When businesses can’t pay the debts that they owe any longer, they enter into a state of insolvency. There are varying degrees of insolvency that can impact a business. Depending on the type of business, insolvency will have a different impact on the owners as well. It is important to understand the different factors that play a role in business and personal insolvency. Principle Insolvency is here to talk about the elements of insolvency and what they mean for your business.
Insolvency is Different for Companies Versus Sole Traders
The structure of a business is going to determine what happens when the business enters into insolvency. If the business is a company, it will enter into liquidation where assets will be sold and will be used to pay creditors and employees. This can be entered into voluntarily by the business owners or by the application of the creditors. If the business is a sole trader or a partnership, the risk falls on the shoulders of the individual business owners. They can then be left bankrupted.
Breaking Down Insolvency
It is important that business owners understand all the elements of insolvency.
– Cash Flow Insolvency: If a business enters into cash flow insolvency, they technically have enough assets to cover the debts that they owe. However, the issue lies in their lack of funds. If they don’t have the funds to make a payment on those debts, they are still insolvent.
– Balance Sheet Insolvency: On the other hand, if a business doesn’t have enough assets to pay off its debts, this is known as balance sheet insolvency. A company will then enter into liquidation or bankruptcy. Sometimes, negotiations can take place to avoid this. While there may be funds to its bills on a short-term basis, they more than likely won’t use all of those funds to pay those debts because they still need funds for daily operations.
Knowing the Difference Between Secured an Unsecured Creditors
Creditors are those that are owed money by the business. They fall into two categories, secured and unsecured.
– Secured: These creditors will have a security interest over some or all of the company’s assets. When Insolvency becomes a reality, assets can be sold to repay the debts to secured creditors.
– Unsecured: The big difference between a secured and unsecured creditor is that an unsecured creditor doesn’t have any guarantee of repayment in the event of insolvency through the sale of assets due to their lack of security interest.
Insolvency Services in Auckland, Hamilton, Levin & New Zealand Wide
If your business is in trouble financially, you can turn to Principle Insolvency to help you navigate the insolvency process. We will help you understand the options that are available to you and help you move forward with your decision. We help all those involved and understand the difficult situation that you are finding yourself in. You can trust our team of professionals to ensure all the laws and regulations are followed throughout the process. Call us today!