sold – a truck or store locations, for instance – that could be used to cover debts, it might attempt to sell the asset and shrink the business.

Financial advisors will review business operations, suggest scenarios for reducing or eliminating debt and suggest a course of action. Staying in business might require that the company convince its creditors that it has made the correct assumptions about future cash flows, but many times businesses and their lenders don’t see eye to eye.

A business can be cash flow insolvent, but balance sheet solvent, if it holds non-liquid (non-cash) assets worth more than its liabilities. The reverse is also possible: A business can be balance sheet insolvent (more debt than assets), but cash flow solvent if its revenues allow it to meet its immediate financial obligations. Many companies that hold long-term debt operate continually in this state.

INSOLVENCY VS. BANKRUPTCY

Insolvency is not the same as bankruptcy. Insolvency is a state of economic distress, whereas bankruptcy is a court order that decides how an insolvent debtor will deal with unpaid obligations. That usually involves selling assets to pay the creditors and erasing debts that can’t be paid. Bankruptcy can severely damage a debtor’s credit rating and ability to borrow for years.

An individual or company can be insolvent without being bankrupt — especially if the insolvency is temporary and correctable — but not the opposite.

Insolvency can lead to bankruptcy if the insolvent party is unable to successfully address its financial condition.

Insolvent companies can reverse course by cutting costs, selling assets, borrowing money, renegotiating debt or allowing themselves to be acquired by a larger corporation that agrees to take over the insolvent company’s debts in return for control of its products or services.

WHAT IF I’M INSOLVENT?

If you are financially overwhelmed and sure you can’t pay your debts, you should contact a non-profit debt counsellor or debt management company that can help you review your balance sheet. Even if you don’t have enough income to pay your debts, a debt manager can try to negotiate a settlement that will partially repay what you owe and avoid a bankruptcy filing.

You can also try to negotiate with creditors on your own. If you owe a large credit-card debt, contact the card issuer and explain your situation. Though the debt holder is under no obligation to offer a workout plan, reduce your debt or trim you interest rate, it’s in their best interests to try. So, you might be able to reach an agreement if you can convince the creditor that it’s either an agreement or default.

Remember, if you reach an agreement that involves debt forgiveness, you might be liable to pay taxes on the amount the creditor writes off. However, the Internal Revenue Service allows insolvent and bankrupt taxpayers to reduce cancelled debt by their insolvency amount.

For example, if a creditor agrees to settle a $20,000 debt with a $5,000 payment from you, you would have cancelled debt income of $15,000. But if you only had $3,000 in assets at the time you reached the agreement, you would insolvent in the amount of $12,000 ($15,000 cancelled debt income minus $3,000 assets). You would then report $3,000 in income on your taxes ($15,000 less the $12,000 insolvency amount).

If you are unclear about this, contact a non-profit credit counselling agency or a tax professional.

A court can deem a company or individual insolvent by issuing an insolvency order. A debtor can petition for an insolvency order as part of a request for personal bankruptcy protection. In most jurisdictions, an insolvency order temporarily prevents any attempts at debt collection. Conversely, a creditor can, in some instances, request an insolvency order to be issued against a debtor, if there is reason to believe that the debtor can repay all or part of the debt. In that case, the court can issue an insolvency order, requiring the debtor to repay all or part of the debt.

REASONS FOR INSOLVENCY

Individuals and businesses can become insolvent for a vast number of reasons, but some of the most common include:

• Job loss or salary reduction
• Divorce
• Medical bills
• Imprudent use of credit
• Financial mismanagement

Bankruptcy

Bankruptcy is a scary proposition. The word "bankruptcy" itself sounds so ominous. The media bombards us with nightmare tales of seemingly solid business giants going from bedrock to bankrupt. The list of the bankrupt runs the spectrum from personal to corporate bringing together the likes of Donald Trump with Enron.

