The Options for Insolvent Businesses
This is a guest post by Jeffrey Carter, who is a business finance expert in the UK, advising companies in financial difficulty of their options.
In 2009 in the UK alone, 19077 businesses went into company liquidation. This figure was particularly high, largely as a result of the 18 month recession that gripped the global economies.
However, even in ‘normal’ economic circumstances, insolvency amongst businesses is more common than we would like. Contrary to popular misconception, however, company insolvency needn’t mean the end of the business. There are a number of options available to insolvent companies.
Recovery
Internal and external recovery plans are the first option an insolvent company should look into. The internal recovery plan involves a plan being formulated entirely within the company. Directors contact the creditors informally to explain the circumstances and discuss a repayment plan. This must be accompanied by a plan that will improve profitability, for example improved training measures or sales initiatives. The external recovery plan involves external specialist recovery services getting involved as an “honest broker,” who helps to negotiate the recovery plan with the business and its creditors. Both are really only feasible for companies who are likely to overcome their financial issues in the near future. Recovery plans do not involve any formal legal proceedings.
Company Voluntary Arrangement
The CVA is a legal plan but one that does enable a company to continue trading. It involves the creditors and the company arriving at a repayment plan over a set period of time (often 5 years). This often goes hand in hand with an internal restructuring plan to ensure long term viability of the business. Interest and other charges are usually frozen throughout the CVA. An Insolvency Practitioner must be brought in to oversee and implement the process.
Administration
Administration is a legal process designed to protect insolvent businesses from creditors until a solution to the financial issues is found. Essentially, from the moment a company enters administration legal proceedings against it are stopped. Essentially, administration is carried out by a court appointed administrator with a simple aim – to draw up a plan to resolve financial problems. The plan might be selling the company, it may be some form of recovery plan or it may be company liquidation. But administration gives the company time to decide what the best course of action is.
Company Liquidation
In cases where the company’s financial situation is dire with no forecast of improvement, liquidation might be the only option. Liquidation means that there can be no further trading by that company. Liquidation could be voluntary (whereby the company directors take the decision to liquidate the company) or compulsory (where a creditor initiates liquidation after proving they have taken all other reasonable steps to retrieve debts owed). The process of liquidation itself involves selling of all company assets and using the funds raised to pay off whatever is possible to the creditors to whom the company owes money. After this, the company must stop trading.
While there are a number of available options for companies in severe debt, the most important thing is to address the issue as soon as possible. Knowingly trading while insolvent could have serious legal implications for the company directors. And as with any form of debt, the longer it is left ignored, the more difficult a situation it becomes to resolve.
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The insolvent company will not be free to transfer its lease to you and there is rarely the time to get the landlords consent.
Your improvements to this program are welcome — “saving houses” won't fix the risks the company treasurers see and thus won't stop the collapse of credit — and maybe your job, in which case, your house is gone anyway.
It is really in the early stages of a company where the company has to spend money on inventory and equipment. If they have no cash flow, they can not buy the proper inventory to sustain sales.
small business supplies goods to another small business, and the small business becomes insolvent before the goods are paid for, what can the unpaid seller do?
The Obama administration is finally looking into Medicare fraud and abuse by medical suppliers and doctors but the Bush admin. wanted to let that slide and cut the staff for any oversight by govt.
Debt restructuring is similarly a clever way to rearrange debt, consolidate loans, cancel certain debts, make the most of loopholes and generally make your overall owed amount a lot easier to handle and less to pay off.
You take more of a risk in buying an insolvent business, since there will be no ‘come back’ on the seller but this risk is often balanced by the much lower price you will be paying.
An insolvent company is one that is unable to pay all its debts when …. Of these, only the first two are normally options for directors!