My company debt cannot be paid – options to solve the problem

My company debt cannot be paid – options to solve the problem

If your company has debt which it cannot afford to pay, you could risk the business being wound up and the directors being held liable. Rescue solutions are available but their early implementation is vital.

When a business is in financial difficulty, creditors will start to take action to recover their money. Very often this will first take the form of county court proceedings. The creditor will apply for a county court judgement (CCJ) against the business ordering the debt to be paid.

The issuing of a CCJ has implications for a company as it will damage the businesses credit rating. However, it will not force the debt to be paid. There is far greater risk to a business if the creditor threatens winding up.

If a winding up petition is issued against a business this will result in its bank account being frozen and trading being suspended. Directors may also be held personally responsible for the debts.

Because of the risk of receiving a winding up order, it is very important to take action as soon as you identify that your company is in financial difficulty.

There are a number of business rescue solutions which you can consider:

Company Voluntary Arrangement (CVA)

A CVA is an agreement with the company’s creditors to settle debts over a five year period. Creditors agree to write off a significant amount of the debt owed because they know the return they will get is far better than if the company was closed.

There is no requirement for upfront investment and the company remains in control of its assets. No part of the business is actually closed and so the director’s activities are not investigated.

Pre Pack Administration

A pre pack allows the assets of the business to be sold to a new company which then starts to trade in place of the old without any burden of debt. The old business is then normally closed and the proceeds of the sale of the assets shared between the creditors.

Upfront investment is required in the sense that the assets of the old business will have to be purchased. However, finance options are available to enable these funds to be raised.

Liquidation

This is the voluntary closure of the business. Liquidation can be used as a business rescue solution in the sense that it allows a failing company to be closed and available resources to be focussed on starting a new company.

The key to successfully rescuing a company with severe financial difficulty is always to take action early. The longer business debt is allowed to increase, the more likely that creditors will start taking serious action such as applying for winding up.

Once this process has started, it is not impossible to implement a rescue solution but it will be more difficult and almost certainly more costly. The sooner the directors make the decision to get help and advice, the greater their rescue options are likely to be.