When a company becomes insolvent this means that it cannot pay its debts as and when they are due. In other words, their liabilities are greater than their assets or cash flow. Insolvency is a serious state of financial distress for a business to find themselves in. That’s why it’s always important to tackle potential issues head on, rather than allowing them to spiral. However, if your business has reached a point of insolvency, this isn’t necessarily terminal. With the guidance of a business rescue specialist, it may be possible to turn the company’s prospects around. These are just a few of the business rescue methods that can be used to make an insolvent company solvent once again:
Company Voluntary Arrangement (CVA)
A CVA is a binding contract between a company and its creditors that sets out a payment plan outlining when debts will be repaid. It alleviates creditor pressure, giving companies the breathing space that they need to implement a recovery plan, whilst allowing the business to continue trading at the same time. In order for this strategy to be successful for an insolvent company, it’s important to look at the company’s finances carefully in order to determine if there is a realistic chance of them returning to profitability following the CVA.
Refinancing/ Restructuring
In many cases, a crucial part of recovering an insolvent company involves reorganisation of the existing structure. Corporate refinancing can be used by an insolvent company to replace existing debt with debts that are on more favourable terms. Asset refinancing is also a good tool for companies that are asset rich but cash poor. This is a method for releasing equity and raising capital using existing assets. Alongside refinancing, a business rescue expert can look at options for restructuring the company’s management and finances in order to make the business more efficient.
Administration
One of the most effective tools for recovering an insolvent company and helping it become solvent again is administration. The reason that administration is such a useful tool for an insolvent business is because it provides an automatic stay on any current or pending legal actions. This gives the business the time that they need to focus on implementing recovery strategies. The company can continue to trade throughout the period of administration, with full control of the company being returned to the directors once the process has finished.
You may also have heard of pre-pack administration. This involves agreeing the sale of the company before an administrator is appointed. This does not rescue the business for current directors as it is sold, however it is a good way to protect business value and continuity, preventing the business from closing.
The Importance Of Acting Quickly
If an insolvent company is to have any chance of recovery using the above rescue tools then it’s essential to act quickly. It’s crucial to seek professional guidance at the first signs of insolvency, however preferably before the company has become insolvent. The earlier the problem is addressed, the more options the company will have for moving forward and becoming a profitable enterprise once again. Additionally, failing to act could result in legal action being taken by creditors. In severe cases, this could involve the company being forced to liquidate, taking the control out of directors hands.
What If My Business Can’t Recover?
If a business rescue expert advises you that there is no realistic prospect of recovery for your insolvent company then the best option is liquidation. A Creditors Voluntary Liquidation (CVL) ensures that all the affairs of the insolvent company are wound up correctly, whilst removing creditor pressure. It also ensures that statutory and redundancy entitlements can be claimed, whilst ensuring that directors will be able to trade for a new business in the future.
If your company is struggling financially, please don’t hesitate to get in touch with our experienced team at Ballard Business Recovery to discuss the best options for moving forward.