And gossip columns never tire of dishing on the latest celebrity inches from bankruptcy whether it's Gary Coleman or Mike Tyson having to part with his pet tigers. You might even fear that you're a few steps from going under. After all, we live in an economy in which credit card offers clutter our mailboxes. And living in debt is an accepted norm. But, just how can you tell when it's time to throw in the towel and declare bankruptcy?

Here are a few questions to help you assess your financial danger zone:

Do you only make minimum payments on your credit cards?

Are bill collectors calling you?

Does the thought of sorting out your finances make you feel scared or out of control?

Do you use credit cards to pay for necessities?

Are you considering debt consolidation?

Are you unsure how much you actually owe?

Assess Your Situation

If you answered yes to two or more of the questions above, you at least want to give your financial situation a little more thought. Simply put, bankruptcy is when you owe more than you can afford to pay.

• To determine where you are financially, inventory all of your liquid assets. Don't forget to include retirement funds, stocks, bonds, real estate, vehicles, college savings accounts, and other non-bank account funds. Add up a rough estimate for each item.
• Then, collect and add up your bills and credit statements. If the value of your assets is less than the amount of debt you owe, declaring bankruptcy may be one way out of a sticky financial situation. However, bankruptcy shouldn't be approached casually. After all, it's not a simple, easy cure-all for out-of-control debt.

How do I Declare Bankruptcy?

• You can go bankrupt in one of two main ways. The more common route is to voluntarily file for bankruptcy. The second way is for creditors to ask the court to order a person bankrupt.
• There are several ways to file bankruptcy, each with pros and cons. You may want to consult a lawyer before proceeding so you can figure out the best fit for your circumstances.

LIQUIDATION

The team has expertise in conducting liquidations of insolvent companies and implements strategies to recover funds from sale of tangible and intangible assets expeditiously. The team identifies assets belonging to the corporate entities and the guarantors etc.

What is Liquidation?

Liquidation can be used in several contexts. Liquidation can refer to both insolvent company liquidation and solvent company liquidation. Liquidation can also refer to the sale of unwanted or surplus stock or assets, known as asset liquidation.

The use of Liquidation in the context of insolvent company closure is the technical use of the term Liquidation as laid out in the Insolvency Act.

Company Liquidation

The liquidation of an insolvency company is the more formal use of the term liquidation.

Company Liquidation can refer to both an insolvent company liquidation and a solvent company liquidation.

Insolvent Liquidation refers to a process where company liquidation is use to close down a company where it is unable to pay its creditors (those who it owes money to) in full. This is either a Creditors Voluntary Liquidation or a Compulsory Liquidation.

Solvent Company Liquidation refers to a company liquidation where the company assets are distributed to the shareholders of the company in a tax efficient manner. This is a Members Voluntary Liquidation.

Learn more about Company Liquidation Types.

Asset Liquidation

Liquidation can refer to the liquidation of assets into cash. This could be the liquidation of excess stock or company assets that are no longer required. More often than not excess stock is liquidated through internet auction sites.

Asset liquidation takes place as part of a company liquidation but asset liquidation can also take place outside of company liquidation.

Liquidation Help

At Insolvency.com we can provide Liquidation help to provide answers and solutions to company questions.

Liquidation help is crucial in understanding the best solution to use for your company’s situation.

Insolveny.com recognises the importance of giving clear explanations of the various insolvency and rescue processes available. As licensed insolvency practitioners we are able to advice on and transact all aspects of personal and business insolvency matters.

Liquidators

Liquidators act to close down either an insolvent company or a solvent company. Liquidators need to be Licensed Insolvency Practitioners. At Insolvency.com Licensed Insolvency Practitioners will advise you on the various options open to your company.

Liquidators act as a Liquidator of a company for a Creditors Voluntary Liquidation, a Compulsory Liquidation and a Members Voluntary Liquidation.

A liquidator’s principal role is to realise value for all assets of a company and to distribute the cash realised to creditors in the order laid out under law.

A Liquidator is also sometimes referred to as someone who liquidates assets outside of formal insolvency.

A Liquidator may sell excess or surplus stock or assets. Such Liquidator may be referred to by their asset specialisation for example furniture liquidators or computer liquidators.

