Can we Trade Out of Insolvency?
Whether it’s possible to trade out of insolvency depends on many factors. Strictly speaking, an insolvent company should cease trading and failure to do so can result in risk of personal liability for directors. The point when a business is definitely insolvent is clear in some cases and not in others.
There are practical considerations which apply to the possibility or otherwise of trading your way out of insolvency. Can you realistically reduce overheads and/or raise finance? Will creditors negotiate with you? Are you prepared for the very stressful and difficult challenge ahead? Is it important to you to try and maintain valuable relationships in the future with suppliers and customers?
Even if you are determined to try to continue trading with significant debts you may find (in the absence of a clear agreement with all creditors) that one or more creditors might take action which results in them ultimately winding up your business, taking the decision out of your hands.
To minimise legal risks, if you are not sure whether your business is financially viable, the best option is to seek professional advice, which will help to protect you, as director, if you think there is a possibility to continue trading. Please do give us a call or email, we can help.
Often any realistic plan to trade your way out of insolvency will need either an informal arrangement with creditors (which you will need to stick to), or a more formal plan in conjunction with licensed insolvency practitioners.
Can a Company Still Trade When in Liquidation?
No, once a liquidator has been appointed, the liquidator will have full control legally of your business and will only be looking to close the company (not save it) in the best interests of creditors and then dissolve it.
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 at 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
Can a Company Still Trade in Administration?
Yes, although you will lose your control over the business as director/shareholder. 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, the Insolvency Practitioner then runs the company. 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 operating 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 whilst insolvent is wrongful trading.
Wrongful trading is a civil rather than a criminal offence. The risk for directors is that where wrongful trading is established the director can be required to personally contribute towards payment of the company’s debts..