When a company is struggling financially, whether it is experiencing cash flow problems, pressure from creditors to repay its debts, or is being threatened with a winding-up petition, the director will need to look closely at its options to understand the best route forward.
Some companies will no longer have a viable future or chances of turnaround, meaning closing the company through Creditors’ Voluntary Liquidation (CVL) will be the best option.
However, some will have a real chance of restoring profitability in the future. These companies will instead need to look at the options available for a business rescue.
There are a number of different ways through which a company can be rescued. To help directors understand which are the best routes for them, Clarke Bell has compiled this handy guide to business rescue.
Is my company insolvent?
The first step in a business rescue is to establish the level of debts a company currently has with a view to confirming that it is insolvent. With your finances established, you can then look for viable options for a business rescue and a way out of insolvency.
There are 3 main ways to test if your company is facing insolvency or is already insolvent.
The first test is the cash flow test. This is the inability to pay bills when they are owed. If your company finds that it is consistently unable to make payments when they are owed, this is a sign that it is facing financial difficulties.
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The next test is the balance sheet test. This tests whether the value of the company’s assets is less than its liabilities. Again, if the company’s liabilities outweigh its assets this can be a sign that it is facing trouble.
The third and final test measures whether your company has any outstanding statutory demands or unanswered court orders against it. If legal action like this exists, it is likely that the company can be forcibly wound up by creditors in the future.
If your company fails any of these tests, it is a sign that it is insolvent.
Read more about company cash flow problems in our handy guide to business insolvency.
What is a business rescue?
Just as it sounds, business rescue is an option that aims to take a struggling business and turn it around, restoring it to profitability.
For this to occur, the company must have real chances of recovery and be able to show that it can be sustainable and viable once again.
There are different ways a business can be rescued;
Option 1: CVA
A Company Voluntary Arrangement is a formal arrangement that is drawn up between the company and its creditors. This is an agreement made between both parties that outlines how the company will back its debts to creditors over an agreed time frame. This can last up to 5 years and must be agreed by both parties.
At least 75% of creditors and 50% of shareholders must agree to the CVA for the process to be initiated.
By entering into a CVA, an insolvent company can avoid entering into liquidation. Instead, the company can continue to trade and operate whilst fulfilling its repayment duties to creditors.
In order to progress with a CVA, a company must firstly be insolvent. Further to this, the director and appointed Insolvency Practitioner must have tangible evidence to believe that the company can be successfully rescued.
As part of this, the director must be able to produce and show projected cash flow forecasts which outline that they have the funds to meet the repayment terms drawn up in the agreement.
A CVA is a great option for business rescue (and the most popular) as it allows the company to continue trading whilst working with creditors to repay what it is owed. A CVA is also a more private option than other insolvency procedures as it is not required to be advertised in The Gazette.
What’s more, by putting a company into a CVA, it means it can avoid closure either through Creditors’ Voluntary Liquidation or the most serious path of compulsory liquidation.
Find out more about the key differences between a CVA and a CVL in our handy guide.
Option 2: Pre-pack administration
Another option for business rescue is pre-pack administration.
This is a route in which a business that is insolvent is placed into administration, following which its assets are sold.
Like with a CVA, a licensed Insolvency Practitioner has to be appointed to carry out the pre-pack administration process.
The Insolvency Practitioner will be responsible for assessing the company’s activities and ensuring that it can be sold.
Before the company is placed into pre-pack administration, a suitable buyer for the company must first be arranged.
The Insolvency Practitioner will also assess whether jobs and client relationships in the company can be saved and maintained.
Once the IP has carried out its assessment, the next stage is to secure a buyer for the business. Once this has been secured, the Insolvency Practitioner will then agree on the terms of the sale before the process is complete.
Looking to rescue your business? Let Clarke Bell help
If your business is insolvent and you’d like to know more about how to turn it around, get in touch with Clarke Bell today.
We will work closely with your business to assess your situation and find the best route forward, whether that is pre-pack administration or a Company Voluntary Arrangement.
Our team of experts has over 28 years experience and has helped businesses of all sizes to find the best possible outcome for them. We work closely with every customer to ensure we will always get the best results.
To find out more about how the Clarke Bell team can help you, or for some free initial advice, get in touch with our team today and take the next steps to rescue your business.