Some survival options
When a company faces cashflow problems often it is because the company was under-capitalised
or that working capital has been poorly managed, eg using funds that should be for
the running of the business, to finance capital items.
To find various options to resolve such problems see our helpful info on factoring,
asset finance and the Small Firms Loan Guarantee Scheme.
Sometimes the problems encountered by companies are more deep-rooted, for example,
the result of
- an insufficiently robust management structure, or
- the lack of proper financial controls and information,
either of which prevents the owners of the company from making informed management
decisions.
There may also be external factors that lead to financial problems, eg
- the failure of a large customer to pay amounts owed by the due dates, or
- the insolvency of a customer leading to a substantial bad debt.
In both these circumstances raising finance can often only provide temporary respite.
The Enterprise Act 2002 recognises that companies can fail due to external factors
and the legislation has been formulated to allow companies to be given another opportunity
to continue trading.
To be more specific the regulations concerning Administration Orders have been specifically
drafted with the primary intention of ensuring that a company survives as a going
concern. (See Administration Orders for the detailed procedure.)
An Administration Order has the following features:
- The application process has been simplified and in most cases does not require a
Court hearing.
- While it remains in force, the process provides protection for the company against
continuing and future legal actions.
- There is a hiatus period in which the directors of the company can formulate plans
to allow the company to survive the process of administration and/or to re-structure
and reorganise its operations.
- No payments need to be made to creditors existing at the date of the application.
Payments are only made for future services and supplies as incurred during the administration
period, usually on normal trading terms (subject to negotiation).
- The company can exit the administration following the formulation of a Creditors’
Voluntary Arrangement (CVA) made to its creditors. This is a contractual arrangement
to pay all creditors a proportion of their debt on a pari passu (at an equal rate)
basis.
However if the company’s position is more serious and there appears to be no obvious
solution to its financial problems, the directors could consider voluntary liquidation.
See our article on Creditors’ Voluntary Liquidation (CVL).
Briefly, under a CVL the directors retain some level of control as to whether or
not to adopt the process, though the liquidation is effectively controlled by the
Liquidator in accordance with the creditors’ wishes and relevant statute.
The directors should adopt this procedure once it is clear that the company is insolvent,
ie it cannot pay its debts as and when they fall due. Continuing to trade with the
knowledge of insolvency without any real prospect of recovery will have serious
repercussions for the directors (see Wrongful Trading).
It is possible for a company that is placed into liquidation to sell its assets,
including its name, to its former directors, provided that all or substantially
all of the assets are purchased from the liquidator at market value and that the
creditors of the old company are informed of the position.
Finance for such successor companies can be provided by way of factoring or asset
finance arrangements or the Small Firms Loan Guarantee Scheme.
Help with decision making
We can advise on the most appropriate way to help your company survive and guide
you through the whole process.
Click here for a free consultation with an expert
from Unique Business Finance. We provide exactly that – a business finance solution
that’s just for you. There’s no obligation to involve us further, if you’d rather
not.