Business Rescue: A Guide to Recovering a Limited Company

November 9, 2023 / Business Insolvency

 

There are many reasons why a company might encounter financial difficulties. For some, their financial situation is beyond repair, and closing the company is the only viable option for the directors. (A Creditors’ Voluntary Liquidation is popular for such companies.) For other companies, while their financial situation is poor, they do have a viable business underneath their debt problems. For them, there could be a path to recovery…this is referred to as a ‘business rescue’.

If your company is in a position like this, then it is worth looking into how you might be able to rescue your business. There are many different forms of business rescue. It is worth understanding the options, so that you can determine which one is right for you and your company.

In this article, Clarke Bell provides a guide to business rescue, the options available to directors, and how they can get their company back on track.

What is business rescue?

Business rescue is broad term which refers to a variety of methods of restoring a company to profitability. There are many different methods of business rescue, including getting alternative forms of finance and negotiating agreements with creditors.

Each business rescue plan has the same goal – i.e. to get the company back on track.

When to use a business rescue plan

Knowing when to use a business rescue plan relies on a few factors. The financial state of the company is at the top of the list. Every director should be aware of the early warning signs that a company is insolvent or is heading that way.

Spotting the warning signs of insolvency in a company

Insolvency marks the point where the company’s debts outweigh its assets, and it often means the end for the company. Spotting the warning signs of insolvency is paramount. By doing so as early as possible, you are more likely to be able to implement a business rescue plan which can stabilise the company’s finances.

There are several warning signs that indicate potential insolvency, including:

  • Reaching borrowing limits – One common warning sign of impending insolvency is reaching your borrowing limits. Being rejected by creditors implies that your company is too much of a risk, or that your credit needs are unfeasible. In either case, this shows your company may be in trouble.
  • Creditors increase pressure – Receiving demands from your creditors is a sign of potential insolvency. It shows that creditors are losing patience and may not have faith that your company can keep its obligations. Failing to respond to this increase in pressure can result in debt collection attempts, and even compulsory liquidation.
  • Unsustainable operational costs – If your company is struggling to pay its operational costs, such as stock purchases, employee salaries and utility bills, then insolvency could well be on the horizon.

Cash flow insolvency test

In addition to the above signs, there are two tests which can be conducted to assess a company’s financial health. These are the cash flow insolvency test and the balance sheet insolvency test.

The cash flow insolvency test requires a company to update its cash flow model and look out for upcoming problems. This model assesses the upcoming 12 months, giving a general idea of what the company’s future looks like. If this model predicts a failure to pay liabilities on time, then the company is considered cash flow insolvent.

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Balance sheet insolvency test

The balance sheet insolvency test involves taking a holistic view of the company, its assets, and its liabilities. This includes every owned asset, from heavy machinery to cash in the bank, and every conceivable expense. If your company looks to have more liabilities than it does assets, it is considered balance sheet insolvent.

The methods of business rescue

If you spot any of the aforementioned warning signs in your company, or either of the insolvency tests produce an alarming result, then you should seek professional advice. Your accountant and/or an insolvency practitioner will be able to advise you.

There are many options available to you. So, before taking action, you should know what the options are.

Company Voluntary Arrangement

Negotiating a new payment agreement with your creditors is often a good idea. If a company has a viable business model, and a decent relationship with its creditors, negotiations can take place as part of a Company Voluntary Arrangement (CVA). This procedure allows directors and creditors to reach a new set of loan terms, ones that make repayment easier for the company. It also ensure its creditors receive a significant amount of the outstanding value. A CVA will typically last for 5 years.

Time To Pay arrangement

A Time To Pay (TTP) arrangement aims to strike a deal with creditors. However, while a CVA requires creditors to be quite amenable, a TTP arrangement is an option if creditors are getting impatient. With a TTP arrangement, companies agree to repay a debt within a short space of time. This can be a good solution when facing rising pressure from more impatient creditors.

Alternative forms of finance

Some business rescue plans involve taking out additional loans to help stimulate the company. In some cases, traditional forms of finance will not be an option. Instead, companies must turn to alternative options, such as invoice finance. This type of finance leverages certain assets held by the company, such as unpaid invoices, to raise money quickly. If debts and other liabilities loom, emergency measures, such as invoice finance, can help reinvigorate a company’s cash flow. This allows it to cover all-important costs, and keep trading.

Company administration and pre-pack administration

Company administration can be an option for companies facing significant difficulty. Administration has three main goals to pursue depending on the company’s state, and affords certain legal protections. A company in administration will be protected from legal action, affording it the time necessary to recover. While in administration, companies will pursue one of three objectives

  1. making a financial recovery
  2. partial or total sale
  3. liquidation.

Administrations will usually only be entered by companies with a viable path to solvency, though this is not always possible when plans are put into practice.

Recovery is the first port of call for a company in administration. An insolvency practitioner (such as Clarke Bell) will be appointed to assist in this recovery and identify problem areas and possible improvements. This can result in a company wrapping up unprofitable departments in order to free up resources for a more profitable endeavour. If it is deemed that the company cannot be recovered, then sale or liquidation will be prioritised. In these cases, the objective will shift from assisting the company and shareholders to ensuring creditors are not left out of pocket.

Regarding the sale of a company, it is possible to place a company into a pre-pack administration to limit disruption. Pre-pack administrations are a unique form of administration where the sale of a company is agreed upon before an administrator is appointed. This helps streamline the process while keeping disruption to business operations to a minimum. As companies that enter other procedures can face certain problems, such as disruption to activities or reputational damage, a pre-pack administration helps protect all involved parties from suffering losses.

Stay of Execution

A stay of execution can be applied for as part of a business rescue plan. Directors may apply for a stay of execution if their company has been issued with a County Court Judgment (CCJ). In doing so, they may buy time for their company, allowing a thorough business rescue plan to be implemented. In other words, a stay of execution can be used to create breathing space and allow a company to implement measures to recover.

Liquidation vs. business rescue

If business rescue is not a viable option for your company, you might consider one of the types of liquidation as an alternative solution.

Creditors’ Voluntary Liquidation

Creditors’ Voluntary Liquidation (CVL) is a popular solution for insolvent companies without a viable path to recovery. It is a voluntary liquidation, allowing directors to appoint their choice of licensed insolvency practitioner to execute the procedure. It allows directors to take control over the situation, preventing it from worsening and ensuring they fulfil their legal duties to creditors.

For more information about CVLs, read our complete guide to the procedure.

Compulsory liquidation

Another method of liquidation is a compulsory liquidation. This is an option for insolvent companies, though not one worth entering willingly.

It lacks any of the benefits present in a CVL and, in certain aspects, has the polar opposite. For example, a CVL demonstrates a willingness of directors to act in the interests of creditors. As compulsory liquidation is involuntary, it demonstrates a lack of initiative on behalf of directors. This can cause serious problems if creditors decide to take the matter to court.

Where possible, this procedure should be avoided. It isn’t a particularly useful alternative to business rescue, often bringing more problems than it solves, but it can be forced upon directors if action is not taken. Thankfully, compulsory liquidation can be avoided by entering your company into a CVL.

Clarke Bell can help you

A business rescue plan can help turnaround a company that is struggling with financial problems and debts.

Clarke Bell can help you identify the best way to deal with your struggling company.

Contact us today for your free advice.