Small Business Going Under

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Updated: 9th February 2021

What to Do When Your Business Is Going Under

Dealing with a failing company is not easy, especially without a contingency plan to keep cash flow steady during times of distress. So when a limited business is at threat of going under, what happens? The answer to that question will depend on how badly your company is struggling and how much potential it has going forwards. The following points should help you understand your options a little better and allow you to put a plan in place for the future:

Obtaining cash flow

Cash flow is vital to the success of any business, and sometimes it is necessary to turn to outside sources to ensure this remains healthy. Two of the most popular forms of obtaining cash flow funding are invoice factoring/discounting, and asset financing.

Asset financing entails using some of your company’s assets (i.e. accounts receivable, equipment, machinery etc.) as collateral to obtain a secured loan; if you default on the loan then ownership of the collateral will be transferred to the lender.

Invoice financing – whether discounting or factoring – allows you to receive a set portion of your unpaid invoices immediately. This channel of funding can be hugely beneficial to those working in industries where late payments are to be expected. Once your customers pay, the invoice financing company will take a percentage of this amount as their fee.

Despite the risk that comes with any form of borrowing, both invoice and asset financing can be worth considering if you simply need some cash flow to get “over the hump” and are confident in your ability to make repayments on time. 

Consider the possibility of a Company Voluntary Arrangement

If your company is struggling under the weight of its current financial obligations, but you believe it has the potential to be a successful business, you may be able to consider a formal process known as a company voluntary arrangement (CVA).

A CVA is a legally binding agreement between a company and its creditors that is used to revise payment terms in order to allow the borrower greater leniency. An insolvency practitioner drafts the CVA based on their assessment of the company’s funds, assets, and monthly repayment capabilities. It is presented as a mutually beneficial contract that increases the creditor’s chances of being paid while also providing relief to the borrower. 

A majority of creditors need to agree to the implementation of the CVA so you must be able to put forward a convincing case as to why it should be approved. A licensed insolvency practitioner will be able to ascertain whether a CVA is appropriate for your company and its situation, and if it is decided that this is the preferred course of action, they will draw up a proposal and present this to the company’s outstanding creditors.

Knowing your directors’ duties

As the director of a limited company, you have certain obligations which you must adhere to; as the director of a company which may be insolvent, these obligations are greater still. The directors of a company that is insolvent, or is approaching insolvency, need to exercise extreme caution in order to avoid accusations of wrongful trading or misfeasance.

After a formal insolvency procedure, such as a Creditors’ Voluntary Liquidation (CVL) or compulsory liquidation, has taken place an investigation is conducted to determine whether the directors of the insolvent company acted in the best interests of their creditors while knowingly insolvent. If it is found that the directors failed to adhere to this fundamental rule they may be held personally liable for some of the insolvent company’s debts and they could be banned from acting as the director of any limited company for up to 15 years.

By contacting a licensed insolvency practitioner at the first signs of trouble, you are demonstrating your desire to prioritise the interests of your creditors even under a trying situation. Not only will this help to shield you against potential accusations, but it will also ensure you are giving your business the very best chances of effecting a successful turnaround.

Learn more about the duties of company directors here.

Considering company administration and voluntary liquidation

If there is no hope of rescuing the company and returning to profit, it may be time to face the music and safely guide the company through an orderly shutdown under the guidance of a licensed insolvency practitioner. This can be initiated by the directors of an insolvent company through a process known as a Creditors’ Voluntary Liquidation (CVL). During liquidation a company’s assets are sold – or ‘liquidated’ – and the funds raised during this process are then used to compensate the creditors. 

Depending on the position of the company, the appointed insolvency practitioner may deem it beneficial to first place the company into administration. Administration allows the directors to appoint an insolvency practitioner to effectively manage the affairs of the insolvent company in the short-term if it is believed that this approach is likely to realise a greater return to creditors than simply opting for immediate liquidation.

If you would like to know what to do when your business is going under or would like to speak to an insolvency expert, call us today on 0800 644 6080. We have an extensive network of 100 offices offering confidential director support across the UK.

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