COMPANY INSOLVENCY ADVICE

What Are Your Options When a Company Is Insolvent?

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When a business faces financial difficulty, it can be hard to know how to respond. In many cases, provided you act quickly enough, there are many ways that you can restore an insolvent company to financial health, whether by securing extra time to pay your debts, seeking extra investment, resolving cash flow challenges, or pursuing a company rescue solution.

It is important to note that the solutions that will apply in each case depend heavily on the specific circumstances. As such, if your accounts indicate that your business will be unable to pay its debts when they are due, or that your liabilities will soon exceed your assets, you should contact an advisor or insolvency practitioner at the earliest opportunity. They will be able to discuss your company’s current situation and identify the solutions that may be viable in your case.

It is useful to understand all of the various options that may be available, in order to ensure that you choose the best course of action for your business. Here, the team at Company Insolvency Advice explain the options that may be available to insolvent companies to enable them to manage their debts, recover from cash flow problems and return to good financial health.

The sooner you act, the more options you will have available that could rescue your business from the difficulties of insolvency. By working with a licensed insolvency practitioner throughout this process, you can receive expert advice and ensure that you exhaust every available option to prevent the most serious consequences for your business.

Consider cash flow

Often, problems with cash flow are the simple reason that a business faces financial challenges. There can be several different causes of cash flow problems, from the loss of a key customer, to companies offering overly favourable credit terms. The solutions that apply will depend on the problems you are facing, but there are several areas to explore to determine whether or not you can quickly resolve your cash flow challenges and pay your debts before the situation develops.

In some cases, organisations can negotiate with creditors to restructure their debt obligations. This may involve extending repayment terms, reducing interest rates, or converting debt to equity. This may be the first thing to consider, although if there are problems within your business that are affecting cash flow, you should continue with the process described below to find ways to make your organisation more sustainable.

Solutions to business cash flow problems

Start by conducting a thorough financial review – or working with an appointed insolvency practitioner to do so – as this will support you in identifying and addressing cash flow problems. By examining income, expenses, and working capital, businesses can see areas of concern and develop accurate financial forecasts. This information can help guide decisions on managing cash flow and implementing necessary changes.

One of the first solutions to consider is reducing costs and improving operational efficiency. Businesses should scrutinise their expenditure, as you may be able to find areas for potential savings and implement cost-cutting measures. This may involve renegotiating contracts with suppliers, consolidating debts, reducing overheads, or streamlining operations.

As well as negotiating with suppliers and creditors, businesses may also need to consider their relationships with their customers – for example, by implementing stricter credit control policies. This may include performing credit checks on new customers, setting credit limits, requiring deposits or upfront payments, and reducing payment periods. Additionally, you should have a robust system in place for managing overdue payments, including regular follow-ups and escalation procedures.

If you do not have the capacity to pursue late payments yourself, another option is to consider invoice factoring. This allows you to sell your invoices to a third-party finance provider for a portion of their value. This third party will then chase payment, and finally pay you the remaining value, minus their fee. 

When monitoring your finances, you may find asset management opportunities, which could unlock cash tied up in inventory or unused equipment. Adopting a just-in-time inventory system, reducing stock levels, or selling underutilised assets can generate much-needed cash flow. Additionally, businesses can consider leasing or renting equipment rather than purchasing it outright.

Investigate financing options

If your internal processes are as efficient as possible, but you are still having trouble paying your company’s debts, then new financing may be the most suitable option. Businesses can explore various financing options to inject capital into the company, which may include negotiating better terms with existing lenders or securing new loans or lines of credit. However, reaching out to an external source of financing may be the best path forward, and there are many options that may be suitable for this.

The team at Company Insolvency Advice has significant experience in advising business on sources of funding, from angel investors to crowdfunding, and through our relationships with financial institutions, we may be able to help you secure new funding that will power the growth and recovery of your company.

Secure more time to pay

A company is insolvent if it has more liabilities than assets, or if it is unable to pay its debts when they are due. Often, you can anticipate this in advance and take action before your business becomes officially insolvent. Even if you fail to do so, it may not be too late to save an insolvent company and restore it to good financial standing.

There are several strategies to manage a company’s debts that could restore a business to financial health. Depending on the debts owed and the nature of your organisation’s debtors, either a Company Voluntary Arrangement (CVA) or a Time to Pay Arrangement might be suitable.

A Company Voluntary Arrangement (CVA)

A CVA is an arrangement between a business and its creditors which allows the company to pay off the money it owes over an agreed period of time. By restructuring your debt and settling it over time, you can enjoy reduced debt repayments, improved cash flow, and an opportunity to recover and return to profitability.

