Insolvency Practitioners

How Insolvency Practitioners Return Insolvent Companies to Solvency?

Just because your business is currently insolvent doesn’t mean that it can’t be rescued and returned to a solvent company. Part of an insolvency practitioner’s (IP) role is to assess the company’s current state of affairs, i.e. the how and why it became insolvent. If the basis of the company is essentially sound, they may feel that resolving insolvency good practices – doing business again – is a more favoured option than seeking liquidation.

There are a number of rescue and recovery options that could be applicable for the business instead of an administration or liquidation procedure. For example, businesses that were sound and solvent prior to the Covid-19 pandemic and have suffered, therefore become insolvent, due to the coronavirus restrictions and lockdowns, can take advantage of several restructuring and refinancing options and return to solvency.

The impact of Covid-19 on businesses

At one point, there were 723,000 businesses on the verge of insolvency, or were certainly having serious financial issues. In 2020, there was a 68% increase in the number of companies seeking insolvency solutions and companies were entering debt management schemes or taking advantage of government-backed restructuring options, such as Virgin Atlantic, DeepOcean and Pizza Express.

But as businesses are starting to emerge into a post-Covid world, there is an air of pensive confidence. The problem is going to come when many of the Government’s business support packages come to an end as we close out 2021. Many business creditors will have creditors of their own, which could lead to a raft of insolvencies to hit IPs in the last quarter of the year.

The predominant problem for many businesses over the past 18 months has been a lack of cash flow rather than spending more than they can afford. So, hundreds of businesses took advantage of the furlough scheme, bounce back loans, temporary measures to give businesses breathing space from creditors, and restructuring plans. But these need to be paid back at some point so the sooner you can get back to resolving insolvency good practices and doing business again, the better.

Ways to return to solvency

Resolving insolvency good practices basically means getting back on the bandwagon and doing business again. So, what can you do as a business to get back to being solvent?

Focus on communication

More than ever, it’s vitally important to communicate with your creditors. In many cases, the companies you owe money to want to understand your situation and come to a mutually beneficial agreement for paying back what you owe. This could mean stopping interest for a period of time or enabling an instalment plan whereby the first payments are lower and increase as your business income starts to return to normal.

This isn’t always easy and, in many cases, hiring an insolvency practitioner who is professionally trained in negotiating with creditors on your behalf may be a good idea. They also come equipped with a variety of rescue and recovery options for your business that you may not have thought of or didn’t think would suit your situation.

Raising finance

For many businesses that were experiencing cash flow problems due to Covid-19 restrictions, it is simply a case of raising finance to bridge the current gap and help them thrive following the pandemic. But before you consider this route, it is important to completely understand your current financial situation.

Assess exactly what the business’s debts are and how much it is in arrears with creditors. Consider your future orders book and the current market climate to know if you can make the necessary regular payments, and be able to predict how soon it would be before you can pay off the debt entirely. Remember that any finance raised usually means having to personally guarantee the loan as a director of the company.

A Time to Pay arrangement

A lot of businesses are currently struggling to pay HMRC, whether it is their VAT bill or PAYE. If your business is basically sound and you haven’t defaulted or been late on payments in the past, HMRC are likely to come to an agreement as part of their Time to Pay scheme.

As long as HMRC agrees, the business will be able to make regular payments over a 6 or 12 month period and clear their outstanding VAT/PAYE debt. You must prove to HMRC that you will be able to afford the payments and will stick to the arrangement. Your proposal needs to include:

● Forecasted sales over the next 12 months
● Examples of where you can cut costs and reduce overheads within the business
● A convincing argument that you’ll pay your taxes!

Administration

It may not be as bad as it sounds. IPs suggest rescue administration as it protects the business from their creditors for a brief moratorium, which allows the IP to either find a buyer for the business, allows trading to continue to raise the funds to pay back the creditors, or to restructure the business.

Part of the administration process is a pre-pack sale whereby the IP assesses the company’s assets and determines which, if any, can be sold to raise the necessary funds and clear any debts. Any administration or receivership process must be handled by the insolvency practitioner and not the directors of the company.

Company Voluntary Arrangement (CVA)

Another alternative is to establish a contractual agreement between the insolvent company and its creditors. IPs are usually responsible for assessing the insolvent business’s capability of making regular monthly payments, liaising with creditors to achieve agreement, and managing the CVA on behalf of the insolvent business.

Whilst a CVA is a longer arrangement, usually 3 to 5 years, it does allow the business to restructure, change their business plan or combine the CVA with other insolvency procedures on the advice of the insolvency practitioner.

Individual or company insolvency is not something that anyone wants to deal with; however, the sooner a financial problem is recognised, the sooner it can be dealt with and the more potential there is for the debt to be paid off. If you or your business is struggling with debt, contact Simple Liquidation for assistance. For more information on how our professional insolvency practitioners may be able to help you, contact us today.