Is a Formal or Informal Insolvency Solution Better for Your Business?

Is a Formal or Informal Insolvency Solution Better for Your Business?
If you’re battling against corporate insolvency there are informal and formal methods or securing a resolution; but which is best for your business?

Finding the best insolvency solution for your business

There comes a point when the directors of a struggling business must take stock, assess their situation and try to find a viable solution that can help to bring their business back from the brink. The earlier a solution is sought, the lower the risk of a company liquidation.

When you can no longer pay your bills and creditor pressure is becoming too much to handle, there is a range of informal and formal solutions at your disposal. Generally speaking, professional assistance from an experienced team of turnaround practitioners will lead to a more positive outcome for your business than choosing to negotiate with creditors independently; however, there may be certain circumstances when an informal arrangement might be best for your business.

Informal insolvency arrangements

If you find yourself in a position where a nominal debt is owing to a single creditor, it may be worth pursuing the debt informally. However, in more complex situations where payments are owed to multiple debtors, it’s always safer to formalise the agreement.

The problem with informal agreements is the lack of a contract which legally binds creditors to the agreement they have made. This means that at any time the creditor can simply back out of the agreement in favour of pursuing legal action against your company, leaving you completely unprotected.

It is also the case that an arrangement proposed independently is much less likely to be accepted by your creditors. Arrangements written, proposed and supervised by a licensed insolvency practitioner are much more likely to be accepted.

Formal insolvency arrangements

Formal insolvency arrangements are considered safer and more effective than informal resolutions thanks to the protection they provide from legal action. Once the agreement has been made, as long as you keep to the terms of the arrangement, there will be no further creditor contact.

There are also benefits associated with the terms of the arrangements. Insolvency practitioners are well versed when it comes to negotiating financial terms and detailing how their proposal is in the best interests of creditors. This is precisely why formally drafted proposals are more likely to be accepted on the first time of asking, and often with more favourable terms.

Have you considered a Company Voluntary Arrangement (CVA)?

An increasingly popular and effective formal business rescue procedure is a company voluntary arrangement. A company voluntary arrangement (CVA) is a legally binding agreement, proposed by a licensed insolvency practitioner, which allows for the full or part payment of your company’s debts.

Once agreed, the CVA will protect your company from any legal action and the creditor pressure that often comes from being in debt. As long as you continue to meet the terms of the agreement, your business will be left to continue to trade while repaying an affordable monthly amount towards its debts.

A company voluntary arrangement allows your business to:

  • Continue to trade as normal
  • Prevent legal action while preserving a viable business
  • Buy time away from creditors to renegotiate your existing debts
  • Save jobs by continuing to trade
  • Restructure its debts based on current affordability
  • Maximise the creditors’ return
  • Potentially renegotiate costly leases or other contractual agreements

If you’re considering negotiating an informal arrangement with your creditors, give us a call first to discuss whether a company voluntary arrangement could benefit your business. Get in touch on 08000 746 757 for your free, confidential consultation.

Written by: Mike Smith