Solutions For Businesses In Debt

If your company is in a bad financial position and can no longer continue to trade then there are options which you can use to stablise it, some of which will allow you to continue to trade whilst you restructure. Here is an over of 4 of the most common solutions;

  • Compulsory Liquidations
  • Company Voluntary Arrangements (CVAs)
  • Winding-up Petitions
  • Pre Pack Administrations

Compulsory Liquidations

Compulsory liquidations are common in business circles. They usually occur when creditors or the government asks a company to be liquidated. The reason for liquidation varies.

In most cases, the creditors are usually seeking to bankrupt a company. The government, on the other hand, orders for this form of liquidation if a company is involved in tax fraud or has been carrying out fraudulent activities.

Process

Compulsory liquidations are not executed instantly. The process starts with either the government or creditors requesting for a court order to liquidate a company.

If the court sees enough evidence to warrant liquidation, it compels the business to stop operations immediately. By ordering this form of liquidation, the court is able to ensure that all those who incurred damage are compensated and fines and any punitive damages are paid.

When is Compulsory Liquidation used?

This type of liquidation is normally used when a creditor is tired of waiting for their payment. So, he or she petitions to the court to get a wind up order. The minimum amount money owed that can allow one to file for insolvency is £750.

Winding-up Petition

The winding-up petition is a legal document that the creditor files to the court in order to start the process of winding up the company that owes them money. Once filed, the winding-up petition and a hearing date is formally advertised. This will lead to the freezing of all bank accounts that belong to the company.

Submitting a Winding-up Petition

To formally submit a winding-up petition, the creditor sends a written application to the court. The application must contain substantial evidence that the company in question is insolvent and is not paying their debts. It then takes 6 to 8 weeks before the hearing commences.

During this period, the insolvent company can do several things to avoid compulsory liquidation. In order to successfully execute these options, the company must seek business debt advice from insolvency practitioners.

Who Performs Compulsory Liquidation?

This form of liquidation is a court directed procedure. Normally, an official receiver is selected from the court to do the winding up.

The official receiver can decide to pass the case to an insolvency practitioner for them to liquidate the assets. The official receiver performs the rest of the winding up and carries out an investigation to determine the alleged insolvency of the company.

Alternatives

There are several alternatives to compulsory liquidation. They include:

  • Creditors Voluntary Liquidation
  • Company Voluntary Arrangement
  • Company Administration Process

These methods are more flexible and have less detrimental repercussions.

Avoiding Compulsory Liquidations

There are ways through which a company can avoid this form of liquidation. It can do so by acting quickly and seeking voluntary arrangements to pay the debts within a set timeframe.

To know the best options that are available, the company needs to get business debt advice from professionals. This way the company can choose the right option.

Administration

Administration is usually the best option, especially if the company has a viable future and reliable cash flow. It ensures the company’s survival by protecting its assets from creditors. This gives the company time to restructure and avoid termination.

Compared to insolvency, administration does not offer great return to creditors. Moreover, it eliminates the possibility of any return. This increases unemployment and prevents the chance of building a successor business.

Act as Soon as Possible

The best way to deal with financial problems in a company is to act quickly. The company must get business debt advice as soon as they spot any problems, like decreasing cash flow and increased pressure from creditors.

Through early detection, the company can take the necessary measures to avoid serious consequences such as liquidation.

During compulsory liquidations, the companies in question can get advice from a licensed insolvency practitioner. He or she offers advice about formal insolvency procedures and explains each insolvent winding-up process to make sure that the company directors are familiar with each of them before making a decision.

Before hiring an insolvency practitioner, it is important to ensure that he or she is licensed. This is because there are some unlicensed professionals who offer misleading information.

With the right information and advice, the company gets to avoid any extra costs during the procedure.

Company Voluntary Arrangements (CVAs)

A CVA or Company Voluntary Arrangement is a common business recovery procedure for insolvent companies. This particular insolvency procedure enables a company that has debt problems or that has become insolvent to come to a voluntary agreement with its business creditors to structure the repayment of all or some of its financial debts over a stipulated length of time.

How Do They Work?

The first part of a CVA is the approval process, which normally takes about 28 days, but in some cases can be up to three months.

The approval process begins with the creditors being asked to take a vote whether or not they wish to accept the proposal. This usually takes place at a special Creditors’ Meeting, although most votes are cast by proxy instead of the creditors being there in person.

Seventy-five percent of unsecured creditors by value who vote must agree to it, as well as fifty percent of non-associated creditors, prior to any CVA being made binding. As a major creditor in the company insolvency, the insolvency practitioner must also approve the procedure.

