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business is failing

My business is failing – I want to turn it around

Authored by Lisa Hogg

Lisa Hogg

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Approximate read time: 7 minutes

When a business is failing, but still has potential, you may wish to explore the options available to help recover the company from its struggling state.

There are processes which allow directors to do this, depending on the current state of the company. Options may include methods of sourcing new funding, finding solutions to overcome debt, and entering formal insolvency procedures overseen by a licensed insolvency practitioner.

It is important to remember that a failing business may be deemed insolvent. Continuing to trade without taking action while a company is insolvent can result in serious consequences for its directors. It is crucial, therefore, that directors act as soon as possible to rectify the problems, as they may face disqualification for failing to do so.

What is the cause?

When running a failing business, the first aim is to establish the source of the financial difficulties. There are several factors that may contribute to a failing business; these may be financially triggered, or be down to issues within the overall structure of the company.

The best solution for company turn-around may be dependent on the source of its financial issues. These may include, but are not limited to:

  • Unpaid debt to several creditors.
  • Inadequate financing as a result of poor cash flow.
  • Unpaid customer invoices.

What are the options?

There are several routes you can go down when it comes to turning a failing business around. Your first option should be to assess the business model of the company. Is there room to reduce outgoing costs? Or to improve your current businesses processes? If there are means of correcting the issue within the business, before having to go down an insolvency route or additional funding, it may be the best way forward.

If there’s an issue within the business that can’t be fixed internally, there are still alternative options that can help pull the business back. These range from measures to re-structure the company as a whole, to means of realising assets/finding adequate funding to pay off debts and bring the company back on track.

In some cases, the business may even be right for a pre-pack liquidation or pre-pack administration. This can effectively allow a business to continue trading, under a new trading name, with the sale or transfer of the business and assets of the insolvent company, bought back at market value by the directors. A phoenix company can pick up where its predecessor left off provided that everything has been purchased at market value, with that money going towards creditor repayments and the cost of the liquidation.

Administration

Company administration is a formal process of placing a licensed insolvency practitioner (IP) in managerial control of the company. The process gives the company protection from its creditors, allowing it to plan the best route forward for the business.

The methods carried out while a company is in administration vary, depending on the cause of the problems it is facing, examples of these may be:

  • Realising assets in order to pay off the company’s debts.
  • Selling parts of the business in order to gain funds.
  • Re-structuring the company/business plan in order to promote greater cash flow.
  • Entering into formal debt consolidation procedures such as a Company Voluntary Arrangement (CVA).

Advantages of entering a business that is failing into administration are clear. The process gives the company breathing space from its creditors, allowing it to plan for survival, and also preventing individual creditors taking action.

When a company enters into administration, this must be advertised in the London Gazette, which could cause damage to the reputation of the business. It is important to remember, however, that such a procedure is necessary for any insolvent company that wishes to carry on trading, as failing to do so can result in serious consequences for directors.

See here to find out more about how Company Administrations work

Formal payment plan

If a company is suffering from debt, but has a functioning and workable business model, the answer may be to enter into a Company Voluntary Arrangement (CVA).

In a nutshell, a CVA is the process of coming to an agreement of how much of a company’s debt can be paid off, and breaking this amount down into affordable monthly payments which are solicited through a licensed insolvency practitioner (IP).

A CVA, unlike an administration, allows directors to remain in complete control of the company, and ultimately allows unaffordable company debts from creditors to be paid off. 

 Advantages of a CVA include:

  • Upon the establishment of a CVA, the company is protected from pursuit by creditors with legal action such as County Court judgments and winding up petitions.
  • At the end of the CVA period, outstanding debts, including liabilities to HMRC, are written off.
  • The company may continue to trade throughout the process of a CVA, giving security to the jobs of directors and employees.
  • There are no upfront fees for a CVA, unlike alternative solutions such as a pre-pack administration.

In order to enter into a CVA, a creditors’ meeting must be held. In this meeting, of voting creditors must vote in favour of a CVA for it to be accepted. Only the votes of attending creditors, or those who vote by proxy, count towards the agreement.

You can find out more about how a CVA works as a formal repayment plan here

Time To Pay Arrangements with HMRC

When a company falls behind on payments to HMRC, the situation can easily fall into a state of being unmanageable.

Time to pay arrangements were introduced by the government  and allow struggling companies to repay their various debts to HMRC in instalments, rather than An unaffordable lump sum.

These arrangements usually last from around 6 to 12 months, but may last longer if there is a realistic prospect of the debt being repaid eventually. They are suitable for any type of business, especially where tax arrears have accrued during periods of poor cash flow. Advantages of Time to Pay arrangements are:

  • Seeking a Time to Pay arrangement decreases the likelihood of HMRC pursuing enforcement action.
  • Spreading out liability payments through a Time to Pay arrangement allows for financial freedom, improving the company’s cash flow.

There are situations, however, where HMRC may reject your proposal for a Time to Pay arrangement. These situations may include:

  • Overdue/late tax returns.
  • Failure to keep to previous financial arrangements.
  • The proposal is deemed unachievable by HMRC.
Click here to see more about how Time To Pay Arrangements Work

What if recovery is not an option

If the business has reached a point in which improving the business processes, finding additional finance or a payment plan simply won’t work, an insolvency process may have to be considered. If recovery simply can’t be achieved and the director’s know this, they must look towards closing the business down.

If this is the case, an insolvent solution like liquidation may work best, or sometimes it could be the only process remaining. There are different methods of liquidation, but the right one will depend on the businesses’ circumstances.

Find out more about how to close down your limited company here

In summary

When a company is facing financial difficulties, but has a workable business model, a director may wish to act in order to rescue the company back to a secure state.  Some include:

  • Repaying debts through company voluntary arrangements (CVAs).
  • Entering an administration procedure with the aim of securing the company through protection from creditors, with the hope of returning its business to a working state.
  • Proposing Time to Pay arrangements to HMRC to aid in the repayment of liabilities owed to them directly.

It is crucial for a director to act quickly when a company is facing financial difficulties, as trading while a company is insolvent, and ultimately deteriorating the position of the creditors, could be Classed as trading whilst insolvent, which can have major consequences.

How we can help

If your company’s financial problems are causing the business to fail, but you feel as though your business model has workable potential, then it is important to act fast to turn your company’s situation around. We are licensed insolvency practitioners with the power and experience to aid you in finding a solution for your company’s financial hardships. We offer a free consultation to establish the best method for your personal situation, and will guide you through every step of the process.

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