Keeping your business afloat can be tricky at the best of times, but as debts climb and your cash flow dwindles, then your business could end up insolvent. While this is by no means necessarily the end for your company, bankruptcy could eventually lead to liquidation and the winding-up of your business. Fortunately, insolvency practitioners are on hand to help guide you through the process and find the best solution for you and your creditors.
What is Bankruptcy?
Your company becomes insolvent when it can no longer pay off its debts. If you have due bills that you cannot pay or more liabilities than your assets, then you may need to involve an bankruptcy practitioner to help you avoid company liquidation.
Bankruptcy can happen quickly and for a number of reasons. Maybe the market has a sudden shift you were unprepared for, perhaps you lose a key customer, or the cost of trading rises for reasons out of your control. Before you get to this point, it’s essential to identify whether you are heading for bankruptcy so you can be better prepared for the outcome.
Signs You’re Headed for Bankruptcy
Most signs of bankruptcy are to do with a dwindling cash flow and an inability to pay for your usual business operations. Here are some warning signs to look out for:
- You are struggling to cover operating costs
- You have received demands for payment from creditors
- You are making late payments of bills and staff salaries
- You have a high staff turnover
- You are consistently reaching the limit of your overdraft
- Loss of major contracts
If these problems sound familiar, you could be headed for trouble. The ability to pay off your debts by their due date is the cash flow test for bankruptcy. If you cannot pay within the time provided, you could be deemed insolvent. Additionally, you can check if your liabilities exceed your assets, if so then you could be on the verge of bankruptcy.
If your business is struggling financially or you have already become insolvent, the next step is to contact an bankruptcy practitioner who can advise you on your options.
What Are Your Options When Bankrupt?
An bankruptcy practitioner is a neutral third party who will act as the go-between for you and your creditors, and they can take on a variety of roles depending on the action that is taken. They have eight weeks to write a statement setting out what they intend to do. An bankruptcy practitioner will do one of the following:
- Restore your company’s viability
- Come to an arrangement with your creditors
- Sell the business as a going concern
- Realize assets to pay creditors
Here is a breakdown of the potential processes that your bankruptcy practitioner might recommend for your business based on your circumstances.
Your business could be put into administration, which would protect it from any legal action and prevent creditors from applying for a winding-up petition that would force the closure of your business. It is commonplace that your company would still be able to trade during administration.
An bankruptcy practitioner would manage the process, becoming the new chief executive of the company and taking responsibility away from the directors. They then have their eight weeks to write a statement with their plan, which could include a Company Voluntary Arrangement, liquidation or closing the company if there is nothing to sell.
Company Voluntary Arrangement (CVA)
A CVA is a way for a business to settle its debts by paying only a proportion of the amount owed to creditors. Your business comes to an arrangement with your creditors over the payments of your debts. Your bankruptcy practitioner arranges the amount of debt you can pay and a payment schedule and then writes to the creditors about the arrangement, inviting them to vote on it.
A proposed CVA must be voted on by your creditors and needs a vote in favour of at least 75% to be approved. Once approved, creditors are prevented from taking steps against your company to seek payment of your debts.
Your business can carry on trading as usual, but your bankruptcy practitioner monitors your CVA. This process can help sure up your cash flow, halt pressure from your creditors and the threat of a winding-up petition, allowing you to pay back your debts over an agreed, more manageable period.
An bankruptcy practitioner may act as a liquidator and take control of business assets. These will be realised, and funds distributed to creditors on a pro-rata basis depending on how much is owed, and the business shut down. This option is for companies that cannot carry on and is the correct legal procedure to close down a company and sell off the assets.
While this can be a stressful outcome, an experienced bankruptcy practitioner can take the pressure off the directors by facilitating the process and dealing with the creditors.