When the CVA is approved, the company will make a monthly payment from the continuing trade profits. A company also has the option of selling some of it’s assets to make these monthly payments. Under the purview of the appointed insolvency practitioner, the payments are then distributed to all the creditors, either on a monthly basis or as a lump sum.

How Can They Help You Manage Your Debt?

Business debt advice commonly recommends CVAs for a variety of reasons. First, debt deferral reduces cash flow pressure so that your business is not overwhelmed by growing, unsustainable debt.

It also offers a far more realistic repayment structure than other debt management programs so that you pay what the company can manage without straining its finances more than they already are.

Creditors are also more likely to prefer a CVA because it offers them a much better option for recouping costs than flat out business closure or liquidation of assets. Another way this helps you manage your debt is freezing all of them so that there is no additional interest accumulating like it would normally.

And at the end of the term of the CVA, the remainder of debt that hasn’t been repaid is written off.

What are the Pros and Cons?

There are very many advantages to the Company Voluntary Advantage. The first advantage is that it’s a very flexible business recovery procedure, while still being formal and legally binding. It’s not indefinite, and it has a pre-defined agreed on timescale so that you have a clear path ahead.

The business can continue its day to day operations and trade without having to change ownership, management, or lose its workforce. It costs far less than options like structured administration and liquidation. There is rarely any need to buy back or dispose of assets.

The reduced strain of incoming cash flow and realistic payment timelines keeps unduly stress off the company.

The primary legal advantage is that it provides court protection to the business and places a moratorium on creditors raising further legal action. CVAs also offer the chance to reform and restructure the business — usually by removing unprofitable areas — while remaining under management’s control with very little intervention, if any.

The main incentive for a company to choose to go down the Company Voluntary Arrangement channel is that it has a much greater prospect of salvaging the company. This has the dual benefit of saving jobs and also returning value to creditors and shareholders alike.

The only foreseeable disadvantages are the potential for possible liability and the chance that the entire procedure could take a very long time to be complete, which may not be desirable if you want to just abandon the company.

Additionally, an insolvency practitioner could decline a Company Voluntary Arrangement if there has been a history of poor payment or lack of compliance.

You Should Know…

While a Company Voluntary Arrangement certainly creates a firm platform for rescuing a business in distress, it is immensely important to act as soon as possible. It is also important to note that all businesses and situations are different, and for individual cases it is always best to consult a business debt advice professional.

Winding Up Petitions

A winding up petition (WUP) is court-instituted process that seeks to “wind up” the affairs of a business that cannot pay its creditors. In most cases, this happens to a business that cannot pay debts of more than £750.

Some of the people who can file a petition to wind up a company include its directors, any creditor, the Secretary of the State, an administrator, or a clerk of the magistrates’ court.

Purpose

The purpose of a seeking to wind up an insolvent company is to ensure all its affairs are in order. This includes stopping all its operations, collecting money from its debtors, selling any disposable assets, settling legal disputes, terminating all existing contracts, and settling its debts. Take note that a WUP does not mean that all creditors will get their money.

How The Process Works

To file a winding up petition, one must prove that the company in question owes him or her more than £750. In addition, one must prove that the company cannot pay up the amount of money that it owes.

One way of proving these claims is by getting a form for a statutory demand from your local court and serving it to the business that owes you money. If the business does not pay you within 21 days, you can proceed to file a winding up petition.

You can issue a claim for judgment against a company if an earlier execution does not result in the seizure of assets that can clear all your debts. Another option is proving that the value of a company’s debts is more than its assets.

Since this process involves legal issues, it is wise to hire a solicitor to help you present such a petition in court.

Your advocate will help you complete form 4.2 and a statement of truth, issue the petition, serve the petition, as well as withdraw the petition if necessary. Your solicitor will also come in handy during court hearings.

Court Hearings

Hearings vary depending on where you file for a winding up order. Nevertheless, hearings always take place on the date indicated on the petition. It is not necessary for the individual or business entity that filed a petition to appear in court. They can instruct their solicitors to represent them.

At this stage, one can request the court registrar to make a winding up order. Creditors can also request the registrar to dismiss the petition if the company that owes them money settles its debts.

If the registrar issues a winding up order, the official receiver will begin the process of liquidating the company involved in this case.

This includes investigating its affairs to establish the reason it failed, advertising the winding up order in the London Gazette, meeting with creditors to appoint an insolvency practitioner, as well as collecting and selling company assets in order to pay creditors.

Pros

The threat of a wind up order can prompt a company to pay its debts as quickly as possible and seek business debt advice. This is especially true for businesses that want to protect their reputation.

