Insolvency action, whether it is voluntary or brought on by creditors can have serious consequences for car dealers and it is always worth being prepared for the possible outcomes.
What is insolvency?
There are two forms of insolvency in the UK – Cash flow insolvency and balance sheet insolvency.
The first form is the one that most readily presents itself to business owners and is pretty simple to explain and understand. Cash flow insolvency is when your business doesn’t have the ready cash to pay its suppliers when due.
For the car dealer this can mean that on paper the company is doing well, it may be profitable and it may have a positive balance sheet with lots of money tied up in stock, but in day to day trading the staff face mounting pressure from creditors and it becomes harder and harder to pay the payroll.
Whilst the balance sheet method may seem to be merely a technical exercise it is important that it is not ignored. Balance sheet insolvency is essentially when the business if wound up today would have fewer assets than debts and directors have a statutory duty to continually assess the status of the business in this respect.
There are serious consequences for continuing to trade whilst insolvent and it could end up with directors being banned from running a company or indeed being forced to pay some or all of their insolvent companies’ debts.
What if I think my company might be insolvent?
If you think that your company could be heading for insolvency then the message is simple; get advice and get it fast.
Talk to qualified experienced professionals about your particular situation. You’ll need to get your accountant to look at your books and prepare an up to date forecast and it is worth speaking with insolvency professionals to get a specialist point of view.
What might happen?
There are a number of possible outcomes when your business gets into trouble and it is important to note that the earlier you deal with the situation then the more of these outcomes will be available to you.
The first possible outcome is that you get better at business. It may sound stupid but we all know owners of dealerships that are fantastic sales people or who know everything about cars but who are absolutely useless at the business of being in business.
This isn’t a failure as such after all everyone has different talents, but it is more a case of understanding what you are good at and where you need to bring in specialist help so option 1 is to get that help.
A finance professional may be able to set in place controls and give your creditors confidence so that no formal insolvency procedure is necessary. Obviously, this is one of the options that you need to deal with early on.
The second outcome is that you may need to bring in cash. That could take the form of releasing some forecourt stock so that your cash flow is boosted or maybe you need to look at stocking loans.
Alternatively, external investment or indeed putting in more of your own money might be a possibility but you really need to be careful that you don’t get a cash injection and then simply repeat the same mistakes. This option needs to be combined with option 1.
If things have got serious and you are on the verge of creditor action then your insolvency practitioner (IP) may suggest options 3 – a CVA.
This is where your business makes a formal agreement with its creditors to pay off all or part of the amount owing over a longer period of time but where the business still continues to trade and the directors are still in charge.
It is vital that the agreement is stuck to otherwise winding up is the inevitable conclusion but it is a way that the company can buy important breathing space to get things sorted out properly and the creditors can get some money back.
You’ll need to be aware that many contracts have a break clause that allows the other party to walk away if you make an agreement with creditors. This could be for things such as a lease on a forecourt or a stocking loan facility being withdrawn so there will need to be a fair amount of stakeholder management here.
If a CVA isn’t practical than option 4 would be an administration and sale.
When a company goes into administration either the court or the directors appoint an insolvency practitioner to run the company whilst the position is assessed and a buyer sought.
Administration can be voluntary where directors get the IP involved or involuntary where creditors ask the court to appoint one.
Clearly apart from the duty of the directors to take action when the business gets into trouble, it is also beneficial if the administration is voluntary as this is likely to end up with a friendlier IP in charge.
A pre-pack arrangement is where a company goes into administration and the good parts are bought by the former directors and they use this to form a new company. Clearly, this is planned in advance and really only available in a voluntary situation.
If creditors lose patience then they may ask the court to issue a winding-up order. In this case, the administrator is appointed to look at the affairs of the company and the actions of the directors and either sell it, returning the money to the creditors or to liquidate and sell off the assets before closing down the company.
Option 5 then is the most serious and results in the ‘death’ of the company – liquidation.
This is where the assets are sold off to the highest bidder and the cash paid out to the creditors.
If your car dealership is in trouble then the overriding message is not to bury your head in the sand.
Speak with your accountant and an Insolvency Practitioner. They will be able to give you clear practical and above all legal advice as to your best options and how to make sure you get the best outcome.