Creditor pressure and how to respond to it
A company can experience financial pressure for any number of reasons. Perhaps a major customer has not paid a bill, there has been a downturn in orders or the business has just received a demand from Her Majesty’s Revenue and Customs. One consequence of problems with cash flow or working capital is that the company may not be able to meet its commitments to creditors and may start missing payments, or only paying part of the sum due. Creditors will start, gently at first, to apply pressure to recover the debt as soon as it becomes clear to them that the business is experiencing difficulty. If the company does not act, pressure from the creditor will soon increase as follows:
- Letters will become stronger in tone;
- The company will be contact by telephone on a regular basis;
- A debt recovery company may become involved;
- Where borrowing is secured against assets they may be seized; and
- A winding up petition, writ, summons or judgement will be sent to the company.
As soon as a business is in trouble it should look at ways to release capital to pay its creditors. If necessary the company should take advice from a Licensed Insolvency Practitioner who may suggest that they employ the services of a Business Recovery Specialist to help turn the business around. Options may include:
- Restructuring. This could include dispensing with less profitable areas, downsizing the workforce if it can be done without the need to make high redundancy payments, directors selling some of their shares in the company, or targeting new markets.
- Taking out a loan. There are finance companies which offer loans to businesses experiencing short-term difficulties. A business in trouble is only likely to be able to take out additional credit if its credit rating is still good and it can prove to the lender that normal trading will soon resume.
- Borrowing from an asset finance company by securing a valuable asset against the loan. This would usually be a business asset. For example, a transport company might offer one of its coaches as security. Alternatively, a director could secure the borrowing against a valuable personal asset, such a Rolex watch, expensive work of art, or jewellery. They must of course understand that if they default on the loan, they will lose the asset.
- Use Invoice Financing. Invoice finance includes Invoice Factoring and Invoice Discounting. Factoring and discounting work slightly differently but the result is the same; the finance company advances between 80% and 90% of the value of each invoice raised, and they are repaid when the customer pays their bill.
A Winding Up Petition.
If all attempts made by a creditor to recover debt or reach agreement with the company have failed, a Statutory Demand for Payment has been sent to the company which they have not responded to within 21 days, and the debt is for at least £750, they can submit a Winding Up Petition to the High Court. If the Court agrees the petition it could result in the company being declared insolvent and having to close. A company should do everything it can to prevent a Winding Up Petition being issued. By this stage options for the company will be limited.
A company served with a Winding up Petition has 7 days in which to try and prevent a Winding up being advertised. If it cannot raise funding and pay the petitioning creditor, and provided that the details submitted to the Court by the creditor are accurate and the company does not have a valid defence, it has four options: –
Company Voluntary Arrangement.
A Company Voluntary Arrangement is a formal agreement made with creditors to repay a percentage of the debt owed to them over a period of, usually, three to five years, with any remaining balance written off. At least 75% of unsecured creditors must agree to the CVA. An Insolvency Practitioner will arrange the CVA, and will need to be convinced that the CVA will enable the business to soon become profitable again. Once the CVA is set up, the company will make agreed payments to the Insolvency Practitioner who will distribute funds, after costs, to creditors. If an Insolvency Practitioner believes that a CVA is the best way forward for creditors, the Court may adjourn a winding up hearing to enable the steps needed to set up a CVA to be taken.
Creditors Voluntary liquidations.
This procedure is only possible if the petitioning creditor agrees to withdraw their petition. A licensed insolvency practitioner can assist by explaining the procedure to the petitioning creditor. If they withdraw their petition, the deposit (currently £1350) will be returned to the petitioning creditor.
A company subject to a winding up petition may enter administration. This requires the involvement of a licensed insolvency practitioner and an application to court. This makes this a very costly procedure and only relevant in limited circumstances.
Compulsory liquidation is where a creditor applies to the Court for a winding up order. If an order is granted, the Official Receiver is appointed as liquidator. Creditors may appoint their choice of liquidator. The considerations made during a compulsory liquidation are the same as in a voluntary liquidation, the different being that a third-party has forced matters and the behaviour or directors comes under scrutiny, which if they are found to have acted improperly can lead to disqualification from being a director for up to 15 years. Also, if wrongful trading is proved, directors may be personally liable for repaying company debts.