Secondly, the entire process is fast and can force a business to wind up its operations within six weeks. Thirdly, this process is quite affordable compared to issuing a claim.

Cons

To start with, this process can be messy if any of the parties involved dispute evidence presented in court. The debtor may mount a successful defense leading to the dismissal of the petition.

Secondly, it may be impossible to reverse the legal process seeking to wind up a company even if the outstanding debt is paid.

For instance, support for your petition from another creditor will lead to the closure of a company even if it pays your debt. Thirdly, the liquidator enforcing administration orders will distribute money realized from sale of company assets in proportion to the value of one’s debts.

A WUP may be necessary in the event a company is unable to meet its financial obligations, particularly to its creditors. One can institute such a process for as little as £750. The pros of a WUP include ability to jolt a debtor to pay off outstanding debts, inexpensive, and it is a relatively quick procedure.

Conversely, its drawbacks include potential disputes leading to lengthy court hearings and distribution of proceeds from sale of a company’s assets in order of priority.

Pre Pack Administration

Struggling businesses often turn to pre pack administration when insolvency seems imminent because of its benefits compared to the alternatives. A Prepack can minimize the damages of insolvency and provide critical business debt help by allowing an insolvent business to continue its operations while under the process of administration.

The company is also given protection from creditor legal action — such as forced liquidation — during this time.

What is Pre-Pack Administration?

Administration is the process by which an insolvent company may be restructured and sold to pay its debts while under the management of an administrator. In the face of looming insolvency, directors may make all the arrangements to sell their company to a buyer(s) — who are sometimes the directors themselves — before appointing an administrator.

Upon being appointed, the administrator immediately sells the company according to the packaged agreement. The pre-negotiated sale of a company’s assets by its directors before the company even declares insolvency is called a pre pack sale and is the essence of pre pack administration.

How does it work?

Companies that have not yet entered insolvency proceedings may agree to a pre-pack sale to avoid the fate of the company being left solely to the administrator.

In this procedure, the directors agree to either buy the company or sell it under certain conditions to a buyer before involving the administrator.

A pre pack sale happens very fast; often within days of the appointment of an administrator. This process is usually agreeable to administrators because it allows them to avoid the risks involved with marketing the company themselves such as the devaluation of the company’s assets.

What are the advantages and who benefits?

Although it is a controversial topic, the truth is many people benefit from pre pack administration. First, directors sometimes benefit by being able to revive the insolvent company as its new owners. Some criticize the fact that prepacks allow the directors who ruined the company in the first place to be central to its future restructuring.

This, however, is not always the case.

Secondly, employees benefit from the continuity of the business by suffering minimal disruption to their jobs during the administration process. The preservation of jobs also facilitates the survival of the business and adds to its value by discouraging longtime employees from leaving.

Thirdly, the interests of secured creditors are served by the speed of the process.

Additionally, the administrator benefits from the ability to sell the company speedily and often for its greatest value. Finally, the most important benefit of the pre-pack administration process goes to the business itself.

By flowing smoothly from insolvency to administration and restructuring, a business preserves its continuity and value.

What are its disadvantages and who is affected?

The major concerns regarding prepacks come from unsecured creditors. Because of the speed of the process, unsecured creditors may not even know until it a sale has occurred, much less be part of the decision making.

This can lead unsecured creditors to distrust the sale and think they could have gotten a better deal had the company been on the market longer.

Additionally, they may not be able to investigate issues regarding improper incurring of credit by directors of the insolvent company. The end result, they feel, favors the directors and secured creditors.

Is pre-pack administration synonymous with business debt help?

A prepack can help a businesses continue operating under new owners should it ever face insolvency. So, under the most extreme conditions, prepacks are a form of business debt help. Selling the company to new owners –whomever they might be- can save a business from crushing debt and give it the chance to restructure.

Prepacks are particularly effective to those who value the company for more than its cash worth in comparison to other insolvency procedures. A company that becomes insolvent may be forced to liquidate by its creditors or it may be entered into administration.

In any case, the future of the company rests in the hands of the creditors whose prime concern is usually retrieving the money owed them, not the survival of the company.

Pre pack administration is usually chosen over other insolvency procedures because it gives the company the opportunity to overcome debt and become successful again in the future.

Business Debt Solutions

Business Debt Advice For Insolvency

First of all, its important to understand that insolvency is not bankruptcy. While both terms are used interchangeably, they are different.

The confusion arises because both are related to finance, debt and credit. The difference is that insolvency is a state where a person, family, business or any other entity is no longer able to pay off its creditors.

