Company directors who face cash flow problems or bad debts that mean they are not able to sustain their business model can understandably assume that insolvency proceedings are going to be inevitable at some point.
However, this is not always the case and directors should seek professional advice to explore all of the options available to them.
Of course, insolvency is sometimes the best option for certain limited liability companies – as well as partnerships, in some cases – even if this isn’t the most desirable first option.
Note that, unless you actually explore the alternatives, it is not possible to ascertain whether this is the case or not. So, what are the main options available to directors who want to ensure they’ve done everything in their power to make the best choice?
Business Rescue Services
To begin with, there are routes out of temporary insolvency that many businesses benefit from. Just because a company is insolvent, it does not mean that it will need to be liquidated or those compulsory proceedings – such as winding-up orders – are inevitable.
In some cases, payment from a customer – albeit a late one – can help to steady the finances of a firm. There again, cutting costs or renegotiating the terms of a loan can help to make a business solvent once more even if repaying the such debt may take longer.
According to a professional business rescue service provider, Salient Insolvency, one area of indebtedness that some smaller enterprises, in particular, tend to suffer from is their bounce-back loan repayment arrangements. These can be renegotiated along with other types of loans and it is often in the interests of the lender to do so if the business can be saved as a result.
Company Voluntary Arrangements
Often referred to simply as CVAs, company voluntary arrangements are a mechanism for buying businesses more time to sort out their current financial woes. CVAs can be used by limited companies to continue operating while they deal with their creditors, such as their bank or commercial landlord, for example.
Directors can seek them when their basic business proposition is sustainable but when historic debts may be holding them back.
Like PVAs, which are similar to CVAs but for partnerships, these arrangements tend to suit businesses that currently operate profitably – or could do so – if they were not servicing debt at such a high rate.
Using a CVA is a good way to prevent creditors from taking further legal action but only for a limited period.
Company Dissolution
In some cases, company directors would like to wind up a company because they no longer wish to trade with it, perhaps to concentrate on other business ventures or to retire, for example.
Under such circumstances, it often makes more sense to dissolve a company than to let it get into debt and undertake formal insolvency proceedings. If a company is properly dissolved, it will be struck off the Companies House register.
Note that company restitutions are possible following a dissolution, however, so they are not final, strictly speaking.