How Can Insolvency Save Your Business?

Dear Reader

We often get calls from business owners in financial difficulty. Usually it seems that their only course of action is to wind up their company, and they have a sense of failure, anxiety and shame. It comes as an enormous relief to hear from us that far from being the end of all their dreams, insolvency can be the first step to saving their business! Read on to see what we mean…

Please forward this issue to anyone else you think will find it useful. They can subscribe to receivetheir own free monthly copy by clicking here.

Best wishes,

Phil Donoghue at CMC

07747 444 960

phil@cmc-partnership.com

How Can Insolvency Save Your Business?

The first thing to get straight is that we are talking about saving your business, not necessarily your company. The business is the intangible entity that has numerous stakeholders – yourself, for one, and also staff, customers, suppliers, landlords and so on. If the business disappears it will have an adverse impact on all these people – in fact, the prospect of letting everybody down will probably have been giving you sleepless nights in the run up to calling for help. Your company is a legal entity through which you chose to run your business – and it is your company that is in trouble.

What's Possible?

There are two insolvency processes you can use to rescue your business:

The Company Voluntary Arrangement

Under a Company Voluntary Arrangement (CVA) your business, if fundamentally sound, can trade its way out of insolvency. Your company proposes an arrangement for repaying its creditors, who agree to freeze your liabilities at that date. If the majority of your creditors (in terms of the value of debt owed to them) vote to accept your proposal, all are bound by the arrangement.

Your company continues to trade, now free of the immediate pressure of its current debts, and pays regular contributions to an Insolvency Practitioner, who distributes them to your creditors at the agreed rate. At the end of the agreed period, your company is completely absolved from the debt.

This will clearly only work if your business is fundamentally sound, able not just to trade profitably for the duration of the agreement, but also to pay the agreed contribution to your debts on top. It's a good solution for a company that has become overloaded with debt through circumstances beyond its control - a major customer defaulting on payment, for example.

Though your creditors obviously have to know about the CVA, your customers don't, and provided you trade successfully through the agreed period and discharge the debt, your company should emerge in even better shape and still be attractive to potential investors.

Pre-Pack Administration

An Administrator is an Insolvency Practitioner appointed by a judge to manage an insolvent company's business and where possible to rescue the company as a going concern with its business intact and jobs safeguarded.

In a ‘pre-pack' administration the company's assets are immediately sold, often to the previous directors or management who continue trading through a new company.

This process has the advantage of enabling the Administrator to realise a greater amount for the assets, as the business (though not the original company) continues and goodwill is preserved. The company employees are usually transferred to the new company, preserving jobs, and liabilities remain with the old company.

You may think this sounds uncomfortably like ‘Phoenixing', an illegal move by which Directors wind up a company to avoid paying its debts, then start up again immediately under a very similar name. The difference here is that the Administrator controls the process as a way of achieving the best possible value for the company's assets and the maximum return for its creditors. He has to make the process as transparent as possible and indicate clearly why he felt this was the best way to proceed.

A recent example of a pre-pack is the sale of the assets of Cobra Beer to Coors immediately after Cobra entered administration. This allowed the brand to continue and saved jobs but also left suppliers out of pocket by an estimated £75 million.

So Can You Declare Yourself Insolvent and Just Carry On?

Nothing gives you carte blanche to avoid your creditors and carry on running your business as you have always done! Use the insolvency process to ensure your business is sound. You and your fellow Directors need to recognise the need to do things differently, restructure your organisation and change your own behaviour.

Above all, don't become too attached to the legal entity – that it was your first company, or you named it after your children, is not a good reason to keep it going when it no longer serves its purpose! It is the business that's important and that people rely on – and it's your job to take the best possible decisions to preserve your business and all it stands for.

Some Top Tips

• Monitor cash carefully when trade is tough and when sales are growing fast!
• Buy goods and services competitively and control overheads, especially when your business is growing.
• Do you rely heavily on one or two clients? Spread the risk by increasing the number of customers.
• Build a budget, monitor it regularly and stick to it.
• Are you sure the business can afford what you are taking out?When building your budget include yourself and only take the cream when it is really available.
• Involve your professional advisors, accountant, solicitor, bank and CMC in major decisions.Use an external view wisely. 
• When things get tough, don't stick your head in the sand. New contracts don't just appear!
• Get help as soon as the pressure starts to build - too many possible rescues fail because they start too late.

Is your business in trouble? Call us on 07747 444 960 or email phil@cmc-partnership.com; we'll happily talk you through the options.