"I want to understand my options"

Published: 29/10/2024 By Andrew Bailey

This was what a director said to me this week on an initial call. It was a sensible step because he can now get his head around all the potential outcomes before he decides what to do. He has a good business but without taking proactive action now he recognised that he would be running into trouble soon.

October has been a strange month.

I suspect insolvency is like many professions in that you get these odd patterns of work that appear to suggest a trend. You try and work out why it is happening and sometimes you can work it out and sometimes not.
 
For example, quite often we have a surge of enquiries for advice after the holiday periods when people get back to work and make the decision to take advice. We get more enquiries in February/March time once accountants have finished ploughing through self-assessment returns in January. There are plenty of triggers and events that prompt people to take action.

In recent times, the upcoming budget seems to be a factor influencing decision making and the type of enquiry we are getting. This has shown itself in the large increase in solvent liquidations as business owners look to extract funds from their businesses prior to any tax changes. I was speaking to a corporate lawyer yesterday who is rushed off his feet because multiple clients are looking to complete transactions prior to the budget date.

From my perspective I have seen an increase in a certain type of enquiry which lends itself more to being resolved using a process called a Company Voluntary Arrangement ("CVA").

In a nutshell a CVA is where a business owner will put forward proposals to unsecured creditors for an arrangement to deal with the liabilities across the board. Many businesses have entered into “time to pay” arrangements in recent years with HM Revenue & Customs to deal with historic liabilities. It is a similar concept but you implement this via a formal insolvency procedure across all the unsecured creditors. It means that all these creditors are bound by the arrangement. The business continues to trade whilst the CVA sits alongside it. The terms would typically be that as part of the arrangement the business will make monthly contributions into a “pot” which is then distributed to the CVA creditors over an agreed period of time.
 
There are various positive aspects to a CVA including avoiding a terminal event such as a Liquidation, reduced costs compared to other insolvency processes and better outcomes for creditors albeit they may need to accept less than 100p in the £ (unless you are HMRC who will want 100p in the £ due to their secondary preferential status).

We look at a CVA on every case but it may not always be suitable. It could be that the business' prospects going forward are poor or perhaps the director does not have the appetite to continue trading whilst carrying the burden of the CVA over several years. There could be many factors meaning a CVA is not suitable.

Sometimes the director is put off by the practical issues that they perceive may arise with a CVA. For example, will suppliers support their business going forward and will clients stop using the business when more stable companies can pitch for the work.

The increase in enquiries for CVAs seems to have been driven for various factors in different cases as follows:

• Clients putting new orders on hold until after the budget meaning the business is depleting cash reserves with no income being generated. The order book post-budget is positive but it will take the business some time to rebuild itself;
• On various cases I have businesses borrowing from high interest lenders in order to bridge the gap before they expect things to improve. Things have not improved as quickly as they hoped and it has left them struggling to service the loans which are very costly;
• Carried forward pandemic related liabilities which in the post-pandemic world these businesses cannot repay in full or on time;
• There is recognition that if something is not done now to restructure the business then it will not end well. There is a desire to restructure now when there is something to rescue and avoid the worst case scenario of a Liquidation. 

I expect this trend to continue. There are many businesses out there which have good prospects going forward but find themselves currently struggling to service historic liabilities which have built up through the pandemic and then in the subsequent period as they have tried to survive energy price hikes, the cost of living crisis, changes in our behaviour, etc.

CVAs are one good option to consider. I had an enquiry recently where cash had been extinguished and whilst we can still help, it does mean that there is more urgency and creditor pressure can build up quickly. Easier said than done, but thinking and planning ahead is so important.

Some useful questions in these circumstances.

• How long can the cash last if things continue as they are?
• Are new loans or is refinancing the answer or is this kicking the can down the road?
• Once I factor this borrowing into the cashflow how long can the business service these loans if things do not change?
• Is it feasible for the company to repay all its liabilities in full and, if not, what is the exit route from this position?
• How can I address the position to think positively about the business’ future rather than just surviving and fending off creditor pressure.

I think they are all important questions to ask and if advice is needed then go for it.

Understand your options.