Nearly all businesses will go through times of difficulty during their trading lifetime. The past few years have proved particularly challenging, with years of covid and rising inflation continuing to have a knock on effect, so it is not surprising that so many companies face financial difficulties.
However, there are strategies that can help improve a struggling business, and even a few tweaks here and there can make a real difference to the success or failure of a business on the edge.
Depending on the overall strategy required, these may need to be combined with a number of formal recovery strategies that are available to you, to give your business space to recover and implement new ways of moving forward.
In this article, senior Insolvency Solicitor Eleanor Stephens explores the different recovery strategies available to distressed businesses.
Formal business recovery strategies
There are several options a business can use to give itself some breathing space to reassess and make positive changes. When creditors are breathing down your neck, and you are constantly firefighting it is very hard to make fully reasoned decisions. However, there are ways to give your business space without this building pressure.
As a direct result of the problems brought about during Covid, the government introduced a measure that companies can implement for a short period, which allows a viable business time to restructure or seek new investment during which time creditors are unable to take action against them. It applies to insolvent companies (those unable to pay their debts), or companies that are likely to become insolvent. This moratorium is obtained by filing the correct papers in court and lasts for an initial period of 20 business days, which can be extended to a maximum of 40 days.
The moratorium is overseen by an insolvency practitioner acting as a ‘monitor’, although the directors remain in charge of running the business on a day-to-day basis subject to certain criteria.
Company Voluntary Arrangement (CVA)
This is a longer term strategy for a company which has significant creditors which it is unlikely to be able to pay in full, but has a viable business that is capable of making profit and recovering given some time and forbearance from creditors.
A company voluntary arrangement (CVA) allows for a contractual arrangement to be made with all unsecured creditors up to the date of the CVA, which, if 75% or more in value agree to the arrangement, binds all known creditors at the date the CVA is agreed. This means that from that point, creditors cannot issues formal insolvency proceedings against you for their debts to that date.
Such an arrangement will often suggest that creditors will be paid a certain pence in the pound of their debt, and may offer additional funds as an incentive to agree, maybe from third parties, or from the sale of assets for example. Creditors are likely to vote yes if this is a more attractive option for repayment that formal insolvency such as liquidation or administration. Note that secured creditors cannot be bound into a CVA.
While a moratorium preventing creditor action is not generally given when negotiating a CVA, certain small companies are able to apply for a moratorium if they are considering a CVA, provided that they comply with specified conditions. If the application is successful, the moratorium will be in place for 28 days.
If a CVA is realistically thought through, then it can provide a clean slate for a business to move forward.
Scheme of Arrangement
This is a similar process to a CVA, but a company does not need to be insolvent to take advantage of it. A scheme of arrangement is a court-approved agreement between a company and its shareholders or creditors. These are regularly used by insolvent companies to restructure debts or to agree a way forward with creditors in an effort to avoid formal insolvency.
One main difference between a CVA and a scheme of arrangement is that it applies to all creditors and members. This means that secured creditors are also bound by the scheme, unlike with CVA which can only bind unsecured creditors. This means that debts owed to secured creditors may be cancelled or reduced without their unanimous consent.
In order to use a scheme of arrangement, the scheme must receive approval from the relevant creditors and/or members and be sanctioned by the court.
Administration is designed to be a rescue process with the ultimate aim of allowing the company to recover and come out of administration to continue to trade solvently again. If this is not possible, then it is often used to sell the viable parts of the business to a new company while the company is still trading, so that those viable parts can continue, while the remaining company can move to liquidation.
Once the company goes into administration, there is an automatic moratorium on creditor claims against the company, which is a major advantage in administrations, giving the company breathing space to recover and make necessary changes.
An administrator must be appointed and they take day to day control of the business and will manage the company during the process. The directors will not be involved unless the administrator allows them to be, and in some cases, the administrator may permit the directors to keep some control. Creditors must claim outstanding money in the administration, and the administrator will deal with all creditors for the company.
Informal business recovery strategies
Take a step back
It is clear to many professionals in this area that sometimes directors are often too close and too involved to be able to make independent sound judgements. This is particularly the case in owner managed and family businesses, which can have an emotional element and conflicting strong opinions from several stakeholders.
For this reason, as a business owner, you should make a real effort to take a step back and to take stock of the company situation as impartially as possible, so you can be honest about what is working and what is not. If this is not possible then bringing in an independent business analyst to assess your business can be invaluable. It may be considered an expense you can’t afford at this point, but it can be the difference between ultimate turnaround and success, or the failure of the business.
What are the issues holding back the business?
Take a neutral assessment of what is going wrong? Here are some areas to consider:
Assess your business and the direction it is going. Consider the current market, what is happening with your competitors? Does your business fit in and is there a legitimate current need for it? Is there too much competition, should you consider methods of diversification of the business to cause a shift in demand in a crowded market? What are your competitors doing right that you may not be yet?
Review your overheads. Where can you pare back unnecessary costs? Can you downsize your premises without too much additional initial outlay? Can you sell unrequired assets? Do you need to maintain as much stock as you may currently have?
Staff – do you have the right number of staff in place to ensure the business runs efficiently? Can you lose unnecessary or inefficient staff? Do you need to recruit an expert in a specific area?
Make sure you have tight credit control methods in place. There is no point doing work you are not being paid for. This is essential. Depending on the size of the company, either recruit a dedicated credit controller and implement tight control measures that are clear to all customers from the outset, or for a smaller company, ensure you dedicate at least one day a week to invoicing and chasing. This is a non-negotiable for a company with a cash flow issue.
How can we help?
If your business is facing financial difficulties, it is vital that you take steps to turn things around fast. Procrastination can kill a business, and the sooner you reflect and take action, the more chance that any issues can be rectified.
At Harper James our Recovery and Insolvency Solicitors have many years’ experience in the options available to you if you want to use a formal recovery route, and our Corporate and our Employment and our Commercial Property teams regularly work with businesses to adjust corporate structures, review staff, and sell or lease commercial premises to work better for your business. We also work with other professionals in the business turnaround sector if you require more specialist knowledge relating to your business. Contact one of our team for a chat today.