Role of Liquidators

The role of liquidators who act with regard to formal insolvency procedures is governed by insolvency legislation. As such for the role of liquidators to be undertaken in relation to company liquidation then the liquidator must be a licensed insolvency practitioner.

The role of liquidators is regulated by the licensing body of the insolvency practitioner concerned.

A Liquidator acting outside of formal insolvency procedures will probably be acting to sell assets in behalf of a company or business.

Liquidate

Should you wish to liquidate a Limited Company then you will need to use a Licensed Insolvency Practitioner. At Insolvency.com we are Licensed Insolvency Practitioners who will advise you on the various options open to you.

Several processes exist to liquidate a company. The most appropriate process to use to liquidate a company will depend on whether the company is solvent or insolvent.

An insolvent company can use either a Creditors Voluntary Liquidation (CVL) or a Compulsory Liquidation to liquidate itself.

A solvent company can use a Members Voluntary Liquidation (MVL) to liquidate itself.

Structuring, Restructuring & Turnaround

Solvent Restructuring

The first test here is; is the company solvent? Is the company balance sheet solvent and is the company able to pay its creditors when they are due?

If the company has passed the first test then please carry on reading, otherwise take a look at the “Options for Insolvent Companies” section.

Members’ Voluntary Liquidation MVL

A Members’ Voluntary Liquidation MVL is a shareholder-led process, which is a tax efficient method for distributing or restructuring the assets and/or trade of a company.

A Members’ Voluntary Liquidation MVL can be used to distribute liquidated assets (cash), assets in specie (non-cash assets) or of shares in newly formed companies, which then hold the assets of the liquidated company.

A Members’ Voluntary Liquidation MVL is an Insolvency Act procedure which will need a Licensed Insolvency Practitioner to act on the case.

Tax advice should always be taken when considering a Members’ Voluntary Liquidation. We are able to provide such advice through our partner network or are always delighted to work with you existing advisors to provide the regulated part of any such restructuring.

Members Voluntary Winding Up

Members Voluntary Winding Up is a term used to refer to a Members Voluntary Liquidation.

Members Voluntary Winding Up is a form of company liquidation used to close down a solvent company and distribute its assets to the shareholders (also known as members) of the company.

Section 110 Insolvency Act Reconstruction

S.110 refers to S.110 of the Insolvency Act.

Section 110 is used to as part of a Members Voluntary Liquidation MVL process.

Broadly speaking the use of S.110 within a Members Voluntary Liquidation MVL allows for shares in a subsidiary company to be distributed to the original shareholders of the holding company.

For example, a company which holds property of assets and a trading business could be split into two companies one holding the trade and one holding the property assets.

Tax advice should always be taken when considering S.110 within a Members’ Voluntary Liquidation. We are able to provide such advice through our partner network or are always delighted to work with you existing advisors to provide the regulated part of any such restructuring.

Extra-Statutory Concession C16

In general terms this applies when a company is being dissolved under S.652 of the Companies Act.

Extra-Statutory Concession C16 is a HMRC concession that with their approval will allow for a distribution to shareholders though classed as an income distribution to be treated for tax as a capital distribution for tax purposes.

Company dissolution -Beware Bona Vacantia

The term “Bona Vacantia” literally means vacant goods and is the legal name for ownerless property, which by law passes to the crown.

Bona Vacantia will usually apply to any assets left in a company once it has been dissolved.

If dissolution is being considered as an end of life solution for a company, care must be taken is in relation to the level of share capital left in a company. Take a look at the website of the Treasury Solicitor and this will explain the £4,000 cut-off level.

A Members’ Voluntary Liquidation MVL can be used to distribute liquidated assets (cash), assets in specie (non-cash assets) or of shares in newly formed companies, which then hold the assets of the liquidated company.

A Members’ Voluntary Liquidation MVL is an Insolvency Act procedure which will need a Licensed Insolvency Practitioner to act on the case.

