Ben Cowgill is the Director of Insolvency Expert, starting with the firm as Senior Manager in 2014. He is a qualified Insolvency Practitioner and Chartered Accountant, and has worked with businesses in varied industries ranging in size from small owner-managed to household names.
Today, he writes for us about what to when your business is insolvent.
The past year has been difficult for many, not least small or micro business owners who have been hit particularly hard with little to no Government support – especially those who recently became self-employed.
Unfortunately, at Insolvency Experts, we’re predicting a tsunami of insolvencies coming this Spring and Summer as businesses who would have failed last year, but survived on Government support schemes, catch up and fall into insolvency. Debts have been racking up and we are seeing a huge amount of businesses waiting until furlough support is over before they become officially insolvent. CBILs and bounce back loans are starting to be paid back now too, which again is having an effect on cash flow.
Is your business insolvent?
You may find that you are at the point where you can no longer afford to pay your debts when they are due and the assets on your balance sheet are not sufficient enough to cover your creditors. This means that your business is insolvent. So now what?
Now you need to act fast. Although you may be wary of spending more cash, investing in the help of insolvency practitioners can actually save you more money in the long run and can help you to avoid an incredible amount of stress and worry. They will step in to ensure that all your creditors get paid in the correct order.
Insolvency practitioners will advise you on the best form of insolvency for your business, but we’re going to break down the main types below so that you know what route you could be taking:
The administration route
This is the most common form of insolvency, so it’s likely you may be strongly advised to consider this. Essentially, you ‘save’ the business by selling it onto new owners. Administrators will take over and search for a buyer, similarly to what happened with the Debenhams brand earlier this year.
If you employ staff, be wary that they may be made redundant in order to cut costs. This is not uncommon during the administration process.
This route is the ideal as it arguably has the best outcome out of the other options – your business still operates under new ownership and creditors receive the money they are owed.
The liquidation route
If the insolvency practitioners cannot find a new buyer, you may have to undergo liquidation, which is a formal business closure. In this process, all staff are made redundant and creditors do not receive what they are owed. (Side note: CBILs and bounce back loans are written off anyway if you become insolvent, no matter what route you take). Your business will also be dissolved from the Companies Register.
If the courts become involved, it may be that you are forced into a compulsory liquidation. This happens when a creditor has issued a winding-up petition against your business due to overdue debt.
Although going into liquidation is a less than ideal situation, there can actually be many contributing factors as to why this takes place rather than administration. It could be that you are facing a market decline where there just isn’t an audience for your products any more – think how records and CDs are barely used these days as a result of digital streaming. This means there probably won’t be any interested buyers as they don’t see potential for profit.
There’s also a risk that if one of your largest customers has become insolvent themselves, this could have a knock-on effect on your business unless you find a new client to fill their space very quickly.
There is so much more that goes into liquidation that it would be hard to summarise it all simply in this blog, so if you want more information, check out the Insolvency Expert’s guide on How to Liquidate a Company – the blog should answer any further questions you may have.
Consider CVAs (Company Voluntary Agreements)
If you owe money but can’t afford to pay it all at once, it may be that you consider a CVA that allows you to pay back your creditors over time (maximum 5 year period). A CVA is a lengthy legal document that outlines the struggle of your business and what you can afford to pay into the CVA over a number of years. During this agreement, you will pay your profits to the Insolvency Practitioner, who will distribute this to creditors accordingly.
Before sending the CVAs over to the creditors for approval, the Insolvency Practitioner will look at the projections of your business and what you can realistically afford to pay. If all of a sudden you hit a bump in the road and you can no longer pay the agreed amount, they can modify the original document and request approval from creditors.
HMRC are one of the largest creditors in CVAs as they are usually owed VAT, PAYE, corporation tax etc. If a creditor is owed more than 25% of your debt, that creditor alone has the controlling vote and the right to disapprove the CVA. HMRC are usually owed more than 25%, meaning that more often than not they have the controlling vote, so again, it’s worth seeking the assistance of an Insolvency Practitioner who will know what they are likely to agree to.
A Good News Insolvency
This is a member’s voluntary liquidation whereby a company has come to the end of its natural life, again due to lack of demand in the market. Any staff will be made redundant and the leftovers go to the shareholders, with all debts being paid off.
As a micro business owner it can be very stressful and time-consuming to get your head around each of these and what they entail, which is why we strongly recommend seeking expert advice in the process. The pandemic has really shaken up the amount of insolvencies and what creditors will or won’t agree to, so experts are keeping up with the times and are on top of any further changes. Save yourself the confusion and exhaustion and seek help today.