What does it mean when a company is a going concern?
When a company is operating as ‘going concern’, it indicates that the company can continue trading without the threat of insolvency and is unlikely to enter liquidation within the next financial year.
Being a going concern is a sign of trust that the company has a future. If substantial action is required to keep the business operating or significant extra funding is needed, it may not be considered a going concern.
This guide will cover some of the intricacies and considerations around a company being a going concern to help you discern whether your company would be considered one.
What happens if a company is not a going concern?
If the company is no longer a going concern, it implies that it isn’t expected to be able to continue operating and meet its financial obligations under normal operating circumstances. It might have to find new investors or undergo an insolvency procedure.
If a company is found not to be a going concern, investors may be put off investing in it, as it will be considered a higher risk. Any new lines of credit could be more expensive or subjected to higher interest rates, which may put suppliers off doing business with the company. Existing investors or shareholders may even request a revaluation.
If the company is insolvent and is unlikely to survive the next financial year, directors can choose to put the company into a voluntary liquidation if it’s clear it has no future or they want to walk away. The company’s creditors can also file a winding-up petition to attempt to reclaim what they’re owed, forcing the company into compulsory liquidation.
Warnings a company might not be a going concern
Your company may not be a going concern if the following warning signs are present:
- Increased debt levels.
- Rejected attempts to secure funding or additional borrowing.
- Defaulting on repayments and other liabilities.
- Creditors resort to legal action like Statutory Demands or County Court Judgments (CCJs) to recover what the company owes them.
- A poor or negative cash flow.
Many of these warning signs can indicate an insolvent company. If you’re unsure about your company’s solvent position, get in touch, and our initial advice team can offer free, confidential advice.
If a company is not a going concern and is insolvent
If the company is unable to repay its debts as and when they fall due, it could be insolvent. Establishing whether the company can be rescued as a going concern can determine whether it can continue trading.
A company being insolvent doesn’t automatically mean it can’t be rescued as a going concern, and the following procedures may be available depending on the company’s circumstances.
- Try and remain a going concern with a CVA
If the company has the potential to continue, were it not for its debts, it might be viable for a Company Voluntary Arrangement (CVA). In a CVA, the company’s debts are consolidated into a single payment to the creditors. The company remains trading for the duration, with the directors retaining control while protected from creditor pressure.
More on Company Voluntary Arrangements (CVA) - Restructure the company through an administration
A company could be rescued as a going concern if it enters administration. During this process, a licensed insolvency practitioner investigates the company’s financial situation and formulates a plan on how to restructure or sell the company and its assets. The process offers the insolvent company protection from its creditors, which the company can find helpful if those creditors are pressuring it to repay what it can’t afford.
One of the three statutory purposes of an administration is to rescue the insolvent company as a going concern, as well as to realise property and assets for distribution to secured or preferential creditors, and to achieve a better result for creditors than through liquidation.
Administration might not be suitable for every insolvent company. Speak with us to assess your company’s eligibility and discuss its options.
More on company administration - Continue the business in a new, separate limited company
Depending on your company’s circumstances, it may be possible to continue the business in a newly formed limited company through a pre-pack administration. That new company purchases the assets of the insolvent existing company, allowing the business to continue. This may only be appropriate in specific circumstances.
More on pre-pack administration - Close the company via voluntary liquidation
If the company’s debts are of such a level that recovery is unfeasible, the directors could be better off closing the company through a Creditors Voluntary Liquidation (CVL). Doing so draws a line under the debts and allows the directors to walk away from the insolvent company. It is often preferable to the company’s creditors issuing a Winding-Up Petition, thereby forcing it into compulsory liquidation.
More on Creditors Voluntary Liquidation (CVL)
Summary
If a company is a going concern, it’s deemed as being able to operate without significant intervention for at least the next financial year. This establishes an indication of trust that the company has a future. If the company is deemed as not being a going concern, it may be insolvent with its future in doubt.
If your company is in such a situation, speak to us for free, impartial, confidential advice with no obligation. We will guide you through your available options and, depending on your circumstances, put you on the path to rescuing your company as a going concern.