Updated: 5th May 2020
Dealing with repetitive creditor pressures and late penalties can be extremely stressful, especially when you’re facing multiple debts and have a great number of monthly obligations. When a company’s assets exceed its liabilities it is legally considered to be insolvent, at which point the risk of liquidation/bankruptcy arises. Many times the only way to save the business is to act quickly in determining a suitable course of action. Depending on the severity of the situation, one of the following three options should be able to help almost any struggling company escape insolvency as long as recovery is still a viable outcome.
I understand that the last people you would ever want to speak to would be a business rescue firm, but I also know that trying to understand your options can be equally challenging. I have seen every eventuality in business and can help clarify what your options are.
Invoice factoring might allow you to sell some of the company’s accounts receivables to a third party in order to generate some cash flow. This is an ideal option if you have multiple clients who currently owe you money and are bound by contract to pay in the future. You can convert these future payments to cash quickly, and then use the funds to repay existing/overdue debts. With the help of an experienced insolvency practitioner you might also be able to gain approval for a secured loan by using some of the company’s assets as collateral. Although this would technically be the equivalent of creating a new debt to repay old debts, it does help the business by alleviating immediate cash flow pressures and postponing or completely preventing any legal action taken against the company.
Even if you’ve already tried negotiating with creditors in the past, a professionally drafted and formally proposed company voluntary arrangement may offer a higher chance of approval. If this route is taken, an insolvency practitioner will create a proposal that asks the creditor to consider extending the length of the loan and/or accepting smaller monthly payments, in order to grant the company the additional time needed to make repayments without default. If the creditor feels that the agreement outlined within the proposal is feasible, they may agree to it, at which point they’d no longer be able to petition the court to wind up the company unless the terms of the CVA are breached.
If the outlook is relatively poor and there doesn’t seem to be a prospect of recovery, the only way to continue operating the business may be to dissolve the company and have the current directors purchase the assets of the company during its administration. The directors would then transfer the assets to a new company in a process known as “phoenixing,” which bears this name because the new company essentially rises from the ashes of the old company, much like the legendary firebird. This is usually the last resort that is considered when recovery does not appear to be an option, as it does result in the official closure of the original company. However, it is also a preferable alternative to losing all of the assets (including clients, equipment, employees etc) that you’ve worked to create with the old company.
If your business is having financial problems and you’d like to discuss your options with a professional, call us today on 0800 644 6080 to participate in a free consultation with one of our experienced turnaround specialists.
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