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Negotiating with creditors: Tips for a successful debt restructuring

When cashflow is tight, you will inevitably find yourself having to delay paying some of your creditors, and prioritising those who you can’t ignore if you want to continue to trade.

However, this balancing act can be very dangerous. Any creditor owed more than £750 in undisputed debt can petition for the liquidation of your company. 

If you are forced into liquidation by one of your creditors, then the fact that you may have preferred some creditors to others by paying them in priority to others when you were technically insolvent, might come back to bite you. Equally, if you continue to trade, knowing that you have no realistic prospect of paying all of your creditors, then if you don’t put the company into some form of insolvency process yourself, you may be accused of wrongful trading, which carries personal liability for you as a director.

Apart from the above, constant firefighting can be very stressful personally and for your business and can take a toll on the ability of your business to grow and be successful. It is therefore essential that you take control of your debts sooner rather than later, so that you can concentrate on running your business.

In this article, Eleanor Stephens, Insolvency Solicitor at Harper James shares some practical tips for businesses that are looking to successfully negotiate with creditors.

Communication is key

One thing that is bound to create mistrust and antagonise your creditors is if you ignore them. They will have no idea if you are likely to be able to pay them, and if so, when or in what sums. This creates a knock on effect for their own cashflow, and makes them less likely to agree to provide you with some time and forbearance when you do get in touch.

If you think you are not going to be able to pay a creditor, then speak to them as soon as possible. Explain your situation. Most creditors will have been in the same position at some point, and would prefer to know that you are not avoiding them altogether.

Can you reach agreement with your creditors?

If you approach it correctly, your creditors are often more amenable to an agreement than you might think.

Why? Business owners who know the market well will be aware that if they are too heavy handed, they might eventually end up with no return at all, or significantly less than they are actually owed. While the threat of petitioning for your liquidation might sound like a good option for them, in reality a company that is able to continue to trade is much more likely to be able to pay their creditors in full eventually, than one where a breakup sale is all that is available to be divided between many creditors.

There are a few ways that you can reach agreement with your creditors, either through an informal agreement, or by using one of the more formal processes such as Creditors Voluntary Liquidation or a Scheme of Arrangement.

Informal agreement

If you are confident that your cashflow problems are more of a glitch than a fatal problem with your business, you should reach out to your creditors to see if they are open to an agreement over the debt you owe them. This might involve a negotiation on how much you can pay them in total, or how long you need to pay them, or a mix of both.

Before you approach a creditor, make sure you have made a realistic assessment of how much you can afford to pay, and when you think you can pay. Consider all of your financial obligations, not just the one shouting the loudest.

In addition, if you negotiate a settlement with a creditor and then fail to honour that agreement, you will lose credibility and it will be very hard to move forward in reaching a fresh agreement.

If you want to offer to pay less than the full amount you owe, you should preferably offer to pay the reduced sum quickly. An offer to pay less should be at least 50% of the original debt, or more, to be persuasive to a creditor to settle.

If you are able to offer a lump sum up front, and payment of the rest in instalments, this may also be more attractive.  Your creditor may be more willing to reach an agreement with you if they see some immediate return.

Note that if you have multiple creditors, you should try to reach agreements with all. Otherwise just one aggrieved creditor who feels ignored or that you are not taking the debt seriously might want to take more formal proceedings against you.

Formal arrangements with your creditors

There are other more formal arrangements that you can come to with your creditors which, once put in place, can prevent the risk of one of your creditors pushing the company into liquidation.

Creditors Voluntary Arrangement (CVA)

A CVA is a contractual agreement reached with your unsecured creditors. It is put in place via an insolvency practitioner, who will supervise the CVA if it is voted upon by creditors (the Supervisor).

The arrangement will cover the amount to be repaid by the company and the timescale of those repayments. Often, the company will pay a fixed monthly amount to the insolvency practitioner who will then pay the unsecured creditors according to the terms of the CVA.

The benefit of formalising the arrangement in this way is that all unsecured creditors that were in existence prior to the CVA will be bound by it if it is voted in by a majority in value, and this means they can’t take any proceedings against the company for the debts owed to them up to the date of the CVA from that date onwards.

In order to make it attractive so that at least 75% in value vote, the offer must provide a better return to creditors than if the company were to go into liquidation or administration. You will need to discuss this with the Supervisor. Sometimes a cash injection from an external source can help, or from the sale of a company asset.

It has its limitations in that it doesn’t bind unsecured creditors, so you would need to make separate arrangements with them. It only covers debts up to the date of the vote, so if you continue to incur debts after the CVA is put in place, you must make sure you meet these too.

You will also need to make sure that you keep up with the agreed payments. If you default and the CVA fails, then you are back to square one and creditors can usually enforce against their original debts.

However, the benefit is that if you can reach a suitable and realistic arrangement, this will bind all of your unsecured creditors, and give you the breathing space to recover your company and move it back to profit.

For more information see: Corporate insolvency: Company Voluntary Arrangements (CVAs) explained.

Scheme of arrangement

This is somewhat similar to a CVA, but it does not require the company to be insolvent in order to use this, and so is sometimes used by companies as a method of restructuring debt with creditors and investors.

This is a court-approved agreement between a company and its shareholders or creditors. To effected, the scheme must be approved by the relevant creditors and/or members, and be sanctioned by the court. To obtain court sanction, the terms of the scheme of arrangement must be reasonable, fair and legitimately aim for an agreement to be reached between the company and its creditors and/or members.

One of the benefits of this over a CVA is that one approved, it also binds the company’s secured creditors. It also has the same breathing space benefits as a CVA.

For more information see: Corporate insolvency: schemes of arrangement.

How can we help?

At Harper James we have an experienced team that can assist you in reaching agreement with your creditors.  This may be by negotiating a reasonable agreement on your behalf, or it may be by working with you to move into a CVA or a Scheme of Arrangement with your creditors.

The key to resolving issues with your creditors, whether formally or informally is not to leave it too late, and to be open and realistic with your creditors. Speak to one of our insolvency solicitors today about your options.

About our expert

Eleanor Stephens

Eleanor Stephens

Senior Recovery & Insolvency Solicitor
Eleanor Stephens is a senior insolvency solicitor with over 20 years' specialist knowledge in all aspects of insolvency, both corporate and personal, covering contentious and non-contentious matters.

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