Updated: 4th February 2021
If your company is insolvent and you are unsure how to progress, there are a range of options that could save the business from closure. Some involve informal negotiations with creditors and others are formal insolvency solutions that require the input of a licensed Insolvency Practitioner.
Begbies Traynor offers professional advice for companies in distress, and can undertake negotiations on your behalf with HMRC and other creditors.
Informal negotiations with creditors do not always succeed, regardless of any previously cordial business dealings. The inherent stress of a debtor-creditor relationship makes it difficult to retain a balanced approach, which is when the involvement of a professional Insolvency Practitioner reaps dividends.
A Company Voluntary Arrangement (CVA) is a formal insolvency process which acts as a legally-binding payment plan between an indebted company and its creditors. A CVA can only be entered into under the guidance of a licensed insolvency practitioner. An insolvency practitioner lends weight to negotiations and instils confidence in your company’s ability to repay, albeit over a longer period of time or at a reduced amount.
Creditors are sometimes resistant to a CVA because its associated fees have to be included in the repayment proposal, but the outcome may be better than if the company had to be liquidated.
As far as directors are concerned, a Company Voluntary Arrangement is an attractive proposition that reduces monthly expenditure and releases cash that can be used to trade the business out of trouble. A CVA also provides flexibility in dealing with employment issues and trade contracts.
If HMRC is pressing for closure, this option prevents further action, and as long as 75% of creditors (by value of debt) agree to its terms, the CVA can go ahead.
Although company administration involves handing over control to the administrator, it does offer an effective solution to prevent closure, and enables all legal action to be stayed once the order is granted.
Company administration may be preferable to a CVA if the business is asset-rich, and potentially has sufficient large contracts to provide long-term stability. The period of administration is generally 12 months, offering time for assets to be restructured and leases/contracts renegotiated.
Entering administration would prevent HMRC closing down your limited company, and under the right conditions it can be a very effective choice. Control is handed back to directors at the end of the 12-month period.
A pre-pack administration involves selling the business assets to a ‘phoenix’ company, which can be set up by directors of the failing business. Assets are professionally valued at a fair market price, and sold to the new company under an Insolvency Practitioner’s guidance.
Marketing of the business and negotiations for sale take place before the IP is appointed, with the sale occurring soon afterwards. It is this sequence of events that allows the new business to trade with little loss of continuity.
If creditors are about to issue a winding up petition, you will need to act quickly. This option may be ruled out once a petition has been issued as it prohibits the sale or transfer of assets, and you may be powerless to save the company.
The sale of business assets to a connected party is governed by strict regulations that ensure fair value is applied; this goes some way to addressing the perception that pre-pack is unethical and detrimental to creditors.
Creditors may be resistant to the idea of a pre-pack administration, assuming that liquidating your company would provide better returns but this is not always the case.
It is highly likely that failure to pay HMRC in full and on time, will result in legal action to close down your company. HMRC has the power to issue a winding up petition without recourse to the courts.
As HMRC is known to collect debts quickly, it is imperative that you contact them to discuss extra time to pay. Arrears for VAT, corporation tax and/or PAYE may be incorporated into a Time to Pay arrangement (TTP) if your company is deemed eligible.
It is the company directors’ responsibility to negotiate with HMRC, but this task can also be undertaken by your appointed Insolvency Practitioner whose professional status may have a positive influence on proceedings and help to gain confidence.
The company’s payment history will be taken into account by HMRC, who state that TTP is a solution for businesses temporarily unable to meet their liabilities.
Begbies Traynor is the UK’s leading corporate insolvency practice. We can help you with all of the options mentioned above, and advise on the most suitable course of action. Call our experts today to arrange a free same-day consultation at your local Begbies Traynor office.