If you find yourself in charge of a company that is insolvent then what you need are practical steps to ensure your businesses survival and in this short guide, we aim to give you some ideas that will help in a real way.
What is insolvency?
There are two forms of insolvency, both of which the company director needs to be aware of.
The first may seem merely technical but it is important to understand.
Balance sheet insolvency means that the company has an excess of creditors over assets. The theory being that if the business goes into liquidation there will be no assets left with which to pay off the creditors.
Of course, it may be that the largest creditor by far is a director or funder who is happy to continue to fund the business and in general, this is fine although you do need to make sure that the situation will continue and take the advice to ensure that directors don’t break the law.
The second form of insolvency – cash flow insolvency is more immediately felt within the business on a day to day basis. This is where the company simply does not have enough free cash to pay its creditors when due.
The company may not be insolvent on the balance sheet having significant assets but they may be the long term such as machinery or buildings that can’t readily be turned into cash.
What steps can I take?
The first thing to do if you suspect that your business is insolvent is to get immediate, professional advice. Speak with your accountant or have an initial chat with an Insolvency Practitioner who will be able to advise the best steps for you.
The penalties for wrongful trading (trading whilst insolvent) can be severe and could result in the directors being banned from running a company for some years so some good advice now could save a fair amount of stress later.
One of the first things that any professional advisor will do is to look at the cash flow forecast and business plan. If you don’t have these or they are not up to date then you need to do some work here so that you can see how bad the situation really is.
Next look at refinancing. If as directors you have faith in your business then it may be an option to put more money into the firm. This will help with cash flow and depending upon the amount of money injected and how it is put into the company it will solve a balance sheet insolvency.
It may be possible to bring in other shareholders who can buy a part of the company in exchange for cash. Admittedly this means giving up a measure of control and future profit but it is better to have 90% of a live company that 100% of a dead one!
If your company just needs more working capital then look at asset financing (where existing assets are used as collateral for loans), invoice factoring or a simple bank loan to bring more cash into the bank. This will certainly get the company through a cash flow insolvency but won’t solve a balance sheet issue because new cash will be matched by a new debtor.
If none of these options are available to you and creditors are pressing for their money then a Creditors Voluntary Arrangement or CVA may be an option.
This is where an Insolvency Practitioner is appointed to run a formal process that gains agreement from creditors. This is designed to amalgamate all debts into one basket and have the business pay off at least a proportion over a defined period of time. This reduces the cash impact, removes the debt collection pressure and solves a cash flow crisis.
Where the company isn’t a suitable prospect for a CVA then the directors must take action quickly and one option is a voluntary administration. This is where the directors appoint an Insolvency Practitioner to become essentially a temporary CEO with the aim of assessing the situation and getting as much cash for the creditors as possible.
Whilst in some cases this can result in the sale of the company, in others it can lead to liquidation where the business is formally wound up.
That having been said there is a further option for the outcome of an administration – a Pre-Pack arrangement.
A Pre-Pack (sometimes called a Phoenix) Arrangement is where the administrator takes over the original company (or OldCo) and the directors set up a new business (called unsurprisingly a NewCo).
The NewCo then buys the assets from the OldCo such as trading name, intellectual property and machinery and leaves the debts and onerous contracts behind. This gives the company a brand new start and allows the directors to continue on.
Next steps
As we have already identified, get your cash flow forecast up to date. Nothing can be done without accurate figures and it is also important to make sure that your accounts are reasonably current.
Then we’d suggest contacting an Insolvency Practitioner just to talk over the options. They can give you clear and more importantly correct advice over your best way forward.
Insolvency isn’t the end of the world and as we have seen it doesn’t necessarily mean the end of a company as long as the directors take the right steps and get into action quickly.

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