As a business owner, few words or phrases carry the power to send a chill down your spine quite like insolvency. Tax audit, maybe. VAT filings – perhaps.
But as much as anything to do with tax administration is widely dreaded across the business world, insolvency carries with it a threat that even the most Kafka-esque processes required by HMRC don’t. The threat of your business going under.
The thought of insolvency haunts many a company director for this very reason, especially when times are tough. If income dips, if costs start to rise, if margins are squeezed or you run into cash flow problems, the next step is you find you can’t pay your bills.
That, by definition, is insolvency. And the fear stems from what happens when the people you owe money to decide enough is enough and take action. Penalty charges on unpaid invoices and overdue debts, making a difficult financial situation worse. Creditors filing for a winding up order through the courts so the assets from your soon-to-be defunct business can be used to pay off your debts.
This in truth is where the real fear around insolvency stems from – the threat of it bringing your business down. But it’s not inevitable that things end that way. Insolvency and liquidation – the process of a company being shut down to use its assets to pay its debts – are not the same thing. Liquidation is one end result of insolvency. But it’s also a last resort.
There are other, much more positive possibilities for an insolvent company before things ever have to reach that stage. Here are three options that mean insolvency doesn’t have to be the end of the road for your business.
Reaching an informal arrangement with creditors
Over time, a lot of meanings and associations have become stuck to the term insolvency, such as the sense of failure and a business going under. But these obscure what insolvency is really about, which is not being able to pay your bills. This may be down to a short-term cash flow problem that you have every confidence you can put right in a matter of weeks or months. It doesn’t have to spell failure.
If you believe your issues are temporary or have a clear plan in place for cutting costs or boosting revenues in the short term, the best thing to do is to speak directly to your creditors. Explain the situation, give them a timescale on when you expect to be able to pay what you owe and see if you can come to an arrangement. If your assessment of the situation is right, everything will soon return to normal and everyone will be happy.
Setting up a Company Voluntary Arrangement (CVA)
Again, the emphasis of a CVA is coming to an arrangement with your creditors on your outstanding debts that will allow your business to continue trading. But a CVA is a formal insolvency procedure administered by a licensed insolvency practitioner, who both negotiates the arrangement and sees to it that the procedures required by law are followed.
Unlike an informal arrangement with your creditors, a CVA has legal standing. It will prevent creditors taking any further action for the period agreed for the CVA to be in place. A CVA will also often rest on creditors agreeing to accept a lower return than they were originally owed. The rationale behind this is that creditors will often stand to get more back from a struggling company that is helped to continue trading than they would from a business that goes bust.
Coming through administration
Finally, another word that carries a real fear factor for business owners is administration. Administration is another formal insolvency procedure where a licensed insolvency practitioner takes over control of a struggling company with a view to settling its debts.
The big downside to administration from directors’ and owners’ point of view is that they lose control of their business. But if their objective is to see the company continue trading, this may be the best step forward. Entering administration suspends all legal action from creditors, such as applying for a winding up order. It gives the administrator space to try to negotiate a CVA if they think that is possible, to restructure the business, or to sell it as a going concern to a new owner.
Though if none of these things are possible, administration can also end with a company being liquidated.
Slipping into insolvency can be a difficult and frightening time for business owners and company directors. As licensed insolvency practitioners, JT Maxwell specialises in administering all formal insolvency procedures as well as advising on corporate debt management and recovery. Get in touch today to find out how our friendly team of specialists can help.