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Ways of Handling Excessive Business Debts

In many cases a company with business debt can also experience cash flow problems and find that they cannot meet their bills and so face financial difficulties. Debt in itself is not always worrying for a business, and many exist with permanent overdrafts and loans, but as long as their cash flow is healthy, and enables them to meet their bills when they are due for payment, then there is no serious problem.

Most companies remain solvent even when they have debts, because their assets are worth more that their total business debt. However, if realizable assets are insufficient to meet the total debt, then the company is considered insolvent and is subject to liquidation or a winding up petition should a creditor that is owed more than £750 decide to take that course of action.

The directors of limited company have legal obligations to maintain their company finances in good order, and should a company suffer cash flow problems, then the directors must take action to resolve the problem. If the directors forecast that the company could eventually face liquidation they are duty bound to take action to prevent this. This is when companies need professional advice.

Keep in mind that if directors knowingly take a company into an insolvency situation without taking appropriate steps to prevent this, or are even found to continue trading knowing the company to be insolvent, then these directors face being struck off for up to 15 years or even being held personally financially responsible for the company's situation.

Initially, a company facing insolvency due to a lack of cash flow should step up their own business debt recovery procedures to get payment from their own debtors, and might also consider refinancing with their bank or a fresh share issue if their assets are sufficient to do so. There are other steps that the directors of a failing business can take to stop the rot and bring the business back onto an even keel.

Here are some of the possible ways for a company to deal with potential insolvency:

A Company Voluntary Arrangement (CVA)

With a CVA you come to an arrangement with your creditors to pay a lower sum than actually owed.  This is generally paid in monthly installments set at an affordable level for the company, and once the set repayment period is up, the debt is considered paid and any other sum owed written off.

It might seem that this is not a good deal for the creditors, but it can be to their benefit because they are paid around 55% of the total debt, whereas liquidation could result in them getting northing.  For that reason, a CVA is a common means of paying debts and enabling a company to remain in business.

A CVA is a good option if your business is viable, but you have cash flow problems on more than a very short-term basis. If it looks like your company could go into administration or receivership, then creditors will accept a CVA rather than take their chances on the value of your assets.  

Its benefits are that you stay in business, you avoid winding up procedures and the directors can retain control over the company.

Administration Order

An administration order is a means of dealing with company debt whereby the company is given time to restructure and become viable again. An Insolvency Practitioner is appointed as administrator and has full control over the company until a restructuring package can be implemented and the business made viable. The order can be applied for by the directors, shareholders or creditors, and can only be applied by court order.

The result of administration could be that the company and its debts are restructured through a voluntary arrangement (CVA) or a compromise between the company and its creditors.

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Pre-pack Administration

If the company debt is giving the company financial problems but it is otherwise viable, and could continue in business without the large debt repayments hanging over it, then a pre-pack administration might be appropriate.

Pre-pack gets its name because the company is pre-packaged and sold by the administrator before a creditors' meeting is held, and is generally regarded by creditors as a fait accompli. In many ways it is not always a good arrangement for creditors who receive their pro rata share of the sale price, but many accept that it may be more money than they would have received from liquidation.

The sale of the company is frequently made to the board of directors, who then resurrect the company in a new name from the ashes of the old one - hence it's alternative name of 'Phoenix'.  The rationale behind it is that by selling the assets quickly, the best price can be obtained. This gives creditors the best possible payment from an unsatisfactory situation, and also enables the new company to maintain continuity of supply.  Employees can be retained, saving redundancy payments, and also saving the government money in other benefit payments.

Winding Up and Liquidation

Apart from business refinancing which banks are often reluctant to do in case they join the list of creditors farther down the line, the ultimate destiny for a failing company is liquidation, when it ceases to exist, all assets are sold and employees made redundant. Directors and shareholders lose out, and it is an unsatisfactory situation all round.

However, some creditors may force liquidation by issuing a winding up petition.  There are rules regarding a winding up petition, but basically the petition can be made to a court to wind up the company by any creditor owed more than £750. It generally means that creditors receive little, if any, of the money they are owed, but some go for it nevertheless.

These are the various ways in which excessive company debt can be handled, and you will need help with each of them - both in respect of advice as to which is best for your company's situation and in how to put it into effect. 



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How to stop a Winding Up Petition
When to use one
How is a Company wound up?
What happens to the directors?
What happens to the Employees?
What is a Pre-Pack Asministration?
Corporate Insolvency




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