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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