If one of your clients enters into administration or liquidation the chance of retrieving your debt are slim. Mark Halstead, Partner at Red Flag Alert cautions:
“If one of your clients enters insolvency proceedings you will be fortunate to see a return of eight pence for every one pound of debt. The best remedy for this problem is pre-planning and avoiding this situation. This is where Red Flag Alert can help.”
At Red Flag Alert our focus is on prevention. We provide detailed financial health ratings on every UK business, so you can see administration or liquidation coming and take action.
Thousands of businesses use Red Flag Alert as an early warning system to avoid bad debt and make sure their business isn’t bankrupted by a key client being made insolvent.
In this article we’re going to cover some brief information on the often misunderstood administration and insolvency terms. This will give you a valuable insight into what is happening if they’re instigated.
Let’s start with some definitions:
- Company Administration is a process started with an attempt at rescuing the business and ultimately avoiding insolvency.
- Liquidation is a process that realises the assets of a company before closing it down.
Often liquidation follows an unsuccessful administration process.
When Do These Processes Start?
If a business is unable to pay its debts and/or has liabilities greater than its assets then administration or liquidation comes into the equation.
In theory the administration process is aimed at making the business profitable again. An Insolvency Practitioner is appointed to assess the business and attempt to make it viable.
Advantages of Administration for the Insolvent Business
- Any legal action against the business will be halted.
- An experienced Insolvency Practitioner will work to make the company viable.
- The company has time to negotiate terms with creditors.
This is where the value of the business’s assets and terms for selling the business are agreed before an administrator is appointed.
The business is then sold, sometimes to existing directors. This enables the business to continue trading.
It must be proved that this process is the best outcome for creditors.
Liquidation is the closure of the business with no attempt to rescue it. There are a few different types of liquidation:
- Members’ Voluntary Liquidation: A solvent company is closed down.
- Creditors’ Voluntary Liquidation: An insolvent company is closed down by the directors.
- Compulsory Liquidation: An insolvent company is forced into liquidation by creditors.
Advantages of Voluntary Liquidation
If a business is not looking viable then there are advantages for a director placing it into liquidation voluntarily:
- Directors are protected from wrongful trading accusations that could carry fines and penalties. This is because they are essentially acknowledging the business isn’t viable by voluntarily liquidating.
- Less chance of being held personally liable. If a company voluntarily liquidates then it does so on its own terms and with professional help meaning it’s less likely for directors to be found personally liable.
- Avoids the process of being petitioned by a court.
How Red Flag Alert Can Help
If one of your clients enters into administration or liquidation the chances of debt recovery become very small.
On average the returns are well under 10% of the total debt. Employees, anyone with a charge over assets, or HMRC are all ahead of suppliers in the queue.
The best action is to avoid having a situation where an insolvent business owes you money. Red Flag Alert is the perfect tool for this, it provides:
- Financial health ratings for every business in the UK.
- Detailed ratings that incorporate all real-time information.
- Ratings developed over 13 years by expert credit analysts.
- Ratings that give quantifiable predictions on insolvency in the next 12 months.
- Key updates sent every day.
- Information integrated into your CRM.
For a free consultation on how Red Flag Alert can help you avoid bad debt, click here to start a free trial.