What can you do when your company gets into financial trouble?

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Not being able to pay bills on time can happen very suddenly and for no fault of your own (a large client does not pay or disruption such as an earthquake). The fall out can be extensive – like the recent Mainzeal receivership.  What are the options?

You get a better result if you decide what to do as soon as you realise you cannot realistically continue. Not only is it unfair to future creditors if you wait, but directors can be found personally liable for debts incurred after a company cannot pay its debts.

Whether or not money is owed to the IRD is an important factor in what options are available.

Shareholders or creditors usually appoint a liquidator. It is an expensive process and takes months to finish. Liquidators can end leases and unprofitable obligations of the company. A company in liquidation cannot be sued. So it may be the best option where money is owed to the IRD. Going into liquidation and appointing a liquidator is simple to do.

Personal guarantees (usually given to landlords and banks) remain despite liquidation. Often terms of trade also include guarantees as well. So liquidation may not be the best option if you can do something else.

There can be other possibilities. A bank can appoint a receiver (or be asked to appoint one) to try and trade and get as much money paid back to the bank. A receiver has less power than a liquidator but this can be useful if the company has some valuable assets to sell or needs to complete a contract to get paid.

An administrator can be appointed by a court. Their role is to try and revive the company within a very tight timeframe. If they cannot do this then the company goes into liquidation automatically.

Another option is a compromise. Here the creditors all agree to take a haircut on their debt (e.g. they all get 60% of the debt owed). This requires co-operation of most of the creditors. A compromise can be difficult to get enough creditors to agree to, but it is useful if you can do it because the company can continue and trade out of its difficulties.

A deal to keep the company going can be done with major creditors if they can be shown it is better to take a smaller amount now rather than liquidation where they will get less. The very strict rules about payments made two years before liquidation will also motivate some creditors to negotiate a way forward because they stand to lose more if the company liquidates.

When businesses get into financial trouble, it is easy to ignore the problem and dig a bigger hole. Getting our advice early on will mean you are likely to have more options to protect your assets and save your business. Don’t wait until it is too late.

Our thanks to Tony Savage for writing this article