When The Curtains' Fall - SME Insolvency Options
The collapse of Monarch Airlines has dominated much of the business headlines over the past week or so. When the axe finally fell in the early hours of Sunday morning, the result was the loss of around 1,800 jobs and the “biggest repatriation operation in peacetime history” by the Civil Aviation Authority (CAA) to bring home the estimated 110,000 passengers with no way of getting home.
For owners of SMEs, the prospect of their business becoming insolvent is stressful and often heart-breaking, especially for small owner operators who have dedicated countless hours and sacrificed huge chunks of their personal life to launch and grow their venture.
Fortunately, shutting up shop is far from the only option available to SMEs who run into financial difficulty. In this article, we will explain the different avenues a small to medium size business can take if they cannot pay their creditors or have more liabilities than assets on its balance sheet.
The meaning of Insolvency
Insolvency describes the legal state of a company in significant financial trouble. The legal procedures for dealing with an insolvent company are contained in the Insolvency Act 1986.If your SME is insolvent, you must decide whether you wish to continue to trade or shut down the business.If you wish to try and trade your way back to solvency, there are three options available:
- try and come to an informal agreement with your creditors
- enter into a Company Voluntary Arrangement (CVA)
- put the company into administration
If you decide to shut down, you need to go through the process of liquidation. In this situation, trading ceases, and the company’s assets are sold off to pay creditors.
Creditors can obtain a court judgment or issue an official request for payment (formally known as a statutory demand). If this occurs, do not ignore it. This is your opportunity to take control of the situation and protect your business from compulsory liquidation.
At this point, it is imperative that you seek professional advice from a solicitor and an accountant.
Informal arrangements with creditors
When under huge financial pressure, many business people forget that their creditors just want to be paid. If your business goes into formal administration, many creditors may receive little or nothing from the breaking up of the company and any subsequent asset sales.
Given these facts, the first action you should consider if you are struggling to pay your suppliers is to negotiate payment terms that buy you time and ensure they get full satisfaction of the debt owed.
The disadvantage of an informal arrangement is that it is not legally binding; therefore, the creditor is within their full rights to demand immediate payment at any time. However, if you have a good working relationship and they understand your financial problems are only temporary, they are likely to honour the agreement – after all, if they want to retain you as a customer, it is their interests that your cash flow returns to health.
Company Voluntary Arrangement
A Company Voluntary Arrangement (CVA) is a legal arrangement made between a company and its creditors for payment of the debts owing, in part or in full, over a period of time. During the term of the CVA, any legal proceedings against the company relating to the insolvency are stayed.
The company can continue to trade while the CVA is in operation. A CVA arrangement also provides a company in distress time to address the management and/or operational issues that caused it to fall into financial difficulty.
Administration
If your company goes into administration, an administrator is appointed to run the company. The administrator’s duty is to the company’s creditors, not its customers. Therefore, every action they take is designed to ensure creditors receive the maximum satisfaction of their debt.
An administrator can be appointed by a court order, the directors of a company (voluntary administration) or the holder of a floating charge.
You will be protected from legal action while the company is in administration. This means another creditor cannot apply to ‘wind up’ your company.
The administrator has a number of options available to them. They can either:
- organise a CVA
- sell the business as a going concern
- sell up the assets of the business using the money made from the sale to pay creditors and close the company
- wind up the business if there are no assets to sell
The biggest disadvantage of a CVA is secured creditors, such as a bank or HMRC, are not bound by it. Therefore, they retain the power to call in administrators, even if the CVA is being followed to the letter.
Liquidation or Winding Up
You can choose to place your company into voluntary liquidation, or it can be wound up.
Liquidation and winding up are two separate processes. If a company is liquidated, its assets are sold to pay creditors. Winding up involves the organisation ceasing to trade.
If a company’s assets are liquidated, the creditors will be paid first, even if there is nothing left over to pay the members (shareholders) of the organisation. A licensed insolvency practitioner handles liquidation proceedings.
Once it has been determined that a company is to be wound up, there are several relationships and obligations which must be terminated.
Whether a company is solvent or insolvent, obligations to customers, suppliers and employees must be ended (wound up). All the company’s affairs are put in order prior to liquidation.
Final words
If your organisation is in financial difficulty, the first crucial step is to contact an experienced insolvency practitioner who will advise you on the best steps to take moving forward.
Understanding your options can help avoid much of the stress surrounding the insolvency process.
Guillaumes LLP Solicitors is a full-service law firm based in Weybridge, Surrey. We have a highly experienced insolvency law team who can assist you with insolvency advice. To make an appointment, please call us on 01932 840 111.