David Kirk, insolvency practitioner, explains the options available when a company is in financial difficulty – and why acting early is vital.

There’s a common theme to companies in financial distress, which I tend to break down into five choices, depending on how far down the route of insolvency they are.

In increasing order of seriousness, the options are:

• raise new finance
• ask for a time to pay (TTP) agreement or instalment options from suppliers and HMRC
• a company voluntary arrangement (CVA)
• an administration or pre-pack administration
• liquidation

The advantages and disadvantages of each option must be considered in every case in order to find the best outcome.

1) Raise new finance

The quickest source of finance is the shareholders and directors, if they have access to funds. The next source is the bank (they may want personal guarantees) and then, after that, to refinance fixed assets.

There are many lenders who will lend on equipment and vehicles, as they can take a fixed charge on them and be secured. The reality of a new angel investor coming forward who will bail out the company is extremely rare.

2) Time to pay arrangement

Most suppliers just want their money back and do not want the company to suffer. If you can make a good case, most suppliers will accept instalment options, as they know that this is far better for them than a formal insolvency.

HMRC is, in my experience, very supportive if you talk to them early on and can make an offer that will clear the arrears while you keep up to date with current VAT and PAYE. A TTP arrangement like this is good, as it does not affect your credit rating.

3) Company voluntary arrangement (CVA)

A CVA is an agreement to freeze the current liabilities, and usually make a monthly payment over three to five years to pay back part of what is owed. A licensed insolvency practitioner must oversee this and will guide you as to what is a reasonable and fair offer to your creditors. To be approved, 75 per cent of creditors by value must agree it.

Creditors can vote to accept the proposal with or without modifications. One modification that HMRC often asks for is to stop any dividends being paid until creditors have been paid in full. 

A CVA can be a very good way of saving a business and keeping licences and other key items that a business needs in order to trade. However, a CVA is registered at Companies House and will affect a company’s credit rating.

4) Administration or pre-pack administration

One of the key risks for a company in trouble is a creditor issuing a winding up petition. Once advertised, this will cause the company bank account to be frozen – even before the court hearing to wind up. This is often a surprise to the directors, who assume that they have more time than they really do.

One way to stop a winding up petition before it is issued is to use a moratorium – which means a company files a notice in court of its intention to appoint an administrator (but does not actually do it yet). This filing is confidential, gives 14 days’ protection, can be extended, and can be withdrawn at a later date if the company can find another solution.

If no other solution can be found, the company will go into administration. Administration gives a company full protection while an exit is worked out. The normal exit or outcome will usually be one of the following:

• sale of the business, or part of it, to a new owner at a later date
• immediate sale by pre-pack to the existing management or a new owner
• gradual trading down of the work or jobs in progress and then an asset sale
• a CVA

5) Liquidation

Although this might sound like the worst option, often it is not. If the business cannot carry on, then this is usually the best and most correct legal procedure to close down a business, begin redundancy procedures, and sell off the assets.

A licensed insolvency practitioner, as the liquidator, will have experience in dealing with creditors and employee claims, and will also help to close the business and any sites or offices. Often this takes a lot of stress and pressure off the directors.

It is never too early to seek professional advice about your company’s financial problems. The longer the warning signs are ignored, the fewer options will be available.

About the author

David Kirk is a chartered accountant and licensed insolvency practitioner based in the south west. Follow @kirksinsolvency, or visit www.kirks.co.uk.

See also

Alternative funding: factoring and invoice discounting