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What Do Insolvency Firms Do?

An insolvency firm is a company that deals with helping businesses that are facing financial difficulties, including those that are already insolvent. Its role is to offer advice and guidance on the different processes that are available, such as a Company Voluntary Arrangement (CVA), insolvency proceedings and liquidation. It can also help a company avoid insolvency firms by putting plans in place that will improve its cash flow and enable it to pay its debts when they come due.

A company may face insolvency for many reasons, including a large unforeseen expense such as an asset purchase or tax bill, the loss of a major client, poor business planning or external economic factors. If a company is struggling to meet its debt obligations it should seek professional advice immediately and consider entering a formal insolvency process, such as administration or a CVA.

The longer a company waits to enter insolvency proceedings, the more difficult it will be to turn around and the likelihood of the directors being held personally liable for the debts of the company will increase. It is also possible that the company could be left with no assets at all, as the liquidation process sees all the assets of the company sold to cover the outstanding debts.

Insolvency laws aim to protect the interests of creditors by preventing gratuitous transfers of firm assets and other activities that harm credit. An overinclusive test for insolvency would hurt firm value by reducing entrepreneurial investments and constraining other forms of capital raising, while an underinclusive test could lead to creditor plunder through the abuse of intra-firm lending.

One of the most common problems is late payments from a company to its suppliers and employees, which is often a sign that the company is starting to struggle financially. Increasing levels of debt are another clear warning sign, as is an inability to raise funds.

If a company cannot meet its debt repayments, it will soon start to lose money, leading to more unpaid invoices and ultimately debt write-off. This can have a serious impact on the reputation of a company, and it will be difficult to attract new clients and retain existing ones.

A well-known example of this was the collapse of retailer BHS in April 2016. Despite receiving government support, the company went into liquidation just weeks after closing its shops. This was largely due to the company failing to take action sooner, which resulted in many suppliers not being paid and staff leaving. If a company has not taken action early enough, it will likely face insolvency proceedings, which can have a devastating effect on its reputation and the chances of making a recovery. This can be damaging to all stakeholders, including shareholders, investors and customers. For this reason, it is vital for all companies to plan ahead for insolvency and have a strategy in place to ensure the survival of their business.