Informal Agreements with Your Creditors
Let’s look at the informal approach. Your situation probably feels about as bleak as it can get, but actually your negotiation position is probably stronger than your think. Nearly all the business I’ve worked with that are contemplating these sorts of options either have no significant assets or they have charges and mortgages over any assets they do possess. Almost by definition they are making very little or no profit so the business has limited resale value. This means that if you go under, your creditors are most unlikely to get paid; even a charge over an asset can be worth a lot less than you might think. For example, if you have specialist equipment where a significant cost is its installation, the difference between its purchase and resale cost can be staggering. I often hear: “but I paid £10,000 for that, what do you mean its not even worth collecting”.
This means that your negotiating position is quite strong, if your business sinks, your creditors get very little or nothing and you can use this possibility to negotiate. You can ask for time to pay; you can offer to pay part of the debt now with the rest written off or you can ask for some of the debt to be written off and offer to pay the rest in instalments. If it is a supplier, you can couple this with an agreement that if they retain you as a customer they can increase their prices by 10%.
Negotiating with business creditors is an uncertain business, some will take a business decision, (see the case study), but some, a general building suppliers for example, will not only refuse to negotiate but will actively pursue proceedings against you, even if there is nil chance of getting paid. Unless the amount owed is disputed there is often little point negotiating with HMRC, but often the banks are more receptive. It all comes down to whether the creditor is going to take a business decision or an emotional one. I often find the smaller the business, the more emotional the response. I had one client who explained she couldn’t pay her debts to her design agency, his response was to come round to her home and threaten her family. Naturally she called the police and we eventually got the situation resolved.
A word of caution. You do need to be careful that you are not trading whilst insolvent. This doesn’t necessarily refer to a negative balance sheet. After all the Channel Tunnel has had a massively negative balance sheet for years, but keeps trading. Essentially the test is whether a “reasonable person” would consider that the business was recoverable. You need to be careful that you don’t pay yourself dividends or an excessive profit if you are in a shaky trading position. This is important because if you continue to trade whilst insolvent or treat yourself preferentially who can lose your director’s protection in insolvency and become personally liable.
The Formal Approach – CVA (Company Voluntary Arrangement)
You may well have heard of IVA’s, (Individual Voluntary Arrangements),a kind of bankruptcy lite for individuals that have mushroomed in the UK during recent years; the CVA is the equivalent for a limited company.
Essentially, a Statement of Affairs is drawn up which looks at all the assets of the business, its balance sheet, the profit and loss and all of its debts. This is then sent to the creditors with a formal offer to pay, for example 40%, of the debt. 60% is then written off and the 40% is then payable over, for instance, a 3 year period.
The creditors vote on the proposal and if 75% by value agree then the deal goes through. It is even possible to allow, as part of a CVA, for some new capital to come into the business to provide cash-flow and additional marketing for example.
The advantage of the CVA approach is that some of the debt is written off, and the balance rescheduled over a number of years. Interest is usually frozen and if it is approved, it is binding on all creditors, whether or not they voted for it. So as long as you keep up your payments, no-one can take action against you. Very often Directors themselves are the largest creditors, thus making a vote in favour more likely. Additionally, if you are able to grow the business you may be able to negotiate paying off the CVA earlier and thus create a profitable unencumbered business. Perhaps the biggest benefit is that it stabilises the situation, you no longer need to juggle creditors and can instead concentrate on growing the business.
However many CVAs fail because the business was actually never sufficiently robust. It’s only worth considering if you think that the business can actually afford to make the payments. Clearly a CVA will have a negative impact on your credit status, but for most businesses considering a CVA their credit position is usually poor anyway. If used appropriately it can make all the difference between a company drowning in a sea of debt and one that is able to turn the position around and create a profitable future.
Next month we look at your options if you decide to cease trading and show that often the position is not as bleak as it might seem.