Getting to grips with insolvency: a brief summary
A small proportion of businesses who borrow through the marketplace will have difficulties paying back their loans and we recognise that it is important to know what this means for the business and the people who have lent to them. With that in mind, we’ve written a summary of key terms and processes involved in the recoveries process. Below is a summary version, for the full details of recoveries terms and processes, visit our new FAQ section which we have added to the Help Centre.
A company in financial distress must be managed very carefully. The directors may incur personal liability if they continue to trade whilst the company is insolvent. A company (or an LLP) is technically insolvent when it is unable to pay its debts as they fall due.
Usually, the directors will first try to come to an informal arrangement with the company’s creditors (being those to whom the company owes money) to delay or reduce payments in the short term. If such an arrangement is not possible, the directors may seek advice from a financial advisor who is also an insolvency practitioner. The insolvency practitioner may suggest that the directors propose a company voluntary arrangement to creditors, or otherwise that the company goes into administration or insolvent liquidation.
Even when a company is clearly in distress, the directors may not appear to be acting in the best interests of the company’s creditors. In these circumstances, the creditors may take steps to appoint a liquidator, administrator or a receiver who will take control of (and sell) the assets of the company for the benefit of the creditors as a whole.
A secured creditor may have all assets security which enables it to rank ahead of unsecured creditors when the assets of the company are shared out. Some creditors may also have the benefit of personal guarantees from directors and/or shareholders, which can go a long way to offset any shortfall from the company.
If a guarantor is unable to pay his or her debts as they fall due, an insolvency practitioner may suggest that the guarantor proposes an individual voluntary arrangement, or otherwise that the individual goes into bankruptcy. Bankruptcy lasts for 12 months, unless there is a good reason why it should be extended, such as the bankrupt failing to disclose all his or her assets.
Once a liquidator or administrator has sold all the assets of a company, and distributed the funds to creditors, the company will be dissolved.