Tax advice should always be taken when considering a Members’ Voluntary Liquidation. We are able to provide such advice through our partner network or are always delighted to work with you existing advisors to provide the regulated part of any such restructuring.

Members Voluntary Winding Up

Members Voluntary Winding Up is a term used to refer to a Members Voluntary Liquidation.

Members Voluntary Winding Up is a form of company liquidation used to close down a solvent company and distribute its assets to the shareholders (also known as members) of the company.

Section 110 Insolvency Act Reconstruction

S.110 refers to S.110 of the Insolvency Act.

Section 110 is used to as part of a Members Voluntary Liquidation MVL process.

Broadly speaking the use of S.110 within a Members Voluntary Liquidation MVL allows for shares in a subsidiary company to be distributed to the original shareholders of the holding company.

For example, a company which holds property of assets and a trading business could be split into two companies one holding the trade and one holding the property assets.

Tax advice should always be taken when considering S.110 within a Members’ Voluntary Liquidation. We are able to provide such advice through our partner network or are always delighted to work with you existing advisors to provide the regulated part of any such restructuring.

Extra-Statutory Concession C16

In general terms this applies when a company is being dissolved under S.652 of the Companies Act.

Extra-Statutory Concession C16 is a HMRC concession that with their approval will allow for a distribution to shareholders though classed as an income distribution to be treated for tax as a capital distribution for tax purposes.

Company dissolution -Beware Bona Vacantia

The term “Bona Vacantia” literally means vacant goods and is the legal name for ownerless property, which by law passes to the crown.

Bona Vacantia will usually apply to any assets left in a company once it has been dissolved.

If dissolution is being considered as an end of life solution for a company, care must be taken is in relation to the level of share capital left in a company. Take a look at the website of the Treasury Solicitor and this will explain the £4,000 cut-off level.

Business Intelligence & Forensic

BUSINESS INTELLIGENCE

Business Intelligence (BI) is the analysis of disparate sets of information within an organisation in order to gain insights to meet tactical and strategic objectives.

BI aims to make the right information available to the right people at the right time, allowing them to make insightful and actionable decisions.

Successful BI implementations involve:

• The clear identification of analytical & business objectives
• Analysis of business processes supporting the objectives
• Establishing a comprehensive data model to underpin the integrity of the analytics
• Defining & agreeing on the metrics & dimensions that will be used in the analytics
• The development of analytical routines & visualisations
• The ability to remain pragmatic & agile as BI is a collaborative & iterative process.

We can assist you on your BI journey through the application of our data modelling and visualisation expertise, delivered either on premises or in the cloud.

Our dynamic and interactive dashboards, using technologies such as Qlik and Microsoft Power BI, allows you to explore the data, ask the right questions and discover previously hidden patterns, trends and relationships.

Our integrated approach will allow you to fully explore both structured and unstructured data sets in order to fully leverage your information assets to achieve the business objectives.

DATA FORENSICS

Forensic analytics is the application of specialised analytical knowledge and techniques to these sources in order to identify patterns of potential fraud, misappropriation, corruption or any other nefarious activity.

Examples of this could include the double payment of invoices, inventory theft, the manipulation of bank statements or inflated bonuses in payroll.

Get a forensic cloud dashboard

Delivered on premises or as a cloud service, we can provide interactive visual analytical models and dashboards that ‘sit on top’ of your transaction systems and data sources to provide a proactive monitoring capability for your internal audit team or external forensic professionals.

Using these interfaces, you will be able to perform a combination of rules-based, statistical and visualisation techniques to quickly identify anomalous activity, prevent and respond to potentially fraudulent transactions.

Forensic analytics can also be performed on a proactive and ongoing basis to assist in the design and implementation of control activities to prevent future fraud risks.

Delegate roles & responsibilities

Procurement, accounts payable and payroll are internal processes that have a high fraud risk as they are areas the majority of payments of made by an organisation.

The highly sensitive nature of such investigations requires strong delegation of authority, segregation of duties and other controls to prevent collusion and possible fraudulent transactions.