Know your insolvency options

A combination of rising energy bills, labour shortages, material deficits and supply-chain delays continues to threaten the viability of small businesses (see panel).

Many SMEs are seeing cashflow deplete, company reserves stagnate and creditors assemble to collect overdue payments. While the cost of running a business rises exponentially, the crisis affects both cash-rich and cash-poor companies, which are urgently reviewing company outgoings.

While economic pressures pose an existential threat to businesses, they can be wrestled by pursuing a company rescue or restructuring strategy.

Grabbing a lifeline

If a business has the financial potential and appetite to continue trading – and a good shot at survival – entering a formal insolvency procedure can help revive it.

The prescribed insolvency procedure will differ according to the extent of financial distress endured by the business and ultimately whether it is solvent or insolvent. If the company is debt-laden and in the firing line of creditors, the insolvency procedure must aim to subdue creditor pressure while the business undergoes recovery.

Business recovery can take many forms. These include the following:

• Company voluntary arrangement (CVA). This restructuring process enables the business to spread payments to creditors over time. It is the appropriate route to take if the business is overwhelmed with debts and under extreme creditor pressure. There are also fast-track CVAs for businesses up against the clock.
• Time-to-pay arrangement. This HMRC payment plan spreads tax payments, including VAT, PAYE and corporation tax. Factors such as affordability and the total due will shape the terms of the arrangement.
• Company administration. Here, an administrator is appointed to rescue the business, which entails preserving areas that are viable. One type is the pre-pack administration, whereby a buyer is already in line before the business enters administration.
• Business finance. This is short- or long-term commercial finance that provides a cash boost. Business finance can be tailored, such as to aid a purchase, replenish cashflow, release invoice payments, bridge the gap while changing finance providers or finance a property.

Act pre-emptively

Taking pre-emptive action by restructuring the company can prevent the financial health of a business from deteriorating further and running up more debts. This involves reorganising company debts so that they are manageable, simplifying company operations to increase efficiency and treating the root of financial problems that threaten the viability of a business.

It may take the form of corporate simplification, debt restructuring and refinancing to selling assets, negotiating payment plans and diffusing creditor tension. Each device is deployed to refine company operations and eliminate inefficiencies.

This can help build a fortress around the business to protect it against rising energy, material and labour costs. If these pain-points are ignored, they can worsen already severe cashflow problems, which will have a knock-on effect on the overall financial health of the business and its ability to make a recovery.

If, however, the business is beyond the point of rescue, the next step is to bring the business to a close, and to do so efficiently. An insolvency practitioner will set out to oversee company debts, maximise returns for creditors and formally close the business.