The arrangement must be prepared by an insolvency practitioner, as it is a formal insolvency proceeding. Creditors will vote on the proposal and 75% must approve (calculated as a percentage of the debt value) before the agreement can move ahead. As such, it is important to choose a practitioner with the expertise to propose a realistic payment schedule, taking into account what the business can afford and what creditors will feel is a fair rate of repayment. They may also need to negotiate with multiple creditors, depending on the nature of your debt.

If it is approved, a Company Voluntary Arrangement A becomes binding on all parties and provides breathing space for a company that is facing insolvency. It freezes interest and charges on the debt, and protects the company from legal action by creditors during the agreed repayment period.

A Time to Pay Arrangement

Similar to a CVA, a Time to Pay Arrangement is a bespoke agreement between a debtor and HMRC to pay outstanding tax liabilities over an agreed period of time. HMRC is one of the biggest creditors to UK businesses and often pursues debts diligently, so it is vital to discuss this type of arrangement with an experienced insolvency practitioner if you are facing pressure from the tax authority. This strategy helps to prevent enforcement actions such as fines, penalties, or legal proceedings, so it can be extremely valuable if an unpaid tax debt is the reason you are facing insolvency.

Time to Pay Arrangements are often available to individuals and businesses that are unable to pay their tax bills in full by the specified due date, but can demonstrate that they can meet the future payment schedule. These agreements are granted at HMRC’s discretion, and if a business can demonstrate that it is otherwise viable, this often incentivises the organisation to approve a deal.

Again, it is important to work with an insolvency practitioner who can support you to prepare a proposal. A Time to Pay Arrangement is not a formal insolvency process in the way that a CVA is, but it is legally binding. With professional advice, you can ensure that you make a proposal that HMRC will view as fair and reasonable. This will improve your chances of having the agreement approved, which can then buy your organisation the time it needs to recover from its period of financial difficulty.

Pre-pack administration

Pre-pack administration is a way to sell your business to pay off a debt, in which the sale of the company’s assets to a new owner is arranged before the company is placed into administration. Once the sale is agreed, an administrator can be appointed, at which point the sale is executed immediately.

This has several advantages for a business. Usually, an insolvent company must cease trading immediately, but with a pre-pack administration, this is not necessary. Company assets are transferred swiftly and efficiently, preventing the business from losing any value while it is closed down and ensuring that operations can continue with minimal disruption.

In many cases, the new company decides to keep staff, which can minimise job losses, and help avoid negative consequences associated with staff redundancies (such as reduced morale, loss of talent, and potential legal liabilities).

Pre-pack administration is also attractive to creditors, as it can result in a better result compared to other insolvency processes. By preserving the business’s value and ensuring a quick sale of assets, pre-pack administration means that creditors are more likely to receive a higher return on their claims.

Finally, this approach offers a good deal to investors, which can mean that this is sometimes the fastest way to resolve financial challenges. The streamlined nature of pre-pack administration can make the insolvent business more appealing to potential investors or purchasers. With the liabilities of the old company left behind, the new company is free from historic debts, allowing for a fresh start and an opportunity for future growth. In many cases, existing company directors form a new company and buy the business through this structure.

If you believe that this approach may be successful for you, speak to a company insolvency expert for advice or to get the process started.

Close your business

Sometimes, when a company is insolvent, the only suitable solution is to close it down. This may mean a creditors’ voluntary liquidation, where the company’s creditors vote on a proposal to close down the company; or compulsory liquidation, where the outstanding creditors take legal action to force the business to close.

This is never the preferred approach, and if you act early enough in response to cash flow problems or the risk of insolvency, we can provide advice that may help you to avoid this outcome.

Work with a licensed insolvency practitioner

Working with a licensed insolvency practitioner is vital in almost any case in which your company is insolvent or facing insolvency. They can advise you on the potential company rescue solutions that could keep your business afloat, or identify the strategies for managing your debt that will deliver the best possible outcome.

The consequences for failing to act can be extremely serious – ranging from legal pressure to compulsory liquidation of your company – so do not try to avoid your problems. There are several options that might be available to your business, depending on its financial circumstances, and it is important to act quickly to learn more if you want to improve your chances of rescuing your business from insolvency. The sooner you contact our team, the more solutions you may be able to pursue – so, if your organisation is on the brink of financial troubles, under pressure from creditors to pay up, or facing threats of legal action, contact us today.

You can call the Company Insolvency Advice team on 0800 999 0666, or use our online enquiry form to request a call back at your convenience.

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Business Advice Expert

Robert Cooksey

Robert Cooksey

Director Advice Line: 0800 999 0666

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Company Insolvency Advice is a leading business rescue, corporate restructuring and insolvency specialists, with years of experience in providing corporate debt solutions. We understand the daily pressure you are under as a director and our team of expert consultants cover the whole of the country in order to discuss debt solutions with company directors.

The first port of call should be to consult with a licensed insolvency practitioner to discuss your options. Thankfully, you can arrange a free initial consultation with one of our local insolvency practitioners at your convenience.

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