Even profitable businesses can run out of cash and become insolvent.  In well established businesses, it is not always obvious that there is a problem until time is already running out.  The solvency test is being able to meet debts as they fall due.  Finding that you are under pressure from your creditors can be very worrying and it can take attention away from running the business when it needs your attention most of all.

There are solutions of course.  Engaging in finding those solutions as early as possible leaves more options open.  In owner managed businesses the owners often feel an obligation to their suppliers and they try to keep going so that they can pay them.  This can result in those suppliers receiving even less of what they are owed and potentially losing you as a customer completely.

The owners or directors can be linked closely to the business with Personal Guarantees and loans to or from the company, so a failing business can impact on the owners too.  Personal bankruptcy is not a good foundation to starting in business again so seeking good advice at an early stage is essential to achieve the best possible result for the owners, the company and the creditors.

• Losses arising from bad debts, poor costings, fall in sales, losing a key customer, unpredicted cost increases, currency exchanges and external factors such as market changes, a trade embargo and even Brexit.
• Over-investment to increase capacity leaving a cash shortfall.
• Carrying high stock levels.
• Extended credit terms for customers.
• Short credit terms with suppliers, possibly arising through a poor general credit rating or suppliers’ trade insurance being reduced or declined.
• Overtrading; closing sales deals but not having the finance available to fund additional purchase orders or staff recruitment/overtime.

In reality, an insolvent situation can be a result of any combination of these factors.  Every case is unique and requires a unique solution.

If you are in financial difficulty but have delayed seeking expert advice, you should be aware of the potential risks.

Directors’ conduct may come under scrutiny by the Insolvency Service if a business fails.  Responsibilities of directors are set out in the Companies Act 2006 and directors should also be mindful of the Company Directors Disqualification Act 1986.  This may result in fines, disqualification from being a director or even imprisonment.  Whilst HMRC is not a preferred creditor, where a company’s largest creditor is HMRC there is a likelihood of investigation by the Insolvency Service.

Even where a director of a company seeks the advice of an Insolvency Practitioner, and that Insolvency Practitioner is appointed to wind up the company, the director should remember that the Insolvency Practitioner has a duty of care to the company’s creditors and not to the director.  The director should seek advice independently.

It is possible to turn around a business where creditors are pressing for payment without any formal procedure simply by negotiation with creditors but there must be a clear appraisal of the current status of the company and how it will generate cash in the future.

The steps are:

• Ensure accounting information is up to date to appraise the current financial status.
• Identify the reasons for the cash flow crisis.
• Consider alternative finance options, including lease finance, invoice finance, borrowing from various sources and equity funding.
• Calculate an estimated value of the business, ignoring the solvency factor but taking into account normal profitability, intellectual property and brand value. This may open the opportunity of equity finance.
• Consider the impact on any group companies
• If necessary, negotiation with creditors can be formalised under a Company Voluntary Arrangement (CVA).
• Consider the impact on the directors personally the possibility of an Individual Voluntary Arrangement or Bankruptcy. These are not desirable routes but if managed well the individual can exit the process within months.
• The best return to creditors may be achieved by closing the company and starting a new one, often referred to as a “pre-pack”. Whilst the creditors may not receive all that is due to them it gives the opportunity for them to receive part of what is owed as well as saving the business and the employees’ jobs.

There are many solutions and combinations.  Our team has much experience and connections with all of the sources of funding which might be needed as well as professional Insolvency Practitioners.