If your business has been affected by the loss of a big customer or another debtor into insolvency then you need to make sure that you take action to secure your position.

An example of this would be the creditors of Carillion, many owed significant sums of money, the loss of which may cause serious harm to their business.

Assess the position

If you find yourself in this unenviable position then the natural reaction is to want to take positive and tangible action as quickly as you possibly can but this could be a costly mistake. Alternatively, many business owners may simply bury their head in the sand and hope that they issue goes away and again this would be a wrong move.

The very first thing that any business needs to do is to get accurate an up to date information, without this it becomes largely impossible to make reasonable and indeed defensible decisions.

If you have an in-house accounts team then get them producing a balance sheet and cash flow forecast immediately. There really is no time to lose as to continue on in business may leave you open to accusations of wrongful trading.

It is also useful to get information directly from the horse’s mouth – in other words, the insolvency practitioner appointed to oversee the process. This may be difficult but should by no means be impossible and it will be important to understand a few basic facts such as what process the administrator is following, whether the company is still trading and whether there is any prospect of debts being paid.

What to look for

When speaking with the administrator you are wanting to know firstly whether the business is trading still. This is distinctly possible as businesses are often sold to trade buyer out of insolvency.

If the company is trading then you will want to know what arrangements are in place for suppliers to get paid. You won’t get payment for debts that occurred before insolvency but it is possible that for essential supplies the administrator will be able to make a special payment just to ‘keep the lights on’.

The decision for you as a business is whether you can continue to legally trade.

If it looks like your company fails either of the insolvency tests then you will in turn have to seek the advice of an insolvency practitioner.

The insolvency tests explained

There are two test for insolvency; the cash flow test and the balance sheet test.

The Cash Flow test is simple enough – does the company have enough cash to pay its debts when due?

Debts can be trade suppliers or funders such as banks but it also includes staff and anyone else that may require paying in the near future.

The balance sheet test can be a little more technical but in essence, it boils down to whether the company’s assets exceed its liabilities. In this case, it is also important to include contingent liabilities and again you may need to call in help to spot and quantify these.

If your company fails either of these tests and you continue to trade then this is what is known as wrongful trading and it is distinctly possible that the directors of the company could face action later.

This then is why it is really important to make sure you have a clear sight of the size of the problem facing your business.

Suppose you are insolvent – what can you do?

The remedies for insolvency vary depending upon the size of the issue facing the company and the resources you have available.

The easiest and quickest remedy is to inject more capital into the business from the personal resources of the directors/ shareholders in the form of equity.

It has to be remembered that should the business still go into administration after this point then any new capital injected will probably be lost so care is required.

In the same vein, getting additional equity investors on board can be a good way to ease a crisis but be careful not to mislead potential funders as to the viability of your company.

A Creditors Voluntary Arrangement or CVA is another option for a business that is essentially profitable but finds itself insolvent through no fault of its own.

In this case, the company comes to an agreement with its creditors to pay all or a proportion of the debts back over a longer period of time.

There are three major benefits to this. Firstly any debt collection ceases so the company has immediate relief from the threat of further action.

Secondly, the company becomes solvent, either through owing less to its creditors (balance sheet)  or having longer to pay (cash flow test).

The final and not inconsiderable benefit is that the business will probably end up paying less out to creditors.

If the company is insolvent and there is no realistic prospect of a CVA or trading out of the situation then liquidation will be the next step.

In this case, the business ceases and the assets of the company are sold off to the highest (or quickest) bidder.

Whilst it may seem that this is the end of the company, certainly as far as the directors are concerned it is possible that the original owners or directors could negotiate to buy the assets, including the trading name from the administrator and thus start up a so called ‘phoenix’ company.

Finally, if all of the other options are not open to the directors then the company could simply go into liquidation, the assets would be sold and the company wound up.

Whilst this may seem like a disaster at the time it is by no means the major trauma that it used to be and directors will be free to start up again, always assuming that they have acted properly in the case of the liquidation. There will be little or no stigma attached to this, especially where a company has suffered due to the actions of another company such as in the Carillion or BHS cases.

In summary

The key message is that if you find yourself losing a large customer who owes a material amount of money then you need to act quickly, be realistic and get professional help.

With the right advice, it is certainly possible that all will not be lost and your company could come out of the situation in good health, if not the right course of action will ensure that the directors do not leave themselves liable.




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