Top Management Story

Writen by Damian Appleby

There are few companies in the UK that have not been Insolvent at one time or another. Their Insolvency may last for a matter of days, it may last for months or even years. Insolvency does not have to mean the end, indeed there are a number of solutions available to an Insolvent company.

Whatever the cause of your Insolvency it is good to know there is a solution available; from simply trading through it, right up to liquidating and starting again. Whatever you decide is your best path forward, there a couple of thoughts to keep in mind:

1. It is your company – if you are not happy with the solution, then get a second opinion.

2. If you are going to go on in business, make sure you fully understand what went wrong. A customer not paying you is not a problem, it is a symptom of a problematic credit control procedure.

3. Be comfortable with who you are dealing with. Whichever professional you decide to use to help you, make sure you are happy with them and their approach as you might have to work with them very closely.

4. Bear in mind your future. Whatever solution you choose, your life will go on afterwards. Make sure the solution enables you to go forward.

5. Honesty. Everyone in the Insolvency field is there to get you out of debt (as hard as it seems to believe at times). If they aren't aware of a problem, make them aware.

It is beyond the scope of this article to narrow down exactly which solution is best for you, your situation will need to be discussed and analysed properly.

So what about the solutions available?

There are only a few, but they cover most situations.

Administration. This isn't a solution in its own right, but it does allow for legal protection while you are sorting another solution. Typically, if you are concerned about your landlord repossessing your stock, or just locking you out, Administration will stop this. There needs to be an exit point, which is usually one of the following.

Re-financing. This is a sticky point with most companies, and rarely provides a solution. However, it can help facilitate another solution. Realistically, it only solves the problem when the assets of the company are badly underutilised. Unfortunately, if your company is Insolvent then the interest rates are likely to be high.

Rescheduling your debt. This covers everything from debt management up to Voluntary Arrangements. The idea is that you repay your creditors over a longer period. Under Voluntary Arrangements the interest on the debt is frozen, and you should only pay an affordable amount every month.

Liquidation. The technical term for restarting an insolvent business is 'phoenixing'. As the old company dies, a new company is born out of the ashes. This is by far the most popular choice as it kills off most of the old debt without the need to make repayments.

Trading through. This is not an option for most businesses. It means that the cause of your insolvency is a 'one off' and you have sufficient work to carry on regardless. Be careful though, if you carry on and the problems still exist, or your cash flow cannot support the company, you will have worse problems later on.

As I mentioned earlier the approach you take to your Insolvency solution is vital. Your business is Insolvent for a reason, it may be you aren't charging enough. Maybe you haven't enough work coming in. Whatever the cause, if you are going to be trading in the future, you need to have dealt with it.

Below we will go into how to deal with each approach, to make sure you get the most out of it.

Trading through. Make sure of your cash flow projections. If you halve them, does it still hold together? If it doesn't you need to ensure you find a way to make sure you get more than half in.

Refinancing. Again go back to your cash flows. Can you make the repayments as the situation stands at this moment? Many businesses borrow on the basis of an increase in turnover; unfortunately this usually leads to failure.

Debt Rescheduling. The crux of any form of debt rescheduling is a proposal put to the creditors. This is your proposal; if you don't believe in it then it probably won't happen. Look at the repayments, are they realistic? More importantly, have you got rid of the problem? If the problem is still there, then the chances are this will fail. This is the single biggest cause of failed Voluntary Arrangements and debt management programs.

Liquidation. If you are looking at liquidation, you need to be aware that you will have to buy the assets of the company out of liquidation. Discuss with your liquidator how much this is likely to cost, and make sure that you will have the funds before you liquidate, once you start, you can't go back.

The most important thing you can do is to take advice; any advisor worth their salt will give you honest and practical advice, the solution has to fit your needs. The earlier you can get the advice the better placed you are to deal with the problems that may occur.