Trading out of insolvency is commonly used to describe the process by which a company facing a serious cash flow problem.
Informal arrangement with creditors will establish a strategy to survive its current problems.
Insolvency practitioners are usually brought onboard if a more formal arrangement is needed with creditors. The approach that is taken must be a sense that the business remains viable, and the financial problems can be overcome. 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.
This a a very common approach. You hit a problem that is not life threatening but you have serious cashflow difficulties, possibly Tax and VAT arrears and creditors shouting loudly.
Following this guide and applying common sense may help you get out of that position. Beware, note down all actions taken, as well as decisions made by directors and keep replies and correspondence with creditors.
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 limited company should cease trading immediately or risk penalties including fines, directorial disqualification and even personal liability for corporate debts as per the Insolvency Act 1986
Informal negotiations with creditors
If you have had a long and successful business relationship with your suppliers they will understand that your problems are most likely temporary, and that all businesses experience financial issues at some point. For many businesses this is seasonal and recurring, but the important point is to prevent the company from slipping into insolvency when all that is potentially required is a quick injection of cash or a slight change to the way your business operates.
Before commencing negotiations with your creditors, you need to plan the company’s daily cash flow needs for the forthcoming weeks and months, and arrive at a repayment figure that will not only be reasonable for the creditor, but also manageable for the business. In other words, err firmly on the side of caution.
A key element of this policy is honesty.
Be honest with yourself, the employees, your creditors and your customers. Without this there is real risk that you will only make the current problems worse.
It is important that you carefully and honestly consider the problems facing the business. Ask yourself the following questions and gauge the answers:
- Is this business viable? If you could remove the problems or the pressure does it have a real long term future?
- Is money all it needs to sort the problems? Can you safely introduce new money, perhaps from your own sources?
- Can you achieve sufficient sales, activity or momentum to cover your costs? We call this critical mass.
- Have you cut all costs to the minimum efficient level?
- If your activity does rise can you:a) Fund it – working capital problems are just as acute for too many sales as too few!b) Produce it – if your creditors will not supply will you be able to deliver sales?c) Justify any further credit you may have to take – is there a reasonable prospect of repaying that credit? If not you may be risking wrongful trading.
- Can you maintain the key people you need?
- Are you able to produce your service or product at a price that the market can sustain?
- Would it be better to close the business and look at other opportunities?
- Have you got the fight in you to keep battling on without support?
- Have you taken advice from professionals? If not talk to our turnaround experts for guidance.
- Have you involved the key partners in your business?
Are you fearful of taking decisions to close, restructure or sell the business and are seeking to trade out to defer that decision-making process?
Read more: Ways to save a company from insolvency
Advantages of Trading Out of Insolvency
Trading out offers a range of advantages, particularly when compared to insolvency procedures such as a CVA or administration. These include:
- Preservation of your business. By trading out of debt, you’ll be able to repay creditors from your business’s cash flow without needing to enter the business into administration or liquidation.
- Your options are left relatively open. By trading out, you may be able to use a range of options to facilitate a business recovery. For example, if your business has valuable assets, you may be able to use refinancing to raise capital and pay creditors.
- Simplicity. Compared to other insolvency procedures, trading out is a straightforward process for most businesses, particularly businesses with short-term cash flow issues that can be solved over time.
- Relatively low costs. In most cases, trading out has fewer fees than other insolvency procedures, reducing costs for your business and allowing you to free up more capital for your business’s recovery.
- Ability to renegotiate credit terms. In many trading out plans, you’ll negotiate new terms for your company’s debt, giving you more time to repay creditors.
- Fixes Cash Flow Problems. As all the businesses debts are paid by one monthly reduced amount, this allows better planning for future cash flow and projections.
Disadvantages of Trading Out of Insolvency
Like other methods for recovering after a cash flow setback, trading out can also have certain disadvantages. These include:
- Creditors may not accept your recovery plan. Your creditors will need to agree to your recovery plan. If creditors disagree, or don’t think the plan is realistic, they may instead take legal action against your business, such as threats of liquidation.
- Lack of protection against legal action. Unlike with a CVA, you won’t be protected from legal action from creditors while proposing a trading out plan. This means that creditors may still be able to take legal action against your business.
Work with an insolvency practitioner
Insolvency practitioners don’t just help with the administration and liquidation of businesses, but also help businesses rescue themselves from entering insolvency in the first place. If your business is approaching financial distress, always seek advice from a licensed insolvency practitioner such as Business Insolvency Helpline This will help you to get a clear vision of what is likely to happen if you decide to trade out of insolvency, as well as whether this is even possible.
An insolvency practitioner will talk you through the whole process, including the risks and obligations while ensuring that you stay on the right side of the law. They may also advise that you carry out a CVA or revert to alternative financing in order to pay your business’s debts, and they could also advise you to negotiate a Time to Pay agreement if the creditor is HMRC. If the financial situation is more serious, they may recommend that you go into administration or, in some cases, voluntary liquidation.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.