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Introduction

There are many reasons when it becomes necessary for a business to cease trading or re-structure. Often a large bad debt, loss of a key customer or fundamental cash flow problems necessitate action.

Cash flow at crucial times is the key for any business. Many viable businesses that go into insolvency could be saved given access to appropriate advice and funding lines.

Access Credit Management can provide extensive funds that are available to business with cash flow problems including:

  • Commercial mortgages
  • Debtor finance
  • Stock finance
  • Asset finance 

Is the business insolvent or can it be turned around?

  • The business cannot pay its liabilities as and when they become due
  • The business has more liabilities than assets

In addition, if the business cannot:

  • Trade at a profit, or
  • Pay staff wages/salaries, or
  • Creditors are taking aggressive legal action, or
  • Your bank is withdrawing support, or
  • There are increasing VAT/PAYE arrears

Contact us immediately on 0800 694 0484 to discuss your options.

Business turnaround from insolvency

If your business is under pressure due to any of the above or additionally if:

  • Bailiffs or Sheriffs have visited the premises,
  • You have entered into arrangements with the Inland Revenue or VAT but have been unable to maintain them,
  • You have been unable to pay yourself any wages/salary

Contact us immediately on 0800 694 0484 for a no obligation assessment as to how the business can be turned around.

This is what we can do to help save your business:

  • Review your financial position and present you with available options
  • Provide you with access to a range of specialists to assist with the turnaround 

Insolvency Options for Sole Traders and Partnerships

The question of personal liability for the business debts needs to be clearly understood. 

Sole traders

If you trade as an individual you are personally liable for the business debts incurred. There is no legal separation and creditors will pursue you for settlement. 

Partnerships

Partners are jointly and severally liable for all business debts and creditors can pursue all partners for the total debt. In the event that full payment cannot be recovered from one partner, they will recover payment in full from any other partners.

In the event that a partner becomes bankrupt, the liability will be written off for that partner, however, creditors will still proceed with recovery from the remaining (or former) partners for the debt(s).

The business is in difficulty - What are the options for sole traders and partnerships?

Acknowledging that there is a problem is often the hardest step.

Understanding the problem will require time and effort to identify where specifically the business is failing in order to determine whether the business is worth saving or not.

Follow the links below for further detail on the insolvency options for sole traders and partnerships

Insolvency: Turnaround and Informal Arrangements

If, after analysing the business the conclusion is that it is worth saving then a strategic plan of action should be created to address specific areas of weakness such as:

  • Cost reduction
  • Capital restructuring
  • Concentration on profitable products
  • Disposal of part of the business
  • Improvement of financial controls

On the basis of the strategic plan informal arrangements can be made with creditors to pay off the debt.

Insolvency: Turnaround and Formal Arrangements

Formal arrangements provide an effective strategy but will require the help of a turnaround specialist.

Key points:

  • Analyse the business to identify which areas have underperformed
  • Write a strategic plan for recovery to cover a 12 month period
  • Keep major creditors informed of the situation
  • Constantly monitor and review the plan to adapt to circumstances
  • Rule nothing out - look at all options if the required improvements are not happening

Remember, creditors would rather accept a percentage of the debt than to receive nothing through insolvency.

Individual Voluntary Arrangements (IVAs)

Individual Voluntary Arrangements provide a way to avoid bankruptcy providing a sum of money can be raised which creditors are prepared to accept in full and final settlement of their debts.

If the business is worth saving and creditor pressure is not allowing time to negotiate an informal arrangement or they will not agree to the proposal then an IVA will allow you to continue to trade and generate income.

The IVA process is a legally binding agreement and as such creditors can claim tax relief against bad debts. Unlike bankruptcy, an IVA does not prevent you from becoming a company director nor does it impact on your professional status.

Insolvency Options for Companies

Unlike a sole trader or partnership, a limited liability company has the benefit of being a separate legal entity from its directors and shareholders.

A company is technically insolvent when it cannot pay its debts as they fall due or where the liabilities exceed the value of its assets.

In general terms, company directors have a duty of care to the company, its shareholders, employees and creditors.

A company director is not personally liable for the company's debts. However they can be personally liable for:

  • Personal unpaid NI and PAYE deductions
  • Unpaid income tax as a result of 'cash drawings'
  • Personal guarantees given to banks, finance companies, landlords etc
  • 'Wrongful trading' - Liabilities incurred as a result of insolvent trading prior to the company ceasing to trade resulting in a benefit from the transaction at an undervalue and/or preference
  • Any liability resulting from fraudulent trading 

The business is in difficulty - What are the options for limited liability companies?

There are several options and strategies available to limited liability companies which are technically insolvent or which have major cash flow problems. 

Company Insolvency: Turnaround, Formal and Informal Arrangements

If, after analysing the business the conclusion is that it is worth saving then a strategic plan of action should be created to address specific areas of weakness such as:

  • Cost reduction
  • Capital restructuring
  • Concentration on profitable products
  • Disposal of part of the business
  • Improvement of financial controls

On the basis of the strategic plan, informal arrangements can be made with creditors to pay off the debt.

Formal arrangements provide an effective strategy but will require the help of a licensed insolvency practitioner.

For further information see Turnaround, formal and informal arrangements.

Company Voluntary Arrangement (CVA)

The business is fundamentally sound but has cash flow difficulties and needs time to recover. The CVA provides a legally binding formal agreement with company creditors for the settlement of company debts over an agreed time scale.

For further information see Company Voluntary Arrangement.

