Can a business continue to trade as part of the Insolvency process?

The basic definition of insolvency can be simplified to “inability to pay debts to creditors as and when these fall due, and/or liabilities exceeding assets”. This essentially means that the business is unable to pay the money it owes to lenders and creditors, or its expenses massively outweigh its income.

Insolvency has strong visual connotations of painted windows with “Closing Down” plastered across them. However, entering an insolvency process doesn’t mean that your business has to cease trading. There are options your business has that can mean you can stay in business subject to an insolvency.

Insolvency Options (UK)

1.Informal Agreements

Some businesses have the option to negotiate an informal deal with their creditors (the party or parties money is owed to). During short-term financial difficulties, the affected company and the creditor can reach an optional arrangement where debts or payments are paused or delayed. However, this is not usually legally binding and can be withdrawn by the creditor at any time.

2.CVA

An approved Company Voluntary Arrangement under the supervision of a licensed insolvency practitioner is a legally binding agreement involving the insolvent company and the parties with whom it is in debt.

The terms of the CVA will usually allow the insolvent company to make a reduced payment which helps the company remain afloat. The benefit of this to the creditor is that they will still receive an income from the insolvent company, as opposed to potentially losing the full balance outstanding if the insolvent company ceases to trade and goes into liquidation.

3.Administration

Alternatively, a company can contact an insolvency practitioner regarding the possibility of the directors or shareholders placing the company into administration. In this instance, the insolvency practitioner would act as the administrator of a company and while the company continues to trade, will draft proposals for the survival of the company and/or better returns to creditors.

Whilst the company is in administration, a creditor won’t be able to take enforcement against the insolvent company without leave of the court. This means that some debts may not have to be paid in full.

The proposals compiled by the administrator may involve subsequent entry into a CVA, the sale of the business assets, estate, or property to cover debts to preferred and unsecured creditors.

If you wish to consider the protection of insolvency proceedings while continuing to trade, Chamberlain & Co can offer support for struggling businesses across Yorkshire and London. To find out more, contact us for impartial financial advice on 0113 868 1203.

You can also find the details for our offices in Sheffield, York and London on our Contact Us page.