Since the Covid-19 Pandemic struck, many companies have been struggling and suffering from cash flow difficulties. And if you yourself are struggling to pay your debts, we understand it can be a stressful time. Keep in mind you are not the only one, during November 2021, 1,446 companies went bust, with the number of insolvencies up by 56% since September 2020.
If your company is declared ‘insolvent’ – i.e through cash-flow or balance sheet insolvency, you may have no other option than to seek expert advice and gain some ‘Rescue Tips’.
Is your company insolvent?
🏆
The 2024 Creative Retail Awards are open for entries.
The Creative Retail Awards are much more than a mere accolade; they represent the pinnacle of achievement in the retail industry. Garnering a nomination or winning one of these awards is a testament to innovation, excellence, and leadership.
www.creativeretailawards.com
First of all, it is helpful to find out if your business is in fact ‘insolvent’ or leading towards the direction of insolvency. Ask yourself these questions:
- Cash flow insolvency test: For instance, can you pay your bills when they are due – PAYE, VAT, national insurance, payments to suppliers, rental payments or bank loans. If you are struggling to pay these bills, you may be insolvent.
- Balance sheet test: Is your debt more than the value of your assets? If you are owing more than you own, this can be a sign of being insolvent.
If any of these situations apply, you should seek legal advice. Professionals such as Connect Insolvency are there to help save the company from liquidation. However, keep in mind that sometimes liquidation and winding-up procedures are the only effective procedures to agree to.
Rescue Tips
Administration
This is one of the first options to consider before company voluntary arrangement (CVA) or liquidation. But what does this entail? In administration, a company is put under management of a licensed insolvency practitioner, known as the administrator. Whilst it is more orderly than closure, the administrator will take over management and act in the best interests of the creditors as the company’s agent. It is a very powerful process, and for this to be an option a company must have failed at the ‘balance sheet’ or ‘cash flow test’.
The administrators aim has to be one of three options:
- Preserve the company as a growing concern
- Rather than winding up the company, aim to achieve a better return for creditors
- Distribute the proceeds to secured or preferential creditors
How long will the administration last?
This all depends on the circumstances, but it generally lasts up to a year. This, however, can be extended by the consent of the creditors and/or court. In addition to this, the administrator themselves also has a time limit of 8 weeks for getting their proposals out to the creditors.
Company Voluntary Arrangement (CVA)
Company voluntary arrangement or CVA, is a contractual agreement on how your debts will be handled between a company and its creditors. This is a legally binding agreement and will usually cover the amount to be repaid and a timescale for the repayments. Monthly contributions are typically agreed upon to ‘write off’ a proportion of the debt. Keep in mind that a CVA is designed to provide breathing space for a company with financial difficulties, so can be a lengthy arrangement, with three to five years being the standard. There are however many advantages to a CVA, for instance:
- Can improve cash flow quickly
- Stop the threat of winding up
- Stop pressure of bills such as PAYE, VAT and tax
- Not publicly announced such as administration, and you do not have to say your company is in company voluntary arrangement to your customers
- Lower cost than administration
Time To Pay (TTP)
Whilst not a formal procedure, it is worth looking into negotiating terms for paying off certain debts and outstanding taxes with HM Revenue & Customs. HMRC will usually agree to pay these back over 6-12 months, but sometimes longer. To go with the time to pay option means you have to meet certain criteria. It is your job to convince HMRC that you can pay your debts back by putting forward proposals that set out what you can afford to pay. You do not want to end up in a worse situation by offering to pay back more than you can afford, so it is best to consult a financial advisor. Your proposal should be:
- Forecasting sales
- Provide examples for how you will cut costs
- Pay taxes
There are also some criteria to consider to see if you would qualify. These include:
- Your past experience with time to pay arrangements
- Your line of business
- Compliance with tax rules and regulations
- Coronavirus
Liquidation or Winding-Up
Liquidation, also known as winding up, results in the company ceasing to trade and eventually being dissolved. If this becomes the outcome, a ‘liquidator’, (who is appointed from an insolvency practitioner) will gather all the company’s assets, sell them and distribute the proceeds among creditors, to settle the company’s debts. This can either be compulsory or voluntary.
Compulsory Liquidation
If a creditor is owed at least £10,000, and has been unpaid for 21 days, a winding-up order is passed onto court. This compulsory liquidation is usually brought upon when the company is unable to or will not settle its debts. If it becomes the decision to liquidate, the company will stop trading, directors will lose control and company assets are sold. It is possible to stop compulsory liquidation, if you act fast.
Voluntary Liquidation
If you are looking for a way to quickly close the company and be rid of worry. Then voluntary liquidation may be the answer. This, however, can only be used by a solvent company- meaning the company is no longer needed, the group needs to be reorganised or members want to be repaid for their investment. For this to happen, directors must give statutory declaration of this solvency, and pay off all their debts within 12 months. You should think about voluntary liquidation if:
- Company appears to not be viable
- Directors are concerned that the business may accumulate debt
- Worried about wrongful trading
Overall, there are a few options you can consider if your company is going insolvent. We recommend seeking help at the first hint of financial trouble you come across. And whatever option you believe to go through, there are professionals to help you every step of the way.
