Can we Trade Out of Insolvency?
The phrase ‘trading out’ is commonly used to describe the process by which a company facing a serious cash flow problem establishes a strategy to survive current problems. Trading out can be either an informal arrangement with creditors, or a more formal plan in conjunction with licensed insolvency practitioners.
The foundation of either approach must be a sense that the business remains viable, and the financial problems can be surmounted. Trading out of insolvency can allow for some room to manoeuvre but it must also be accompanied by fundamental change if the problems aren’t to be repeated.
Can a Company Still Trade When in Liquidation?
The first thing to realise about trading out is that, if the company has actually crossed the threshold of insolvency, it is not an option. Once a company has entered the state of insolvency, directors have a legal right to put the interests of creditors first. With that in mind, insolvent companies should cease trading immediately or risk penalties including fines, directorial disqualification and even personal liability for corporate debts as per the Insolvency Act 1986.
There may be rare occasions where the insolvency practitioner in charge of the case deems it necessary for the business to keep on trading despite being in liquidation, but they are very much the exception rather than the rule.
Two Methods of Trading Out of Insolvency
(1) Informal Negotiations with Company Creditors
Where a company has a historical track record of success, and a long standing relationship with creditors, it may be possible to negotiate repayment holidays, or a structured payment plan to enable you to establish some breathing space to get the company back on track.
Discussions should be accompanied by a formal plan that includes:
- Cash Flow Forecasts
- Time-frame for your own collection of unpaid invoices
- Details of the credit terms you are requesting (best to err on the side of caution here)
- Detailed notes about how the situation arose, and what you intend to do to trade out of it.
(2) Request Professional Help from an Insolvency Practitioner
Insolvency practitioners do not just liquidate insolvent businesses, they are also involved in company rescue operations. If you are the director of a limited company edging close to a state where your debts exceed your assets, it would be wise to least consult with an IP to gain a clear understanding of your situation, along with the risks and obligations.
Insolvency practitioners might help with some of the following options:
- Setting up a company voluntary arrangement – a formal repayment plan that must be voted upon by creditors
- Alternative finance, such as Invoice factoring, can help with the cash-flow cycle
- Going into administration could be an option for larger companies
- If the creditor is HMRC it may be possible to negotiate a Time to Pay agreement
- If you situation is more serious than you suppose, the IP may recommend voluntary liquidation
How do I Stop Insolvency?
While this is something we are often asked, there is no easy answer. We recommend making contact with us to discuss your situation, after which we can advise on what opportunities are available to you
Ultimately, what gives you the best chance of avoiding liquidation is to get out in front of the situation, and not put your head in the sand. It’s a relatively common scenario for us to speak with company directors who have repeatedly ignored warning letters from creditors, and ultimately found themselves facing compulsory liquidation.
Especially where HMRC is concerned, clear communication is the best scenario to avoid a process of escalation.
Can a Company Still Trade in Administration?
Going into administration is an insolvency process suitable for larger companies. In this case, if it is ascertained by the insolvency practitioner that the business has a good chance of getting back on its feet again in the future, administration provides a legal moratorium on further creditor action, while the IP restructures the company.
Since businesses have more inherent value when they are still operating, the insolvency practitioner will often decide to keep the business operation during the period of administration. This is known as a ‘trading administration.’
The key concern for the directors of limited companies who continue to trade during insolvency is wrongful trading. Often called Section 214 by members of the Insolvency profession, the full rules surrounding Wrongful trading are covered in that section of the Insolvency Act 1986.
Wrongful trading is a civil rather than a criminal offence and may be deemed an appropriate charge where the insolvency practitioner finds evidence that the director put other interests than the creditors first subsequent to become aware of the state of insolvency.