What does it mean when a company is classed as a 'going concern'?

What is Operating a Company as a Going Concern?

The term “going concern” is used to describe a company that is able to continue operating without the threat of liquidation. The opposite of a going concern would be a company that is planning on closing down and going out of business.

Establishing whether a company is a going concern is an important aspect of insolvency practice because TUPE regulations only apply to proceedings that are carried out with the intention of saving the business. Here are some insolvency procedures that would NOT allow a company to continue operating as a going concern:

Compulsory Liquidation

During a compulsory liquidation one of your company’s creditors petitions the court to request that your business be liquidated (all of its assets sold) in order to repay as much of the outstanding debt as possible. This usually occurs after a company is unable to pay a statutory payment demand of more than £750.

Voluntary Liquidation

In a voluntary liquidation the directors of your company would submit a resolution stating that they would like to voluntarily enter into the liquidation process. This is a fast and easy way to close a business, so it is not something that should be considered if you’re hoping to continue operating as a going concern.

Receivership

If one of your creditors holds a fixed charge provision over some of your company’s assets they may be able to exercise receivership over those assets. This procedure typically ends in the dissolution of the company.

The following are formal insolvency procedures that are used to bring about a turnaround and convert a struggling company into a going concern:

Company Voluntary Arrangement (CVA)

A CVA is a contractual agreement between a company and its creditors which introduces revised repayment terms. It can also help you renegotiate or terminate employee/supplier contracts at little to no cost. A CVA is submitted in the form of a professionally drafted proposal presented by a licensed insolvency Practitioner (IP).

Company Administration

In an administration you would essentially relinquish control of your company to an IP who would be serving as the administrator (temporary chief executive officer) for a period of several weeks.  During this time the IP would work to reduce debts and overhead, setup arrangements with creditors, and potentially liquidate assets or conduct trades in order to raise the funds needed to repay creditors. Administration is one of the most common procedures used when a business aims to continue on as a going concern.

Pre-Pack Administration Sale

A pre-packaged administration sale occurs when one or more of a company’s directors pre-arrange to purchase some or all of the company’s assets during liquidation. The assets are then transferred to a new company that could pick up where the old company left off.  Even though the old company would be dissolved , the new “phoenix’ company would still be considered a going concern, so TUPE regulations would apply with respect to transferring and honouring employee arrangements.

If you’re being pressured by bill collectors and creditors and feel as though your business may be on the verge of liquidation, email us or call on 0800 644 6080 for free advice. We can help you facilitate a complete restructuring and recovery that will turn your failing company into a going concern.