Insolvency is a worrying time and with a restaurant, it is a very personal situation.
It is important to remember that insolvency for a limited company is a legally defined term and Directors have to act in accordance with the law.
If you have determined that your restaurant business is insolvent then you have to make sure that you and your fellow directors take professional advice.
Working out the options
It’s vital to ensure that your company is properly advised. Unfortunately, there is a lot of disinformation out there and so finding someone to take a dispassionate but informed view is so important.
There are a number of possible different options available and your advisor will be able to explain these in detail and help you decide which is the best course of action.
The advisor will look at the current situation, how much is owed and to whom and what assets the business has. They will also look at the profitability of the company and develop an understanding of how the firm found itself in the situation it is currently experiencing.
Once they have all the details they need then they will form their plan.
If the situation isn’t very serious and the insolvency is clearly a temporary cash flow problem then it is possible that the company could trade out. This means that the directors form a plan to raise cash to pay off creditors or the natural course of trading will mean that in due course the insolvency will end.
There is however a very important caveat to this – Directors must not trade whilst insolvent, so the advisor will be able to ensure that this doesn’t happen.
It may be that a CVA is a suitable option. A CVA (or Creditors Voluntary Arrangement) is a formal process where an agreement is made between the company and its creditors to pay off the indebtedness over a period of time.
This is a formal agreement and needs to be set up properly or the creditors may choose to ignore it and launch legal action.
If things are particularly bad then the insolvency practitioner may suggest that the company is wound up or ‘liquidated’.
Again this is a formal process of ending the life of the company, realising any assets and returning the value that is left to the creditors.
Company liquidations, especially in complex cases can take quite some time and because it results in the end of the business it also naturally means that the employees lose their jobs.
A third option includes a liquidation but in essence, allows the business to continue.
A ‘pre-pack’ or ‘phoenix’ liquidation means that the original business is wound up but the valuable parts of the company are bought by a new company. This new company can for instance buy the trading name of the restaurant and take on the lease.
The newly formed company then continues to trade and the staff retain their jobs.
Again this is a formal process and the steps required need to be taken in the right order or the sale can be challenged in the court and unwound but a professional insolvency advisor will be able to set up and run this.
One of the things that most people need to know after an insolvency procedure is what their personal situation is likely to be.
Obviously, this depends upon the individual circumstances around the company and this is something that the insolvency practitioner will be pleased to discuss before any action begins.
In general terms, it is a central principle that the insolvency is happening to the company and not the individual directors.
In most cases, the directors will be free to begin their business life again and the insolvency doesn’t attach to the person’s credit record.
Clearly, the case is different where the directors have traded whilst insolvent or when there has been some form of criminal activity.
Directors also need to be aware that if they have signed any guarantees then they may have to pay an amount of money into the insolvency pot.
Insolvency is an issue that requires careful management and enlisting the help of an insolvency professional is crucial in ensuring that the Directors are protected from any potential legal problems.
Properly handled, insolvency doesn’t have to have a lasting effect on the career of a restaurant owning director and can even end up being the beginning of a more successful chapter.