Company administration

Under the provisions of the Enterprise Act 2002 the ability of a company to go into administration became easier.

In all cases a licensed Insolvency Practitioner is appointed to take control of the company and its affairs to assess the business, with the objective of making formal proposals that will allow a turnaround, or to come to arrangements with creditors which provide a better realisation of the company's assets.

For further information see Company Administration. 

Company Administrative Receivership

This is known more generally as Receivership and is where the company assets are realised by the Insolvency Practitioner to repay a major creditor who holds a significant security over the assets e.g. a finance company.

For further information see Company Administrative Receivership. 

Company Liquidation

The appointed Insolvency Practitioner realises the company assets which are then distributed among the creditors according to their legal priority i.e. secured creditors are paid in priority to unsecured creditors - typically suppliers.

For further information see Company Liquidation.

Company insolvency: Turnaround, Formal and Informal Arrangements

Turnaround, formal and informal arrangements can provide an effective strategy if effectively managed. Most businesses will suffer a deterioration in trading at some stage either through economic conditions or the loss of a key customer.

If you are confident in the product or service being supplied and believe the company has a future then adopting one of these approaches could be the solution.

Taking the formal approach will require a turnaround specialist to achieve the desired outcome. Planning and implementing the required corrective action such as company restructuring, cost reduction, concentration on financially viable 'core products', and increasing financial control can help towards returning the company to profitability.

Taking the informal approach requires contact with the major creditors whose support will be required if the business is to move forward. A detailed explanation of the cash flow with a realistic time scale for the repayment of the debt will assist in obtaining the support of the creditor.

Key points:

  • Plan the cash flow and monitor performance
  • Keep major creditors informed of the situation to maintain support
  • Review and adapt the plan as circumstances arise
  • If the position does not improve consider other options

Company Voluntary Arrangement (CVA)

A Company Voluntary Arrangement is a formal arrangement with the company creditors, typically over a 5 year time period, which allows a business to continue to trade whilst repaying its debts at an agreed rate.

As long as 75% of the company creditors vote for the arrangement all remaining creditors are by default bound by the agreement and are frozen.

Payments into the CVA are made on a regular basis and distributed to creditors at the agreed rate, although it is possible if a lump sum payment could be raised that the term could be shortened.

Positives of the Company Voluntary Arrangement (CVA)

  • It is legally binding between the company and its creditors.
  • It protects the company. No further action can be taken against the business by its creditors once agreed to.
  • It is a common and accepted way for dealing with debt and does not carry the 'negativity' associated with company liquidation or company administrative receivership.
  • Trading can continue.
  • Company creditors can claim tax relief against bad debts.
  • Creditors acknowledge that they will receive a reduced amount in lieu of the total due.

Negatives of the Company Voluntary Arrangement (CVA)

  • If creditors representing 75% of the total value of money owed do not agree to the proposal it cannot go ahead.
  • If during the term of the CVA it fails, the company can still go into company liquidation or company administrative receivership.
  • A record of the CVA will appear on the company credit file which will impact on the ability to obtain future credit.

Insolvency and Company Administration

Under the provisions of the Enterprise Act 2002 the ability of a company to go into administration became easier.

Company administration is one of the options open to insolvent businesses. It allows the re-organisation of an insolvent company, while protecting it from its creditors. Within the administration the company plans are formulated to rescue the business, maximise asset realisations, or put forward alternative options.

Administration can be initiated by directors and used very effectively as a restructuring mechanism. Where the company has a viable future it provides a breathing space in which proposals can be put to the creditors.

The company can subsequently exit from Administration in a stronger financial position.

In all cases a licensed Insolvency Practitioner is appointed to take control of the company and its affairs to assess the business, with the objective of making formal proposals that will allow a turnaround, or to come to arrangements with creditors which provide a better realisation of the company's assets.

Company Administrative Receivership

Company Administrative Receivership is known more generally as Receivership.

In these circumstances, a receiver is appointed, putting the company into a formal state of insolvency in order to protect the position of both creditors and directors. Administrative receivers have wide powers which allow trading to continue, and, if at all possible, to sell the business as a going concern. Even if the business cannot be sold, actions can be taken to enhance asset values prior to realisation.

The company assets are realised by the Insolvency Practitioner to repay a major creditor who holds a significant security over the assets e.g. a finance company. 

Company Liquidation

A company liquidation involves taking the company assets and disposing of them to create the maximum financial value for distribution among creditors according to their legal priority and entitlement.

Typically, the preferential and secured creditors of the business will be paid something but unsecured creditors will receive nothing during this process.

The liquidation process may occur following a receivership or administration. However, the directors or shareholders may recommend that circumstances require that the company be placed directly into liquidation via either:

  • a Creditors Voluntary Liquidation (CVL);
  • or a Members Voluntary Liquidation (MVL);
  • or a Court can issue a winding up order for a compulsory liquidation on receiving a petition from a creditor.

For an insolvent business there are two options for liquidation:

  • A creditor's voluntary liquidation, the directors pass a resolution to wind the company up. A creditors meeting is held to nominate the appointment of a liquidator and consider a statement of affairs.
  • In a compulsory liquidation, creditor's petition to the court for the business to be wound up.

Once a company has been put into liquidation, the Insolvency Practitioner has a duty to report to the Insolvency Service on the conduct of any director of an insolvent company who has been a director within 3 years from the date of insolvency.

In the event that the conduct of the director(s) is found to be unsatisfactory they could be prosecuted and disqualified.