When, technically, is a business insolvent?

[britishbulldog]

Not quite sure how to ask this question, as I don't want to give away too many details.

When is a business insolvent? This is a business that has reserves of some tens of thousands of pounds, and an ok income, however part of the business is losing money hand over fist and reserves are being fast depleted.

Are you technically insolvent at the point you can't meet your (putative) redundancy costs? What about pension shortfall?

Or is it literally when you don't have money to pay the gas bill/staff?

Insolvency means the inability to pay one's debts as they fall due. Usually used to refer to a business, insolvency refers to the inability of a company to pay off its debts.

Business insolvency is defined in two different ways:

Cash flow insolvency
Unable to pay debts as they fall due.

Balance sheet insolvency
Having negative net assets ? in other words, liabilities exceed assets.

Thank you. Still not quite sure I understand though.

Said business:

Cannot pay pension deficit (but isn't due - ie no pensioners yet)

Has enough to cover ongoing costs, for the time being, but pretty soon wouldn't be able to cover the cost of all redundancies, should it fail. Is the redundancy thing just a red herring, ie if the business goes bankrupt then the employees just whistle for their money?

Am trying to work out when business would be insolvent (is this different from being bankrupt?)

(point of these questions, I hasten to add, is to AVOID bankruptcy - v possible, but it's getting quite desperate...)

"Is the redundancy thing just a red herring, ie if the business goes bankrupt then the employees just whistle for their money?"

The state intervenes and pays statutory redundancy money, and then joins the queue of creditors to try and recover some of that from the gone concern. See here.

The pension deficit (presumably you mean that the current value of the fund's assets is less than the actuary's view of net present value of the liabilities) is a matter for the pension trustees and, ultimately, the pension protection fund.

However, if you are a director of the company, or otherwise involved in ensuring that it is trading as a going concern, and you have reason to believe that it is entering into obligations which it cannot discharge, you need legal advice. Fraudulent trading: bad.

Thanks v much. I'm not a Director - this is actually a charity which I'm (tangentially, not formally) involved with.

OK, have I got this right:

So long as this business (is also a business) isn't entering into new sorts of obligations, then it can kind of limp on?

And it is not legally obliged to declare insolvency on the basis of not being able to cover pension deficit/staff redundancy?

I think a huge shake-up is in the immediate offing, which would cut out the failing bit of the business, so there it is not unreasonable to think that things might be turned around...

This is FANTASTICALLY helpful: thank you.

I think that fraudulent trading mostly covers placing orders that you know, or have reason to believe, you won't be able to pay. For example, if you purchase things on 28 day terms, but know you'll be closing the doors in 14 days, very bad.

Companies don't have to hold redundancy money as a reserve.

Pension deficits you need legal advice, but I think the issue is that pension trustees may decide that the covenant in weak (ie that the assurances the company offers of future payment are not credible). They can demand the deficit be cleared right now, and in some cases can force a company into bankruptcy to do so. The pension regulator has to approve deficit recovery plans, and can therefore object to the opposite problem, which is that the trustees are cozy with the employer and are willing to accept implausibly long recovery periods.

If this is an unincorporated charity, the trustees have personal liability for the charity's obligations.

This obviously has potentially very serious implications for everyone involved. If I were advising anyone involved (and I am not, I am just providing information), I would advise you to assure yourself (with legal advice if necessary) that your 'tangential involvement' does not put you in the position of a de facto trustee, and I would advise the trustees to immediately seek advice from one of the second-tier accountancy firms that specialises in charities.

Yes, this is something I am very nervous about.

Companies House website says it is 'private, limited by guarantee, no share capital'

What does this mean?

I don't think I could be seen as a de facto trustee, unless offering to help out with tasks and volunteering for the charity gets me into that position?

Ah, so it IS a company, so it will have (at least one) director (unless they died or resigned and the company has failed to appoint a successor).

I can't really give you any information that is going to help you, because it is the detail that really matters here. For instance, is there a separate charity with trustees which deal with the charitable activities and the company only deals with the trading activities (a common structure)? Is there anything relevant in the Articles of Association of the Company? Is the Company subject to audit? These and many more are the questions a professional adviser would ask before offering any advice.

It's not really relevant, but "Limited by guarantee without a share capital" means that the company doesn't have shareholders: such companies are not allowed to distribute any surpluses (profits) they make and so this is the normal form for a company that is a charity.

Oh and the de facto trustee point is not relevant for a charitable company. A creditor would have to prove a whole bunch of things to successfully claim personal liability on the part of someone who is not a statutory director.

I suggest that you speak to the Treasurer or the Accountant or auditor. Have you examined last years annual report and Accounts? Did you attend the AGM of the company?

sorry for long delay in coming back here - this is invaluable advice and I would have been back sooner if i could have.

I did attend the AGM, it was not wildly informative. this is not a very professionally run setup, and I have the sense that the trustees don't understand that much more than I do. The accounts to 2009 are available at the charity commission website, I looked at them.

Director - I've never heard anyone talk about this, perhaps I should check and see. Would all the Board of Trustees be Directors? The company does nothing the charity doesn't, if you see what I mean (this is hard to explain in these very vague terms).

Just to confirm I've understood what I've been told:

• You are not required to budget for redundancy costs, ie you can reasonably continue trading after the point at which you could not pay redundancy (assuming you could satisfy other creditors?)

• Likewise the pension deficit is not really the charity's problem, that's the business of the pension fund trustees (was reviewed relatively recently, according to Annual Report)

Many many many thanks...

If you look at the Annual Report and accounts it should have a list of the Directors.

The Board of Trustees and the directors would normally be the same people for a charity. However, as Lucinda says, the annual report should list the directors. You can also get the list of directors from the Companies House website for £1.

Your understanding is pretty much correct. The company does not need to budget for possible redundancy costs.

The pension deficit is the trustee's problem but they will want the charity to clear the deficit. Unless the pension trustees are demanding that the deficit is cleared immediately, the charity doesn't have to budget for that. If, say, the deficit is £100k but the trustees are happy for it to be paid off at £20k a year, the charity simply has to have the £20k available each year on the due date.

One other point to make is that a company can continue to trade whilst insolvent provided there is a realistic prospect that it will be able to trade its way out of difficulty. If, however, the company's position is made worse as a result of continuing to trade, the directors may be liable for some of the debts and may be disqualified.