Insolvency is a financial state while bankruptcy is the process that starts after the entity is declared insolvent. Insolvency leads to bankruptcy. It can be a voluntary or compulsory process.

You will need strategic business debt advice when faced with insolvency. Learn more to know which type of insolvency solution is best for you.

Corporate Voluntary Arrangement (CVA)

A company offers this solution on its own to its creditors. It offers an arrangement that will be acceptable to the creditors.

If the creditors agree to the arrangement terms, the debts can be settled and the company can continue to trade.

The solution can be proposed by the company’s directors or the liquidator administrator.

The proposed arrangement with the creditors is approved formally by the court. Creditors are offered the solution of receiving their dues over a fixed period of time.

This solution is different from Individual Voluntary Arrangement (IVA) that applies to self employed individuals and sole traders. Corporate Voluntary Arrangements (CVA) is possible when all directors or members agree to this solution.

A company can apply for it only through a registered insolvency practitioner. This arrangement is suitable mostly for big businesses. Seek business debt advice if you want to use this option.

Pre Pack Administration

This option is used to sell an insolvent business to a third party, a trade buyer or existing directors. It is an effective solution if a petition for winding up the business is being contemplated by the creditors.

It is important not to wait until the winding up petition has been issued because after that it is not possible to use pre pack administration insolvency option. This solution gives the business owner greater control over the company.

It means continued operations and higher level of certainty. It helps preserve value of the company by selling its assets to a third party or existing stakeholders like directors, shareholders or original owners.

After the pre pack administration process is over, the company can continue to operate in a new form.

Invoice Factoring

There are two types of insolvencies that an insolvent business can face if it is unable to clear its debts. The first is cash flow insolvency where the business simply does not have money to pay its debts and dues.

The second is balance sheet insolvency which refers to negative net assets of the company. In this condition, the business has liabilities that exceed its assets. Invoice factoring can be a good solution to your insolvency problem.

Your sales ledger contains values that you can release to your benefit.

The cash that you receive with invoice factoring can be used to clear your liabilities and debts. Seek expert business debt advice if you are under insolvency or facing this prospect.

Invoice factoring is a good way to borrow at a time when your poor credit situation means you cannot borrow any money.

Use this solution and get immediate access to the funds already present in your sales ledger.

Winding Up Petition (WUP)

It is a legal notice obtained by creditor through the court. The creditor files a petition in the court for winding up the insolvent company. This action is generally taken when the creditor has lost trust in the business.

You may have tried to pay the creditor but have been unable to do so due to slow sales or because of not receiving payments from your customers.

You need proper business debt advice if you have received notice for winding up petition. There are two court hearings before the compulsory liquidation process is started. A winding up petition is the first court hearing.

The creditor has to prove that the company is insolvent. Speak to an expert business debt insolvency practitioner fast if you have received such a petition.

Your company will face closure if the winding up order is processed to its conclusion.

Compulsory Liquidation

As the name suggests, the company is forced to compulsorily liquidate. You have limited avenues available if this procedure is started. Once the winding up petition has been completed, the creditor can get the order for formal and compulsory liquidation of the company.

Compulsory liquidation is not started by the creditor only; it can be started even by the company itself, its shareholders, its directors, an administrator, an administrative receiver, voluntary arrangement supervisor, financial services authority, chief court clerk or official receiver.

This process can be started even if the business has no assets. The early stages of this process are handled by the official receiver who informs the creditors and shareholders about winding up the company.

A liquidator may be appointed if the company still retains some significant assets. Consult an insolvency practitioner for expert business debt advice if you have received winding up petition.

Key Man Insurance

A key man insurance policy can prove useful when you are facing insolvency. All businesses have some key employees who are critical to its business operations. They are not the owners, directors or shareholders.

Just a few valuable employees can contribute more in increasing sales or running your business smoothly.

Their contribution helps in the growth of your company. If such a valuable employee becomes unable to work due to an accident or unavailable due to untimely demise, your business can face lots of hardship.

A key man insurance policy can help you recover quickly in such a situation. You will be able to recover financial loss that you suffered due to the loss of a key person of your business. There can be one or many key persons in the company.

A person holding less than 51 percent shares of the company is eligible for this insurance coverage.

Final Thoughts

Insolvency can arise due to various problems. Some of these problems are not in your hand. Poor economic climate at national level or in your industry can force you to declare insolvency.

It does not mean your business is a failure. It is possible to get back on track if you take right decisions at the right time. Consult an insolvency practitioner for good business debt advice.

You will receive complete guidance from an expert specializing in insolvency.