When businesses are faced with closure due to unpaid debts, it is easy to assume that they are doomed. Staff will lose their jobs, suppliers will lose business and clients will lose out on lucrative contracts. However, there are strategies and procedures that can be put in place to tackle extreme debt, even when it looks as though there is no realistic solution.
Certain debt management plans can be implemented in order to get a company back into the black without selling or closing a business. Professional financial advisors are experts in this field and will advise a company on which is the best option for them.
However, there will be certain circumstances where debt management plans cannot be enforced. Whether it’s because the debt is too extreme, a winding up petition has been issued or creditors simply will not agree to the terms of a plan, closure may be the only option; although this doesn’t have to mean the end of trading. Business speakers can really help with this process. Certain processes can be undertaken by many businesses that are faced with insolvency which will see them continue trading and making a profit.
One process that can be taken is that of pre pack administration, also referred to as phoenixing. The directors of an insolvent business start a brand new company which subsequently buys the assets of the failing one. The money that would have been used to fuel the struggling business can then be used to set up the new one. All of the remaining debt that is tied up in the old one is then liquidated. This particular way of dealing with debt does not sit well with creditors, who do not have a say in the process and stand to lose out on the sale of the business if it was either delayed or reduced.
Step by Step Process
Step 1 – The new company will need to be registered for the process to begin. More often than not the directors are the same as those from the old, failed business.
Step 2 – A licensed insolvency practitioner (or similar figure) will need to be appointed to act as administrator by the directors who will then have the company’s assets valued.
Step 3 – The assets will then be sold to the new business through a sale and purchase agreement.
Step 4 – During a creditors meeting, the administrator will (usually) advise the sale of the old company and use the proceeds to be distributed amongst lenders.
As with any solution to debt, there are certain restrictions that may apply. If you are looking to guarantee company formation, you have several specific criteria that must be met before being accepted. If directors have a history of unpaid taxes or VAT then this could lead to further problems, especially if company directors of the failing business wish to start a new one. HMRC has strict guidelines on how a director should approach a new business set up and will only allow for VAT registration if a lump sum is paid up front. This amount is often the total of unpaid VAT for the last 4-6 months from the old company.