We are currently in unprecedented times. Small businesses in a broad range of sectors have had to stand by and watch their revenues plummet as the coronavirus has taken its toll. That has left many previously successful businesses facing a struggle just to survive.
Since May, more than 1.3 million businesses have been approved for Bounce Back Loans, with more than £30bn of funding having been handed out. However, according to Simon Renshaw, a director and insolvency practitioner at AABRS, the potential personal liability issues surrounding Bounce Back Loans when a company becomes insolvent mean they may not be the cure-all some company directors have been hoping for. In fact, in some circumstances, exploring the formal insolvency procedures that are available, including the company voluntary arrangement, could improve the outcomes for small businesses.
What Does it Mean if Your Business is Insolvent?
An insolvent is one that cannot afford to pay its debts when they become due. This will be a familiar situation to many small business owners and company directors at the moment. When a business becomes insolvent, the responsibilities of the company directors are no longer to the shareholders of the business. Instead, they must act in the best interests of the company’s creditors as a whole.
You may think that an insolvent business has little choice but to close, but there are formal insolvency procedures that can be used to try and rescue the business. These should only be used where it’s in the best interests of the creditors for the company to continue trading and the business is viable and has a realistic prospect of being profitable once again.
How can an Insolvent Business be Saved?
Two main procedures can be used to try and save an insolvent business, namely administration and a company voluntary arrangement (CVA). They must be set up and administered by a licensed insolvency practitioner and are both worth careful consideration.
We often think of administration as a procedure with negative connotations such as closures and job losses, but in reality, the outcomes can be very positive. The business will appoint an insolvency practitioner to act as the administrator. They will step into the director’s shoes and try to rescue the company wherever possible so that it can continue as a going concern. Where that’s not possible, the administrator will seek to achieve the best possible return for the company’s creditors.
One of the major advantages of the administration process is that it prevents legal action from being taken against your company. For example, if you are unable to pay debts owing to HMRC or a landlord and have explored all of the coronavirus financial support schemes that are available to you, obtaining a company administration order will prevent legal action being taken that could lead to the liquidation of your business.
Once the administrator has been appointed, they will continue trading the company where possible, without the threat of legal action, so that funds can be made available to settle the business’s debts. Once the period of administration comes to an end, control of the company will return to its directors, who, all being well, will be allowed to continue to trade.
- Company Voluntary Arrangement (CVA)
A company voluntary arrangement is a legally binding agreement with your creditors that allows your business to repay its debts over time. While a Bounce Back Loan may provide some breathing room in terms of cash flow, it may not be sufficient to repay all of the company’s creditors. That’s where a CVA may be preferable.
An insolvency practitioner will look at the financial position of the company and help you create realistic and affordable proposals for your creditors to consider. If 75% of your creditors (by the value of debt) agree to the proposals, the CVA will be approved and you will usually repay a proportion of the debts owed, rather than the full amount, over a period of between two and five years.
A CVA is legally binding over all of your creditors. As long as you make the monthly payments and stick to the terms of the arrangement, your creditors will not be able to take legal action against you to recover the debt.
You might wonder why your creditors would agree to proposals where there are paid just a proportion of the money they are owed. However, when compared to the likely alternative, which is your company being liquidated, they’ll typically receive a much greater return via a CVA.
Where Do You Start?
If you think administration or a CVA could be the best way to save your business, you need to contact an insolvency practitioner. You can search for licensed insolvency practitioners on the Gov.uk website or speak to your accountant or solicitor for personal recommendations. Your initial consultation with an insolvency practitioner will usually be free so you can better understand your options before you commit.